Is it appropriate to use non-disclosure agreements or confidentiality clauses in settlement agreements?

Non-disclosure agreements (‘NDAs’) or confidentiality clauses are often legitimately used in a genuine attempt to protect the interests and reputation of a business, as well as its trade secrets/confidential information. In an employment context, NDAs/confidentiality clauses are commonly contained in an employment contract, entered into at the outset of an employment relationship, to protect the confidential information of the employer (such as trade secrets, client information, financial statistics etc.), to which the employee will have access during their employment. However, it’s the use of NDAs at the end of the employment relationship – often included in a settlement agreement or COT3 agreement to settle a dispute – that is more controversial and has been the subject of increased scrutiny over recent years. While NDAs in a settlement agreement can be mutually beneficial to both parties, by allowing them to draw a line under an issue and move on without litigation, various concerns have been raised about them being improperly used to silence employees and intimidate them from reporting concerns externally.

Initially an issue highlighted by the #MeToo campaign, the inappropriate use of NDAs – particularly in cases of sexual harassment – has been the subject of a number of inquiries and reports. Indeed, in 2019, in its response to a consultation on appropriate measures to prevent the misuse of NDAs in situations of workplace harassment or discrimination, the Government committed to introducing legislation to govern the use of NDAs/confidentiality clauses in settlement agreements. However, a timeframe for such legislation still remains unclear.

For organisations negotiating settlement agreements, it is best practice to consider at the outset whether a confidentiality clause is actually needed and you should discuss this with your legal adviser.[1] The ACAS guidance states that confidentiality clauses should not be used as a matter of routine, and it’s certainly sensible to consider on a case by case basis whether an NDA is required. This should include identifying the specific reasons why an NDA may be needed and weighing up the benefits to the employer vs the impact on the employee in question, as well as the impact on the wider culture of the organisation.  This is particularly the case for allegations of sexual harassment. It’s relevant to note that The Higher Education (Freedom of Speech) Act 2023 received Royal Assent on 11 May 2023, and when it comes into force (on a date to be specified in regulations), it will prevent English higher education providers from entering into NDAs with staff, students, visiting speakers etc. in relation to sexual abuse/harassment/misconduct and other types of bullying or harassment. Other organisations and sectors also seem to be taking note and are moving away from blanket NDAs in settlement agreements. For example, since 2015, the Department for Work and Pensions has not used NDAs in its settlement agreements and, in 2019, a city worker making accusations of sexual harassment and victimisation settled her claim for circa £270,000, without being required to enter into confidentiality provisions.

If and when an organisation decides an NDA is appropriate, careful thought should be given to how wide such a clause should be. For example, in some cases, the NDA may need to cover the settlement sum only, rather than the entire agreement. In terms of the breadth and content of the confidentiality obligations, businesses will usually wish to engage lawyers to assist with the drafting. It is worth noting that there are certain clauses in a settlement agreement which will be void and unenforceable if included. For example, an NDA cannot be used to: prevent an employee making a protected disclosure; stop an employer making necessary legal and regulatory disclosures; or prevent an employee reporting criminal offences or becoming involved in criminal investigations. Further, if an NDA is used in a settlement agreement, an employer should use plain English to set out the confidentiality obligations and should not put pressure on an employee to sign it, nor impose arbitrary or oppressive time limits on getting it signed.

In terms of wider considerations, organisations may want to consider introducing an approval process for confidentiality clauses – for example, prescribing that the use and terms of an NDA must be signed off by a director not involved in the matter. From a wider cultural perspective, businesses should consider monitoring their usage of NDAs on an organisation-wide basis to gain a better understanding of when, why and how often they are used, as well as helping identify particular areas of concern or patterns of behaviour.

As with most things, being proactive in managing risks and behaviours is better than having to be reactive in dealing with the fallout later down the line. Fostering an open and transparent culture, which takes allegations seriously and investigates fairly and transparently, can help prevent disputes (and ultimately, settlement agreements) arising. Again, having (genuine) zero tolerance policies in place for bullying and harassment, and providing relevant training on those policies, should reduce the risk of such behaviour, which should in turn have a knock-on impact on the use of settlement agreements and NDAs.

Ultimately, careful consideration as to the inclusion, and scope, of NDAs should take place at the outset of any settlement negotiations. They should only be used to protect information which genuinely requires protection: not as a way to cover up inappropriate behaviour. Given that many now deem NDAs as unethical and unacceptable in harassment and discrimination cases, businesses would be well advised to give proper thought to their approach to NDAs and what practices best reflect their company’s ethos.

For advice on the use of NDAs/confidentiality agreements, please contact Rachael Lloyd or another member of our Employment Team, who have a wealth of experience in this area and would be happy to help.

This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.

[1] Solicitors and firms regulated by the Solicitors Regulation Authority (SRA) and Law Society are subject to specific regulatory requirements regarding the use of NDAs, which is outside the scope of this article.