When Should Employers Use Nondisclosure Agreements?

Nondisclosure agreements (NDAs) are used for a variety of reasons—including to protect employers' sensitive business information. But when should NDAs be used, and what types of information should be protected?

News about overreaching noncompetes that prevent low-wage earners from working for competitors and NDAs that may silence victims of harassment have motivated state legislators to regulate employer use of restrictive covenants. But NDAs can still be used to safeguard sensitive information, employment law attorneys said.

If an employer has valuable proprietary information or trade secrets, then it absolutely makes sense to require employees to sign NDAs, said Karina Sterman, an attorney with Greenberg Glusker in Los Angeles. This is the case especially because most trade-secret protection statutes require employers to show that they took reasonable steps to protect such information to preserve its secrecy. 

Informing new hires through an NDA that they will be provided with confidential information can be crucial to proving such reasonable efforts were taken, noted Cheryl Orr, an attorney with Drinker Biddle in San Francisco.

"NDAs are critical for protecting a company's confidential information and trade secrets both while an employee is employed and following the employee's departure," she said.

Even if a business doesn't have any clear trade secrets, employers who share business information with workers about their processes, clients and development plans should make sure the information is protected against unauthorized disclosure, Sterman said.

Consider the Scope

Sometimes businesses run into trouble when the scope of their NDA is too broad. "Improperly drafted or overbroad NDAs could be rendered unenforceable or expose the company to legal action," Orr said. Therefore, employers should take care to ensure that the confidentiality provisions are narrowly tailored to protect information that is actually confidential.

Orr noted that NDAs also shouldn't be so broad as to run afoul of state or federal employment protections. For example, the California Business and Professions Code invalidates any contract that restrains a person from pursuing his or her trade or profession, such as noncompete agreements, certain forms of nonsolicitation agreements, and confidentiality agreements in which the definition of "confidential information" is unreasonably overbroad.   

[SHRM members-only toolkit: Managing the Hiring Process in California]

Federal labor laws also prohibit policies and agreements that could be construed as preventing employees from discussing their wages and other terms and conditions of their employment with other employees. 

The Defend Trade Secrets Act (DTSA) requires employers to include language in their NDAs about a whistle-blower's right to disclose trade secret information to federal enforcement authorities. And employees must always retain the right to speak and cooperate with the Equal Employment Opportunity Commission and related state civil rights agencies regarding an agency investigation into discrimination claims.

"If not correctly drafted, NDAs could lead to legal action pursuant to these state and federal protections," Orr said.

Furthermore, an overly broad agreement can harm a business if it is so onerous that it makes it challenging to recruit qualified talent, Sterman noted.

Consider the Timing

When businesses decide to have their employees sign NDAs, they should make every effort to complete the process at the time of hire, Orr said.

In some states "continued employment" isn't sufficient consideration to have existing staff sign a new agreement. Employers in those jurisdictions would have to provide additional consideration—such as a raise or bonus—for the agreement to be enforceable.

Employers should consult an attorney to ensure that their NDAs comply with applicable federal and state laws. Particular care should be taken to ensure that the scope of the NDA's definition of confidential information is sufficiently narrow to protect truly confidential information and trade secrets and to avoid any challenges to enforceability, Orr said.

Every employee who has the ability to access confidential information or trade secrets should be required to sign a reasonable NDA, Sterman said. This reminds employees of their obligations to the company and signals how valuable the company considers its information, she added. "An NDA is a relatively small company investment with a relatively high payoff."

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