and Confidential Information)
Confidentiality provisions in an employee handbook are a powerful tool.
Written properly, an employee handbook with a confidentiality provision demonstrates an employer’s efforts to maintain secrecy, while at the same time establishes that the employee knew that the information was confidential. As such, the handbook policy should identify the trade secret information (e.g., customer lists, pricing information, etc.) and should specifically prohibit employees from using or disclosing the information during and subsequent to their employment. As discussed below, though, just having a written policy may not be enough.
All employee handbooks should also have an accompanying acknowledgement of receipt for the handbook, indicating that the employee has read and understands its contents. In certain circumstances, it also may be prudent to actually have the employee sign a separate acknowledgment form confirming that they have read and understand the employer’s confidentiality policy.
It may also be prudent to periodically distribute memoranda reminding employees of their obligation to maintain the confidentiality of documents and information. Doing so is particularly important if the confidentiality provision of the employee handbook is ever updated. The more evidence there is to show that the employer’s information is confidential (and that the employee knew it and agreed to it), the easier it will be for the employer to enforce that understanding in a court of law.
(Have Employees Execute Confidentiality and Non-Disclosure Agreements) A solid confidentiality and non-disclosure agreement is a good way to protect your company’s proprietary and confidential information and to give your
company a contract claim against any employees who depart with important company records. The economic turmoil since 2008 has made competition stiff and, unfortunately, encouraged employees facing termination to take risks in order to obtain employment elsewhere. As a result, more and more employees are taking employers’ trade secret information to their new employment.
Confidentiality and non-disclosure agreements executed by employees at the commencement of their employment can be an important tool in protecting documents and information that are important to your company from getting in the hands of a competitor.
(Limit Access to Trade Secret and Confidential Information)
An employer should limit access to its confidential documents and information. If every employee has access to such information, the employer will have a much harder time convincing a court that the information is confidential. Therefore, an employer should set up mechanisms whereby only those employees with a need to know the confidential information actually have access to that information. Otherwise, the employer is significantly disadvantaged at claiming certain information is a trade secret or confidential.
Additionally, trade secret and confidential information should not be left unprotected or open to public view.
(Implement Computer Security)
Access to computers, as well as information about the company, should be password protected. Passwords should be themselves confidential, and only certain users should be able to access certain databases. An employer should also consider placing a computer use and technology security policy into its handbook memorializing that passwords are confidential and should not be exchanged or distributed. If possible, software and database access should be monitored and routine backup tapes should be maintained and marked confidential.
(Implement Document Handling Procedures)
Any documents that are confidential should be marked with a visible warning that they are confidential and proprietary. If possible, confidential documentation should be printed on colored or dark paper to discourage photocopying. Confidential documents should also be separated from non-confidential documents and kept in separate, locked storage cabinets.
It is important to differentiate between documents and things that are confidential and proprietary and those that are not. Indiscriminate claims of confidentiality over documents clearly not falling into such categories is inadvisable as doing so calls into question the claim of privilege and confidentiality, even those documents that are legitimately claimed by the employer as being confidential.
(Train Company Employees)
It is important to train employees and new hires basic security awareness, the company’s policies and procedures on security, their responsibilities for the security of company property and procedures for dealing with the theft or misappropriation of company secrets. This training should be done on an annual basis and records should be kept memorializing the training given to the employees.
(Protect Company Information Upon Employee’s Termination)
Once it is known that an employee is resigning or otherwise being terminated, it is essential to limit and/or disable all accounts and access privileges of the departing employee, especially those areas that contain confidential or restricted information. This can be done by changing access codes and rights, as well as discontinuing any remote electronic access for the employee. These steps are crucial since a vast majority of damage to company property is usually done when an employee knows they will be departing.
(Examine Departing Employee’s Computer)
If the company has any suspicion that the employee has acted improperly or misappropriated the company’s confidential information, it is prudent to remove the employee’s computer from active use and examine the employee’s computer or laptop to determine if the employee has accessed or copied sensitive information in recent months. However, great care should be taken and this examination should only be done by a trained computer forensic professional since even turning on a computer can impact the ability to prove that a departing employee has misappropriated company information. For further information and guidance on this issue, please review Chapter XIII, Section D.
(Take Immediate Action Once It Has Been Discovered That a Former Employee Is Competing)
Being proactive is also critically important considering the nature of restrictive covenant actions. In almost all cases involving violations of restrictive covenants (and where a former employee goes to work for a competitor), the employer is forced to seek immediate injunctive relief in order to protect its trade secrets.
In virtually all jurisdictions, the employer will need to show irreparable harm if the former employee is not immediately enjoined from working for the competitor or using confidential trade secret information. To that extent, an employer who takes a “wait and see” attitude will have a difficult time proving to the court that the employer will suffer immediate, irreparable harm. As such, the employer should always remember that proactive, aggressive litigation strategies are more likely to succeed. If that were not bad enough, an employer who develops a reputation for not enforcing its restrictive covenants will embolden and encourage dissatisfied employees to leave and violate the employer’s restrictive covenant.
(Do Not Materially Breach the Employment Contract)
An employer will be unable to enforce an otherwise enforceable restrictive covenant if it materially breaches the employment contract. As a general rule, where a party has materially breached a contract, it cannot take advantage of the terms of the contract or recover damages from the other party to the contract. A material breach is one described as a lack of performance of a term without which the parties would not have entered into the agreement.
Material breaches have been found to be, for example, the employer’s refusal to pay an employee’s salary, refusal to provide an employee’s promised benefits, and the holding of secret meetings without giving notice to shareholders who have a right to attend shareholder meetings.
Moreover, when an employer terminates an employee in bad faith, a court will likely not enforce the restrictive covenant. Accordingly, employers should ensure that they comply with the terms of the employment agreement including, but not limited to, paying the employee all the money and benefits to which he or she is entitled.
(Conduct Annual Trade Secret/Confidential Information Audits) In order to establish that a company has a protectable trade secret, it is well-settled that the company take reasonable measures designed to protect and maintain the secrecy of the information at issue. In other words, unless the company implements reasonable measures to protect the trade secret, a court will likely find that the relevant information is not a trade secret worth protecting. In this regard, employers should routinely conduct an audit to ensure that they are taking necessary steps to protect their valuable information.
The specific scope of a trade secret audit varies depending on the industry, as well as the assets the company is seeking to protect. However, in general, an audit identifies the assets and reviews the employees who have access to those assets. Additionally, an audit will help the company identify how it is securing those assets and what procedures and protocols are in place to maintain and secure those assets. A company’s efforts to maintain its trade secrets should be ongoing and reviewed on a regular basis.
CHAPTER VIII
CLASSIFICATION OF WORKERS
An issue of great concern to all employers is whether they are properly complying with the Fair Labor Standards Act (“FLSA”) and state laws when it comes to compensating employees for hours worked. An employer’s failure to properly classify its workers can have a detrimental financial impact on a company, subjecting it (and its owners) to liquidated damages, back pay, fines, and attorneys’ fees. Of particular concern is: (1) whether the employees are exempt or nonexempt for purposes of overtime compensation, and (2) whether nonexempt employees are properly receiving at least the minimum wage for hours worked and time and one-half their regular rate for hours worked over 40 in one week. Another area of increasing importance is whether to classify a worker as an independent contractor (as opposed to an employee) and what legal ramifications that classification may have for the employer.