Non-Disclosure Agreements in Employment Settlements

Non-disclosure agreements or ‘NDAs’ have been under much scrutiny in recent years due to high profile cases which have revealed incidences of powerful and influential individuals using them to silence people who could speak-out about alleged misconduct.

There is no precise legal definition of a ‘non-disclosure agreement’ and they can take many forms. The original intention behind a non-disclosure agreement was to allow two or more parties to share confidential information and trade secrets, safe in the knowledge that a binding legal agreement was in place to prevent the unauthorised disclosure or selling of sensitive information to third-parties. They are an important device to help businesses develop projects or deal with sales, mergers or acquisitions with increased confidence.

The use of NDAs, however, has moved away from this original purpose, with so-called ‘gagging clauses’ being imposed in some employment settlement agreements, effectively silencing former employees from speaking out about misconduct or behaviour that they may have received or witnessed during their employment (e.g. bullying, harassment or sexual misconduct).

Clauses have been phrased to the effect that ‘you shall refrain from making any complaint about the employer’… or ‘you will make no public statement or comment relating to your service with the employer’.

NDAs have therefore been used as a means of ‘sweeping things under the carpet’, allowing misconduct or the darker side of an organisation’s culture to go unchecked, permitting powerful figures within an organisation to maintain their position of strength and influence, unchallenged and unpunished.

NDAs are legally binding and legal action can be brought against those who breach their terms. However, in wake of widespread condemnation of the misuse of such agreements to protect alleged perpetrators of misconduct, there has been pressure for NDAs to be restricted.

Whilst NDAs may be put in place to prevent the release of trade secrets, criticism of the company or ‘embarrassing’ information, they cannot prevent employees from whistleblowing about illegal activities. The FCA handbook (SYSC 18.5) deals with the issue of settlement agreements with workers. SYSC 18.5.1 requires firms to make it clear in the agreement that nothing prevents the worker from making a protected disclosure.

A protected disclosure is one made in the public interest under the Employment Rights Act 1996 which, in the reasonable belief of the worker, shows that one or more of the following has been, is being, or is likely to be, committed: (i) a criminal offence; (ii) failure to comply with any legal obligation; (iii) a miscarriage of justice; (iv) the putting of the health and safety of an individual in danger; (v) damage to the environment; or (vi) concealment of the above.

Also, under the Senior Managers and Certification Regime (SM&CR), which will apply to FCA solo-regulated firms from December 2019, there are restrictions on the use of non-disclosure clauses in employment settlement agreements that would restrict the ability of the employer to make the disclosures required within a regulatory reference.

The regulator is showing increased attention to non-financial misconduct in the sector. Therefore, it makes sense for firms to foster a culture of greater openness and transparency - one in which allegations of misconduct are dealt with fairly and appropriately. This will help avoid the need for non-disclosure agreements in employee settlements in the first place.

About the author

Kate is the chairman and co-founder of RWA and has worked for the company for nearly 20 years. She is a fan of developing practical, workable, business-led policies and procedures. Kate has specialist training experience within the financial services sector, including major general insurers, and the Lloyd’s underwriting and broking market. She has researched and developed numerous training programmes, both for commercial and in-house use. She has extensive experience of developing in-house and public training programmes for business skills, including Diversity, Employment Law, Management and Leadership, Motivation, Coaching and Feedback, Communication Skills and EQ.

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