A Confidentiality Agreement is an agreement signed by and between the employer and its employee, which requiring the employee to keep the employer’s trade secret/s, and its proprietary information.

A Confidentiality Agreement is a legal/contractural instrument commonly used by employers.  Both Confidentiality Agreements and Non-Competition Agreements (NCAs) are used by employers to prevent employees from leaking its trade secrets, which, of course, could lead to a competitor getting an otherwise unavailable advantage over the employer.

However, many employers can’t tell the difference between a Confidentiality Agreement and an NCA, and the two are frequently confused, one with the other.

These are the primary differences between the two:

1. Nature of the liability

The function of confidentiality is to establish a statutory obligation based on direct provisions of the law, or a collateral obligation of the labor contract. The impacted employee is obliged to maintain said confidentiality regardless of whether he/she and his/her employer have signed a confidentiality agreement or not.

However, the NCA is a contractual obligation based on the mutual agreement between the employer and the employee. No employee is required to abide by the obligation not to compete directly with the employer unless an NCA is in force.

2. Focus of the liability

Mainly speaking, a confidentiality obligation demands that the employee not divulge its employer’s trade secrets, meaning “not to disclose,” while an NCA requires that an employee not work with any company which directly competes with his previous employer; neither may said employee start a competitive business himself/herself,

3. Term of the liability

Generally speaking, the duration of the obligation of confidentiality is as long as the existence of the trade secrets. The duty of confidentiality exists not only during the period of the labor relationship, but also after the end of it, as long as the trade secret has not been publicly disclosed. Put another way, as long as the trade secret exists, the duty of confidentiality exists.

• However, the period for competition limitation is comparatively shorter—no more than two years, technically.

4. Liability for breaching agreement

• The employer shall not specify any penalty for breaching the confidentiality agreement. However, the employer may ask that the employee compensate for any actual losses he/she causes by breaching the Confidentiality Agreement. As such, it is very important for the employer to specify in the Confidentiality Agreement how its loss/es will be calculated in the event of any breaching.

However, an employer may specify liquidated damages in an NCA. If any employee breaches his/her NCA, the employer can directly require employee to pay the specified liquidated damages without the burden of having to prove how much damage the employee has caused.

5. Condition for observation of  the agreement

The Purpose of confidentiality is to impose a statutory obligation for the employee. Performance of this obligation is not contingent on the condition that his employer pays any confidentiality fee.  In other words, the employee should keep his employer’s business secrets without any premise or condition.

However, the employer is required to pay the employee a certain amount of remuneration while asking the employee to observe the NCA.  Usually, the amount of the remuneration is 30% of the employee’s salary before the end of the labor contract or no less than the minimum local average salary.

Though both are measures intended to protect employers from the loss of competitive advantage by virtue of their trade secrets not being made public, there are five differences between Confidentiality Agreement and a Competition Restriction Agreement.

Useful link:

Ministry of Human Resources and Social Security of the People’s Republic of China