Protecting Business Information Through Confidentiality and NonCompete Agreeements
The majority of small businesses probably don't need a policy addressing employees' access to and dissemination of confidential information or trade secrets. Whether you need a confidentiality policy will depend upon what type of information you feel you need to protect. For some businesses, noncompete agreements may be necessary to prohibit employees from working in a related business in your area for a certain length of time.
Has your business spent a lot of time and effort developing its customer lists, highly specialized operating procedures, or some revolutionary technology or product? If so, it may be a wise course of action to have a confidentiality policy in place to protect your information or products from possible competitors.
Some employers choose to make noncompete clauses part of their confidentiality policy that employees are asked to sign. Alternately, employees may be asked to sign noncompete agreements that are discreet, separate documents.
Before you decide whether you really need a separate confidentiality policy for your employees you'll have to determine if you have information that is actually "secret" to be protected.
What Are You Trying to Protect?
Employers can have a hard time knowing what they should consider secret. It's hard to control employees' access to information and equipment unless you know what you're trying to protect.
In deciding what's confidential about your business, look at:
- the extent to which the information is known outside the business
- the extent to which the information is known by employees and others involved in the business
- the value of the information to the business and its competitors
- the amount of effort or money expended by the business in developing the information
- the ease or difficulty with which the information could be properly acquired or duplicated by others
Specific items to protect. Some specific items that can be protected by a confidentiality clause or agreement include :
- trade secrets
- business methods
Customer and client information. Another type of information that you may want to protect is sensitive customer or client information. In certain industries and professions, your employees may become privy to information that you and your customers or clients would not want to be made public. If this is true for your business, you may want to consider a confidentiality policy to protect it.
Once you have an idea of what you want to protect, if anything, you can better devise a strategy for how to protect confidential information.
Protecting Confidential Information
The type of information that you're trying to keep secret, and how many employees have access to it, will play a role in deciding how you choose to handle confidentiality issues.
There are some basic steps you can take to protect your business's information. Some of these steps may seem too drastic for your purposes. Use only those that you feel are necessary and that will achieve a degree of security with which you are comfortable. These are also good steps to take in developing your confidentiality policy:
- Explain to employees the need to protect certain types of information.
- Define as much as possible the type of information that you are trying to protect.
- Prohibit the dissemination of confidential information.
- Educate employees on the kind of situations in which they might unwittingly reveal confidential information.
- Explain the penalties for violating the company's policy.
- Make employees sign a noncompete agreement when they are hired.
- Remind employees that work product belongs to the business, not to individual employees.
- Set up procedures for identifying and safeguarding company proprietary information (for example, establish passwords for computers).
- Be prepared to prosecute the theft of secrets.
How to Create an Effective Confidentiality Policy
If you decide to have a confidentiality policy, you need to specify
exactly what you're protecting and what you consider confidential in
order to prevent current or former employees from later claiming that
they did not realize that the information they were using, sharing,
etc., was protected.
The clause following is an example specifying what is considered confidential for purposes of nondisclosure.
The term "Confidential Information" means information, not generally
known, previously acquired by XYZ Corporation and/or which may be
acquired by the employee and/or XYZ Corporation during the period of the
employee's employment by XYZ Corporation, relating to products (whether
existing or under development), the business activities of XYZ
Corporation, technology, or its inventions.
Consideration may be required. Consideration is a legal
term that refers to the "thing of value" that passes between parties to
a contract. In the case of an applicant, getting the job might be
considered adequate consideration. If the employee has been working on a
project and you decide that the employee's research or work is
confidential, consideration might be continuation of employment or a
bonus of some kind.
For the agreement to be binding, the bonus or other consideration
must be enough to reasonably compensate the employee for what he or she
is giving up by signing the agreement. A $250 bonus, for example, may
not be enough.
The examples below demonstrate how to build the consideration for the employee into the agreement or policy.
Example 1: In consideration of my employment by the XYZ
Corporation and of the further continuation of such employment, and of
the salary or wages paid to me in connection with such employment and
for other good and valuable consideration, I agree as follows:
Example 2: In consideration of the above nondisclosure
and noncompete agreement and in an effort to avoid possible conflicts
and unethical actions, XYZ Corporation employees are required to read
and confirm that they are familiar with these policies and that they
have no knowledge of any violations of these policies.
Including remedies and damages statements. If you're
concerned enough about confidentiality in your business to have a
policy, you'll want to give that policy some teeth. Make it clear to
employees what the repercussions are for violating your confidentiality
The example below may help you devise a set of remedies or damages
that you will want to collect if you have to enforce your policy.
The employee agrees to pay liquidated damages in the amount of
$___________ for any proven or admitted violation of the covenant not to
compete contained in this agreement/policy.
Be aware that noncompete agreements, whether as a part of a policy or
as a separate document, are difficult to enforce. Before asking
employees to sign or before trying to enforce such an agreement, consult
When and How You Should Use Noncompete Agreements
A noncompete agreement is either a separate agreement or a clause in
an employment contract that prohibits an employee from working in a
related business in your area for a certain length of time. Noncompete
agreements are used to prevent an employee from using your business's
The challenge lies in deciding if noncompete agreements are right for
your business and which employees should sign them. While some consider
noncompete agreements an effective way to protect the business's time,
money, and resources, such agreements are difficult to enforce and are
not looked favorably upon by many states' courts because they restrict
an individual's choice of employment.
If you do decide to use noncompete agreements, not all your employees
may need to sign one. The janitor, for example, may not have access to
any sensitive information, so there's no need for this type of employee
to sign such an agreement.
Employees who should be asked to sign noncompete or nondisclosure agreements are:
- all employees who are engaged in or related to research or product development work
- all engineers and drafting employees engaged in design or
engineering work including, for example, tool room engineers, plant
engineers, manufacturing trainees, etc.
- all employees engaged in the service of machines, apparatus, appliances, and similar products made or sold by your business
- manufacturing, maintenance, and production department heads, if
applicable, who have substantial supervisory authority over the
manufacture or production of products, apparatus, machines, and the like
made by your business
- all employees who may reasonably be expected to do creative work
relative to trade names, advertising, broadcasting, sales promotion
material, and the like
- all sales/service employees who are likely to encounter customer problems, suggest solutions, etc.
- all clerical and office employees whose position and
responsibilities require complete direct accounting for or processing of
details relating to any experimental, inventive, or creative work
- all employees who have sufficient information about your
business to be able to start up a similar business that would compete
Be careful not to create an employment contract when you have an
employee sign a noncompete agreement. You can make the signing of a
noncompete agreement part of your terms of employment without creating
an employment contract. It's important not to make it seem that by
signing the noncompete agreement, an employee can expect to be employed
forever. A noncompete agreement should apply only to one specific aspect
of an employment relationship — the confidential information related to
Creating an Enforceable Noncompete Agreement
Noncompete agreements can be hard to enforce because many courts
perceive them as attempts to limit an individual's ability to obtain
employment. For that reason, most courts will insist that a noncompete
agreement be reasonably limited in geographic scope and duration.
The Business Tools contain some sample language that you might want to consider incorporating into a noncompete agreement.
To help ensure that your noncompete clause or agreement is enforceable:
- Have your agreement drafted by your attorney. If you ever have to enforce this document, it will be closely scrutinized by the courts.
- Make sure that it follows applicable state law.
- Be sure there is sufficient consideration (i.e., compensation) given to the employee for signing the agreement.
- If the agreement is part of the hiring process, giving the
employee the job is sufficient consideration for agreeing to refrain
from competing later on.
- If the agreement is signed later on, the promise of a raise
or a promotion is probably sufficient. Even the promise of continued
employment may be enough consideration if you are prepared to show that
you would have fired the employee for failing to sign the agreement.
- Have it drawn as narrowly as possible. Generally, only
those restrictions that are reasonably necessary to protect a company's
legitimate or "protectable" interests will be upheld.
- Define the company's legitimate or protectable interest.
Be specific in terms of equipment, information, technology, strategy,
sales prospects, and other pertinent proprietary information. Even
though you specify it, it will be up to the courts to determine if it is
- Reasonably relate the restrictions to what the company seeks to protect. If the time and geographic restrictions, for example, are too long or too broad, the agreement will not be enforceable.
- Structure the agreement with an eye toward partial enforcement.
Even if a court finds the restrictions too broad, you can include a
clause saying that if one part of the agreement is held invalid, the
remainder of it should still be enforced. This may give you some protection, even though it is not everything you required in the agreement.
- Do not selectively utilize or enforce such agreements. Make all similarly situated employees sign them, and make sure all employees comply with the agreements they sign.
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