Employee Confidentiality and Non-Disclosure Agreement for Employees

Employee Confidentiality and Non-Disclosure Agreement for Employees

Soumya Shekhar
Soumya Shekhar
03 min read 1311 Views
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Last Updated: Apr 9, 2024

Confidentiality is a crucial aspect of any business. It is necessary to protect trade secrets, intellectual property, etc. Thus, businesses put a premium on the secrecy of information- this is especially true of information that can adversely affect business. At the time of employment, companies sign separate agreements about the non-disclosure of information or include a confidentiality clause in their employment contract. Some corporates even maintain a confidentiality agreement policy to standardize practices. 

Employee Confidentiality Agreement

The most common way that companies ensure confidentiality is by signing separate confidentiality agreements with the employee. These agreements are known as as non-disclosure agreement (“NDA”). Typically, NDAs forbid the employee from using the company's confidential information for personal gain or the benefit of any third party. 

NDAs also need to contain several other details:

  • Clearly define what kind of information is ‘confidential and how such information is to be kept confidential. Frequent ways are to mandate a period for the return of such documents or the destruction of such information. 

  • State the time period for which the obligations of the NDA will be active. This typically exceeds the validity of the NDA.

  • Exceptions to the NDA. Particular circumstances may require disclosure of information, such as disclosure to a governmental authority. If these are applicable, they must be clearly stated in the NDA.

  • The penalties for breaching the NDA and the forum in which legal action can be taken for breach of confidentiality. This can include either a court or an arbitrator. It is useful to which Court would have jurisdiction, if applicable.

Non-Disclosure Agreement for Employees in India

In India, NDAs are governed by the Indian Contract Act, 1872. Even though the Indian Contract Act does not explicitly name NDAs, they may generally be regulated by Section 27. Section 27 states that agreements in restraint of trade are void.

However, the judiciary has generally tended to uphold the validity of NDAs. In VFS Global Services Private Limited vs. Suprit Roy, the Bombay High Court held that confidentiality clauses were not generally a restraint of trade under Section 27 of the Indian Contracts Act. However, they would be considered invalid if they remained operational beyond the period of the initial agreement itself. This distinction began from Niranjan Shankar Golikari vs. Century Spinning and Manufacturing Company Limited, where the Supreme Court held that negative covenants that operated during the period of employment were not violative of Section 27. Still, if they were in operation even after the termination of the employment, then they would be void. Thus, the Court in VFS Global Services stated that since the Garden Clause was a negative restriction (maintaining confidentiality) operational after the discharge of the initial agreement, it was violative of Article 27.

Employees Confidentiality Agreement Policy

To ensure that employees are aware of their obligations, companies may consider creating a written policy to ensure that employees know the limits of the information they are allowed to disclose. Creating such a standardized policy is helpful since it mentions all the duties and obligations of every employee and allows for convenient referencing. Usually, the NDA that the company signs with the employee are likely to contain provisions of the Confidentiality Policy. Even though there is no substantial difference concerning contents, companies should  have an operational confidentiality policy.

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Employment Agreement Confidentiality Clause

While many companies sign detailed NDAs with employees, others prefer to include confidentiality clauses within the main employment contract. There is not much significant difference between these, except that the NDA will contain more detailed clauses and provisions. Nevertheless, the choice of which to prefer depends on a case-to-case basis.

There may also be concerns about the enforcement of confidentiality clauses in India. We have already highlighted how negative covenants cannot survive outside the master agreement. However, the cases of Hi-Tech Systems & Services Ltd. v/s. Suprabhat Ray and Ors. and Fairfest Media Ltd. v/s. ITE Group Plc hold otherwise. In these cases, secrecy clauses operated two to three years beyond the original employer agreement and the Court did not invalidate these. Thus, there is doubt over whether confidentiality clauses are valid after the lifetime of the master agreement or not. As a result, it may be a better option to opt for confidentiality agreements over clauses.

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Confidentiality or secret clauses are legal as long as the information they seek to protect can be reasonably considered ‘secret’. While there is no authoritative judgement outlining what is reasonable, High Court judgements are illustrative. In Hi-Tech Systems & Services Ltd. v/s. Suprabhat Ray and Ors., the Calcutta High Court said confidential information could include “the customer list of a trader…information [that] would be potentially damaging if a competitor obtained such information…cost and pricing, projected capital investments, inventory marketing strategies and customer’s lists.” Most confidentiality clauses cover similar information, so there are unlikely to be major legal issues on this front.