Non-disclosure agreements in employment contracts - do employers really need them? (Part 2)
First published in The Bermuda Chamber Of Commerce Newsletter (Chamber Insider) January 2019
The previous article looked at the increasing use of non-disclosure agreements (NDAs) in the employment context. This part 2 considers the alternative of introducing or improving upon standard confidentiality clauses in an employment contract as an alternative.
To recap, there is a term of confidentiality implied into every contract of employment. This means that an employee is under an obligation not to disclose their employer’s confidential information to an unauthorized third party. Despite this duty being implied, it is often wise to bring home to an employee the existence of the obligation by including it as an express term which also defines the information that the employer classes as confidential. Express clauses strengthen the ability of an employer to discipline employees for disclosing confidential information or to seek injunctive relief from the court. This can be complemented by a confidentiality policy in the employee handbook.
When an employee moves job, they are generally free to use the skill, training and knowledge that they have acquired during their employment. This does not extend though to information that can be classed as “trade secrets”. The challenge is how to determine what this includes. One way is to ask the question ‘if this information were to be disclosed to a competitor, would it cause significant harm to the employer’s business?’ Ultimately, each case will turn on its own facts. Trade secrets can include secret manufacturing processes, designs or special methods of construction, customer lists, marketing plans and confidential price lists. In determining whether the criteria are met, a court will consider the nature of the employee’s employment, the nature of the information, whether its confidential nature was impressed on the employee and whether the information can be easily isolated from other information which the employee is free to use or disclose.
So how can a prudent employer best achieve this?
The confidentiality clause should define trade secrets as tightly as possible within the specific context of the business. This requires careful thought as there is a tightrope between being too blandly generic and being over prescriptive.
The employee should acknowledge that these matters do amount to trade secrets.
The nature of trade secrets in a business may change over time, as may the employee’s role, and so the wording of the clause should be kept under review, especially when an employee is promoted or starts a new role internally.
The employment contract should ensure that there is a clause requiring an employee to return confidential information (in whatever form) when employment terminates.
There should also be a clause requiring an employee to sign a statement confirming that they have fulfilled this obligation.
If the employer is still concerned about a departing employee working with a competitor, a letter can be sent to the new employer outlining the former employee’s express legal obligations. This letter will often have a ‘chilling effect’ on a new employer who wants to actively or implicitly induce a new employee into disclosing confidential information.
Another way to reduce the risk of disclosure to a competitor is to include appropriate restrictive covenants in the contract of employment.
This note is intended as a high level overview of this topic. Legal advice should always be sought on a case by case basis.