According to Harvard Business Review, recent data shows that more than one-third of the U.S. workforce is bound by a confidentiality agreement, also known as a non-disclosure agreement (NDA). A confidentiality contract is a legally binding document between an employer and employee that protects company information such as trade secrets, research and development, and client lists from the competition. Sometimes referred to as “gagging clauses,” the use of confidentiality agreements (CDA) in business has grown in both number and breadth. Find out more about what is included in a confidentiality agreement and why employers are using them to protect sensitive information. Plus learn the best time to present a confidentiality agreement and four common situations they are used.

What is a confidentiality agreement and policy?

An organization’s confidentiality policy prevents the sharing of trade secrets, internal processes, and sensitive information about new products or services. The policy is typically developed by top executives such as the CEO and CFO. Legal counsel will also be involved in order to ensure that the final document complies with local and state laws. A confidentiality agreement details the sensitive information that the employee may not disclose and will typically have an associated time limit on the employee. For example, the usual term for a confidentiality agreement covers a span from one to three years. The contract will also cover any penalties or recourse the company will seek in case there is a breach in the contract. These terms are spelled out in a formal document that is signed by both the employer and employee.

Why a confidentiality contract is important

The most successful businesses work to protect anything that is developed, invented, or written during employment. That’s why many businesses include a provision that states there is “no implied license” to the technology or information provided to the employee. That means that any models, drawings, or data should be returned to the employer upon request and that the employee is not entitled to keep any copies. This obviously protects the employer’s interests and ensures that proprietary information doesn’t fall into the hands of competitors.

When to present a confidentiality agreement

Many employers introduce a confidentiality agreement when an employee is hired. This allows for the successful implementation of the contract since the employee is aware of this employment requirement from the beginning. Employers choosing to implement an agreement years after hire could encounter some push-back and employees may refuse to sign. In this case, the employer faces increased risk of information going public as well as a decrease in employee morale.Confidentiality agreements aren’t just legal documents between employers and employees. Sometimes, confidential information is shared with an outside third party for a variety of reasons. An article in Entrepreneur discusses four situations when a confidentiality agreement is commonly used:

  1. The sale or licensing of a product or technology.

    If you plan to sell a product you own to another business, you’ll have to share detailed, sensitive data about how it works and the financials surrounding it. Protect your interests by getting the potential buyer to sign a confidentiality agreement before the meeting takes place.

  2. Making an offer to a partner, investor, or potential senior-level hire.

    Sometimes you have to share proprietary information with people you want to work with and for your company. For example, if your business is hiring a new CFO, you’ll have to provide more in-depth information to that person in order for them to make a commitment to take the position. Before the interview begins, it’s important to sign a confidentiality agreement.

  3. Working with a services firm that needs access to proprietary information.

    Organizations often work with outside agencies for things like marketing, advertising, and even audits. Those firms need access to sensitive data in order fulfill their contract with your company. It’s imperative to protect that data with a confidentiality contract.

  4. Sharing information with potential buyers in the case of mergers and acquisitions.

    If your business is thinking about a merger or acquisition, you’ll have to share everything about your organization from financials and operations to research and development. If it doesn’t go through, you’ll need a signed confidentiality agreement to protect your business from risk.

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