Non-disclosure agreements in employment – calls for action

The spotlight has once again fallen on the use of non-disclosure agreements (NDAs) with the publication at the end of February of the Legal Services Board’s (LSB) document ‘The Misuse of Non-Disclosure agreements: Call for Evidence Themes and Summary of Evidence’. NDAs extend beyond employment but their use in this field is the context of many of the submissions to the LSB and is the focus of this article and is arguably the paradigm example of a power imbalance that can make NDAs problematic.

The potential abuse of NDAs and the role of lawyers was thrust into the spotlight in 2017 following revelations in the Financial Times about their use to silence victims of sexual harassment in high-profile cases involving Harvey Weinstein and hostesses at the Presidents Club dinner.

Since then, various measures have been proposed or introduced to address this misuse, but concerns remain. The LSB call for evidence represents only one of many reports calling for action to avoid misuse. Soon after publication of the LSB’s summary, the House of Commons Treasury Committee’s report, Sexism in the City, recommended legislation to ban the use of NDAs in harassment cases.

LSB summary of evidence

The LSB call for evidence looked at: the misuse of NDAs; the role of legal professionals in NDAs; the regulatory response to misuse; and suggestions from respondents. It received 103 responses from a range of interested parties, including several distressing examples on the impact of NDAs on the wellbeing and health of those involved.

The LSB's call for evidence concerned itself, to a large measure, with the role of lawyers in the misuse of NDAs. The responses demonstrated disquiet with both lawyers acting for the employer, who drafted the NDA, and the lawyers who acted for the individual who signed up to it.

Settlement agreements

Taking a step back, NDAs are used in various workplace scenarios. Most commonly, we see them in settlement agreements (previously known as compromise agreements), which are often entered into on termination of employment.

In these agreements, the employer normally agrees to pay a sum of money to the employee in return for the employee agreeing not to sue the employer. However, these agreements will customarily include various other commitments. Among these are confidentiality obligations, collectively referred to as NDAs.

NDA obligations will normally reinforce the employee’s ongoing obligations of confidentiality. They will also often include ‘non-bad mouthing’ clauses, in which the employee agrees not to make or publish any derogatory comments about the employer or any of its people. This may be mutual and include the employer agreeing not to make derogatory comments about the employee.

However, these kinds of obligations are not only found in settlement agreements. Confidentiality and non-bad-mouthing obligations are also found in employment contracts, and they may also exist on a standalone basis. the Presidents Club, mentioned above, is an example of a situation where staff were required to sign NDAs before starting work.

In terms of the breadth of the restrictions, sometimes, the settlement agreement will expressly prohibit the departing employee (or even both parties) from saying anything about the circumstances leading up to the employee’s departure. Concerns about misuse arise where these circumstances include allegations of wrongdoing, particularly of harassment or discrimination, and have the effect of hiding the alleged conduct.

However, depending on the facts, an agreement not to mention the background to a departure can be legitimate and important to both parties. The employer may be concerned about the malicious dissemination of false or, at least, disputed allegations by a disgruntled former employee, perhaps anonymously, including on social media. Providing for the repayment of any termination payment in such a case can be seen by employers as a legitimate and effective deterrent.

In other cases, such as conduct or performance dismissals, the employee will want to restrict publication of criticism, which they will often dispute or consider unfair. Nonetheless, concerns over the misuse of NDAs persist and the challenge remains how to restrict misuse but permit the legitimate use of NDAs.

There are many reasons why an employee might knowingly accept an NDA. Particularly where, as the LSB responses highlight, there is such an inequality of bargaining power. While the risk of reputational damage concerns employers, getting a positive reference is often at the forefront of an employee’s mind. In providing a reference, the employee needs the employer to do something they are not legally obliged to do (at least outside certain regulated sectors). From the employee’s perspective, accepting restrictions on speaking about their employment in return for an agreed reference may be a deal they are willing to strike.

Abolish NDAs and settlement agreement payments will undoubtably be lower. For employees losing their job, maximising financial security will often be uppermost in their minds. Agreeing not to say anything that might damage the employer’s reputation represents important leverage in negotiating a favourable compensation payment. Indeed, in some circumstances, this may in fact be the departing employee’s most valuable bargaining chip – potential reputational damage may be more concerning to the employer than the threat of litigation once practical obstacles that claimants face in employment tribunals (such as unrecoverable costs and delays) are taken into account.

Protected disclosures

As is flagged in the LSB summary, certain disclosures are protected under existing law, and in fact were before the high-profile cases highlighted above.

Most significantly, whistleblowing laws mean that any provision which purports to prevent a ‘protected disclosure’ will be void. For that reason, many settlement agreements will include a statement that its terms do not apply to any protected disclosures.

Various conditions must be satisfied for the disclosure to be protected, such as the fact that the disclosure must, in the reasonable belief of the whistleblower, be in the public interest. But perhaps the biggest potential weakness with relying on whistleblowing rights to address the misuse of NDAs relates to the person to whom any protected disclosure must be made – the disclosure will only be ‘protected’ if it is made to the right person in the right circumstances. Legitimate recipients include the employer, a member of parliament (MP) and many regulators. In certain circumstances, wider disclosure may be protected if certain conditions are satisfied. These include that the disclosure has already been made to an appropriate person and that the subsequent disclosure is reasonable in the circumstances, though when this will be the case will often be unclear.

However, the UK’s whistleblowing laws are not sufficient to deal with all legitimate disclosures. Dame Maria Miller MP, reported in the LSB summary, highlights that among the worst misuses of NDAs are individuals feeling that they cannot approach a health professional for support to deal with trauma. She also mentions individuals being unable to discuss reasons for leaving a previous job and the consequent career disruption. Neither of these examples would be permitted as a protected disclosure under the whistleblowing legislation described above.

Another notable exception in whistleblowing legislation is the police: they are not expressly mentioned as appropriate persons to which to make a disclosure. However, anyone drafting an NDA, which prevents reporting to the police, should be mindful that it is a serious criminal offence to act with intent to impede the apprehension or prosecution of a person guilty of a serious offence.

Further, though this has received little attention, perhaps due to the complexity of the case law in this area, it must be highly arguable that restrictions on disclosing wrongdoing, particularly to health professionals and the police but also more generally, would be unenforceable as contrary to public policy.

It is, therefore, clear that there is existing legal regulation that touches on the lawful use of NDAs. However, one of the major hurdles in relying on existing laws to mitigate against their misuse is that they were designed for a different purpose and, as a result, there are too many uncertainties in their application to NDAs.

The role of solicitors

Legal professionals, usually solicitors, are often involved in drafting the settlement agreement, which will often be the template used by the employer. Solicitors will also often advise on the terms of a settlement agreement, as independent legal advice is a statutory requirement for a settlement agreement to be valid.

The LSB report makes clear that a significant failing with the current system arises from inadequate legal advice to employees entering into a settlement agreement.

Many of the responses displayed, as the LSB highlights, ‘that awareness of existing legal protections may not be widespread’, as the respondents protested, incorrectly, that NDAs prevented the reporting to regulatory or law enforcement authorities of wrongdoing.

The LSB concludes that more action needs to be taken to address the role of legal professionals in the misuse of NDAs and that ‘there is sufficient evidence to take forward work to determine how regulation can best address the unethical conduct of legal professionals, including in the context of NDAs, which provide tangible examples in which such unethical conduct manifests. This may include looking at whether aspects of the existing regulatory framework could be reinforced, for example through more supervision or enforcement action to address unethical conduct or whether there are any gaps which might need to be addressed with further regulatory intervention.’

Regulation

The regulatory response to the high-profile cases of 2017 has been significant: there has been no shortage of bodies considering the use of NDAs, potentially plugging the gaps exposed by existing legislation.

Solicitors Regulation Authority (SRA)

One way of addressing misuse is to regulate more effectively the lawyers advising either party to an NDA.

Misgivings about the misuse of NDAs by solicitors prompted the SRA to issue a warning notice to all solicitors in 2018, which it updated in 2020. The SRA highlights that the improper use of an NDA may put the solicitor or their firm in breach of the SRA Principles. It then sets out detailed guidance on the proper use of NDAs, to which it will have regard in exercising its regulatory functions.

The warning notice provides examples of improper use of NDAs, including their use to bar proper disclosures to health professionals or others bound by a duty of confidence or to deter lawful disclosures. The warning notice also emphasises the need for solicitors to be aware of the rules governing NDAs and for plain English to be used.

In August 2023, the SRA published a thematic review ‘The use of Non-Disclosure Agreements in workplace complaints’. This continued the themes set out in the warning notice.

Law Society

Last year, the Law Society also issued its own call for evidence on the use of NDAs to hide matters of public interest. Its recommendations included that it should be harder for NDAs to be misused in settling issues around workplace harassment or discrimination, and that confidentiality clauses should not prevent disclosure to the police or health professionals.

Prospective legislation

As far back as 2019, after a report by the Women and Equality Committee (‘The use of non-disclosure agreements in discrimination cases’), the government committed to legislate on NDAs. This included proposals to clarify that disclosures to health professionals, legal advisors and the police would be permitted, and proposals to ensure clearer information in agreements about permissible reporting and better guidance for legal advisers.

The proposed legislation has not yet been brought forward and there is no published timeframe. However, as recently as December last year, the Minister for Women and Equalities Rt Hon. Kemi Badenoch MP, confirmed that the government was still looking into “an elegant solution” for preventing the misuse of NDAs.

There has been legislative change on a sector-specific basis. Legislation has been introduced in higher education, specifically banning all NDAs related to sexual abuse, sexual harassment, sexual misconduct and other forms of bullying and harassment. And in the financial services sector, employers regulated by the Financial Conduct Authority must include a term in any NDA making it clear that it does not prevent a protected disclosure.

Guidance

There has also been softer regulation in the form of guidance on the use of NDAs, with detailed guidance from the Equality and Human Rights Commission and the Advisory, Conciliation and Arbitration Service (ACAS).

Other countries

This is of course not an issue of concern only in this country; the fallout from the abuse of NDAs has also resulted in proposed legislation or guidance in other jurisdictions, including Ireland, Canada, Australia and the US states of California, New York and New Jersey. In each of these, however, the proposed restrictions apply only to sexual harassment and discrimination claims and not restrictions on reporting wrongdoing more generally. This echoes the changes introduced in higher education in the UK.

Ways forward

For employers (and employees), a priority should, of course, be to reduce the number of cases where NDAs become an issue. The current trend towards better training, internal early reporting and early intervention processes and frameworks to encourage concerns to be raised and resolved at a formative stage is to be encouraged and will hopefully be reinforced by the introduction in October this year of the proactive duty on employers to prevent sexual harassment. Nonetheless, there seems little doubt that further action needs to be taken to address the misuse of NDAs.

The LSB summary document focuses on the role of lawyers. No doubt, it would help to address low levels of knowledge about the SRA notice requirements and perhaps make changes to the rules regarding settlements agreements – for example, rendering NDAs contained within them void if: the advising solicitor has not confirmed that they have provided advice on its implications; insufficiently short time has not been given for advice (and perhaps even a cooling-off period, in which the employee can change their mind); and an express obligation to set out in plain English permitted disclosures.

Regulating the lawyers may be important, but not all NDAs are drafted by lawyers and not all individuals receive legal advice on NDAs. Indeed, even with a better understanding of the current law and better legal advice, relying on laws designed for a different purpose seems unsatisfactory.

Some steps could be taken to address an inherent imbalance in negotiating power between the parties. For example, addressing the costs and delays in enforcing legal rights in employment tribunals and requiring employers to give references would reduce some of the pressure to accept an NDA. But neither of these are quick or easy fixes.

Regulating NDAs more generally seems to be inevitable. Whistleblowing laws are not clear in several respects and contain gaps. And, even if disclosures to health professionals, family and prospective employers were clearly permitted, there is a debate to be had about circumstances in which individuals can be prevented from waiving rights to make disclosures to the media.

How far should regulation go? Banning all NDAs seems to be throwing the baby out with bathwater – they do have a valid role to play. Employers have a legitimate concern about disgruntled employees exploiting the potential reputational damage of disputed or false allegations being circulated, for example on social media or on review sites, such as Glassdoor. Defamation laws are not an effective way to police such issues. NDAs can also be important to employees wanting to ensure that, what they may regard as, unfair criticism does not impact on their future job opportunities.

Examples from the higher education sector in the UK and from other countries and the recommendations from the Treasury Committee, referred to above, have focused on NDAs which prevent the reporting of sexual harassment and discrimination. However, as ITV’s exposé of the Post Office Scandal shows, ensuring that wrongdoing more generally cannot be hidden by NDAs remains critical.

James Davies is a partner at Lewis Silkin
lewissilkin.com