Can non-disclosure agreements ever be ethical?

Spencer Shaw Solicitors Ltd

Non-disclosure agreements (NDAs) gained a bad name as the #MeToo movement revealed how often they are used to silence victims of sexual harassment and assault.

The agreements have even been the subject of discussion in the House of Commons and demands for tighter regulation. In this article we will look at how non-disclosure agreements work and the benefits they bring, as well as their limits.

We’ll also look at proposals to manage the use of non-disclosure agreements, and what these would mean for businesses and employees.

What is a non-disclosure agreement?

Non-disclosure agreements can be standalone contracts, but in employment law they are more often part of an employment contract, or a settlement agreement (resolving a dispute between an employee and employer).

They are generally used to protect business interests by preventing valuable knowledge being shared publicly, or to prevent damage to a company's reputation by ensuring that the public does not find out about sensitive incidents.

Non-disclosure agreements can relate to valuable information such as inventions, customer information, business practices, or the subject of dispute between a company and an employee – not just bullying or sexual harassment, but disciplinary issues as wide ranging as redundancy, pay disputes, absence, poor performance and discrimination. As a non-disclosure agreement is a contract, a company could sue an individual who breaks the agreement.

It is also possible for parties to take advance action if they think the agreement is going to be breached and obtain an injunction to prevent the other party from speaking publicly.

There are penalties for breaking an injunction, including the possibility of imprisonment.

The problems with non-disclosure agreements Non-disclosure agreements have gained a bad name due to their use in cases of sexual harassment.

In high profile cases, including Harvey Weinstein’s scandal and Philip Green’s battle with the Telegraph, the clauses have been used to prevent victims speaking out about harassment and assaults. A report by the Women’s and Equalities Committee, published on 11th June 2019, expressed concern that many companies avoided investigating wrongdoing by ‘covering up’ incidents with non-disclosure agreements.

The agreements can also work to hinder investigations, as victims are less likely to discuss their experiences.

There is often an imbalance of power when making non-disclosure agreements, with an individual on one side and a potentially far wealthier company with greater legal expertise on the other side.

Non-disclosure agreements and whistleblowing NDAs cannot overrule whistleblowing legislation, or the rights of staff to make protected disclosures.

The Employment Rights Act 1996 and the Public Interest Disclosure Act 1998 protect staff who are making a disclosure in the public interest about:

- a criminal offence
- dangers to health and safety
- environmental damage, or the risk of such damage
- a miscarriage of justice
- person’s failure to comply with a legal obligation
- the covering up of any of the above

However, many people who have signed a non-disclosure agreement are unaware of these protections, and so are fearful of making a disclosure of this nature.

In some cases, it can be difficult to say whether the complaints involved meet the requirements for whistleblowing protection or are simply a grievance.

In these cases, people may be worried about facing action if the other party does not feel that the matter falls within whistleblowing protection.

Whistleblowing must concern information that is in the public interest.

As it is up to tribunals to decide what is or is not in the public interest, individuals can face uncertainty right up until the time of the tribunal as to whether they will be protected or not.

It would be difficult for employees to know whether their claim is whistleblowing without expert advice.

The benefits of non-disclosure agreements

Non-disclosure agreements have far wider use than covering up harassment and, used ethically, can be beneficial to both parties.

Without non-disclosure agreements to protect intellectual property, legitimate business interests would suffer.

As part of wider settlement agreements, non-disclosure agreements can benefit employees by offering an incentive for businesses to offer a settlement agreement.

For many employees, this is a quicker, cheaper and less stressful outcome than taking a case to tribunal.

Without confidentiality, employers may worry that a settlement could appear to imply guilt, and so may chance letting the case run its course in the hope that the individual will run out of financial or emotional resources in the process.

This could deprive many workers of a just and beneficial outcome.

The ethics of non-disclosure agreements

Such was the level of concern around non-disclosure agreements that in March 2018 the Solicitors Regulation Authority (SRA) published a warning notice for solicitors.

The note reminds solicitors that those drafting and using non-disclosure agreements to cover up misconduct could be in breach of SRA principles, including requirements to:

- uphold the rule of law and the proper administration of justice
- act independently
- act with integrity
- to maintain public trust as an individual and in the legal profession.

The note goes on to give examples of non-disclosure agreements that the SRA would consider to be improper.

These included agreements that prevent a person from reporting misconduct, an offence or a protected disclosure to the relevant bodies and that prevent a person from co-operating with a criminal investigation.

Agreements which threaten litigation to influence and deter the individual would also be improper, as would preventing an individual from keeping a copy of the agreement.

Proposals for change In its “Turning the Tables” report on sexual harassment, the Equality and Human Rights Commission called for the government to legislate on non-disclosure agreements.

The committee recommends that non-disclosure agreements at the start of employment that prevent an employee reporting future incidents of harassment should be void, while those used in settlement agreements after a complaint should be closely regulated.

The committee also suggested that, apart from exceptional circumstances, confidentiality clauses should only be used at the request of an employee.

In their warning note, the SRA suggested that it could be helpful for non-disclosure agreements to specify which disclosures are exempt from the agreement.

In its 2018 report into sexual harassment in the workplace, the Women and Equalities Committee recommended the required use of standard, approved confidentiality clauses in plain English, which would specify the limits of the clause.

Another recommendation would make it an offence for an employer or adviser to use confidentiality clauses to prevent an employee from making a protected disclosure or disclosing a criminal offence, as well as educating the legal profession that using unenforceable provisions is a disciplinary offence.

The future of non-disclosure agreements

On March 4th 2019, Business Minister Kelly Tolhurst announced new legal proposals for non-disclosure agreements, which addressed some but not all of these suggestions.

The proposals included:

- legislation to clarify that non-disclosure agreements cannot prevent somebody from reporting a crime to the police or providing information in criminal proceedings

- the requirement for individuals to receive a clear description of their rights, in writing, before signing an agreement that includes a non-disclosure agreement

- extending the existing law that workers must receive independent advice before signing a settlement agreement, so that the advice must include the limits of any confidentiality clause

Protect, the whistleblowing charity, have argued that these measures, while they will help inform workers, do not go far enough.

Protect argues that more still needs to be done, especially concerning the disclosure and investigation of harassment and discrimination that does not meet the threshold of being a criminal offence, and defining what is in the public interest.

On June 11th, 2019, the Women and Equalities Committee published its report into the use of non-disclosure agreements in discrimination cases.

While the committee approved of the Business Minister’s proposals, it felt more was needed, and set out further recommendations including:

- increasing the damages for non-financial loss

- introducing one-way cost shifting, so that employers would more often pay the employees costs

- requiring employers to pay for employees to receive legal advice, and for the costs associated with negotiating terms, even if the agreement is not ultimately signed.

What does this mean in practice? Given the increased scrutiny around agreements, it is important that businesses ensure they using the clauses in a fair and transparent way.

To misuse non-disclosure agreements could not only risk a legal challenge but would risk reputational damage.

If the government decides to implement the changes recommended by the Women and Equalities Committee, or go some way towards these changes, this could have a huge impact on the cost involved for companies. More than ever, it will be vital that companies obtain legal advice.

Employees should ensure that they receive independent legal advice before signing an agreement that includes a non-disclosure clause and be clear about how the agreement impacts on their rights of disclosure.

Any concerns about the agreement should be fully discussed before signing. Legal advice and representation will also be useful if an employee wishes to challenge or renegotiate the terms of the agreement.

Get in touch for advice about non-disclosure agreements