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Non-Disclosure Agreement Controversies - What Firms, Employees Need To Know

Sybille Steiner and Natalie Taylor, 14 March 2019


Recent prominent uses of NDAs have created a firestorm of controversy. And the wealth management sector will be affected when trouble strikes. Lawyers at Irwin Mitchell consider the issues.

Recent high-profile sexual harassment allegations and the use of non-disclosure agreements to clamp down on media reporting have implications for all kinds of legal cases, such as those involving employees in the wealth management sector, for instance. It is therefore highly timely to have the comments here from Sybille Steiner, who is head of the Southern employment team at Irwin Mitchell, and Natalie Taylor, solicitor at the employment team at the same firm.

The editors are pleased to share these thoughts with readers. If readers want to respond, email tom.burroughes@wealthbriefing.com. This publication stresses that it does not necessarily endorse views of all contributors.

In the wake of the recent sexual harassment allegations which have been exposed through the #MeToo movement, employers who are faced with workplace disputes which include sexual harassment allegations need to be aware that the use of so-called ‘gagging clauses’ included in non-disclosure agreements (NDAs) has proved controversial and is being debated by the government. 

The Women and Equalities Committee appealed to regulators in certain industries, including the legal and financial services sectors, to take a more active interest in employers’ actions to protect workers from sexual harassment. Employers, therefore, need to understand how they can use NDAs in an ethical manner and what they should do to address sexual harassment in the workplace. 

Use of NDAs in the workplace
NDAs are legally binding contracts to prevent people from discussing confidential information and to protect trade secrets. NDAs can be used in a variety of legal situations: 

-- In the corporate context, NDAs are signed between two parties (typically companies) who are discussing a sensitive transaction, such as a possible asset or share sale. The seller wants to ensure that the buyer, who is often a direct competitor, does not misuse any confidential information and trade secrets which are disclosed during the due diligence process, particularly if the sale folds. 

-- In the employment context, NDAs are rarely used as a separate agreement, although confidentiality clauses will most certainly be included in employment contracts and, once an employment relationship terminates, within settlement agreements. Among other things, these clauses can prevent employees from openly discussing harassment, bullying and discrimination. The government is particularly worried about the use of NDAs to silence victims of workplace sexual harassment.  

Despite the government’s concerns, settlement agreements with confidentiality clauses can be a useful tool for both parties. The employer will be reassured that it faces no legal action, both protecting its reputation and limiting any financial repercussions from having to defend a claim. 

A settlement agreement will also allow the employee to draw a line under the dispute and move on, usually by finding a new job. Employment tribunal decisions are publicly available on the internet, which sometimes concerns both employees and employers. Having gone through potentially traumatic experiences, employees may be worried about potential repercussions on their personal life, professional life and finances. Employment disputes are, by their very own nature, distressing and upsetting. Many employees see the benefits of accepting a financial settlement which will allow them to start again. Settlement agreements with confidentiality clauses can therefore be helpful, provided they are used correctly. 

Protecting the employer’s reputation 
When faced with sexual harassment allegations, the main concern for an employer is to protect its reputation, particularly when the alleged perpetrator is a senior member of staff. Depending on the severity of the allegation, the employer is likely to be exposed to public scrutiny, particularly if it has not taken any action against the alleged offender. This often leaves employers in a precarious situation. 

On the one hand, they need to take allegations of harassment seriously and act on any concerns or grievances raised by employees. On the other hand, they have an obligation towards the accused employee to conduct a fair and reasonable disciplinary procedure. This should include a thorough investigation into the allegations followed by a disciplinary hearing where the accused has the opportunity to address the allegations. The employer should then inform the accused employee in writing of any sanctions imposed and give them the right to appeal the decision. 

Companies may therefore be exposed to legal challenges by the accused if they take swift and impulsive actions without following a fair and thorough procedure. Employers who face these situations need to manage them carefully and, in most circumstances, seek adequate legal advice. 

What if an employee ignores the NDA? 
In recent cases, some employees have decided to breach their confidentiality obligations and have publicly spoken about their sexual harassment experiences. What can companies do about this? The reputational damage to the company has already been done. While, strictly speaking, the former employer may have a contractual claim against the employee for breaching the NDA, it should consider this carefully from a PR perspective. Any legal action against the employee would be in the public domain and would be likely to tarnish the company’s reputation further. Companies will need to consider all the elements (including the cost and managerial time involved in litigation and the uncertain outcome) when deciding whether to take any formal action. 

Moreover, to bring a successful claim for breach of contract, the company will have to demonstrate that it suffered a loss because of the breach. Practically, this can be difficult to prove. While sale numbers may decline because of the bad press received, the company will have to link this to the fact that the employee broke the gagging clause. Although it may be possible to prove this, it will be very fact dependent. 

Instead of considering what legal actions are available, employers can try to limit any reputational damage by actively investigating the matter, ideally as soon as the allegations have been raised. This may include conducting a disciplinary investigation and disciplinary meeting with the alleged perpetrator. If the employer reasonably believes that the allegations are true, it may be entitled to impose sanctions on the perpetrator, possibly resulting in dismissal.  

Employers can also use the situation as an opportunity to update any internal procedures and policies, such as those on bullying and harassment, and remind employees that they are obliged to adhere to these policies. This will limit the reputational damage if an employee goes public. 

What next? 
Various regulatory bodies have started to take action to tackle sexual harassment in the workplace. The FCA responded to the Committee’s report stating that they will continue to give this topic serious consideration and to continue to focus on the issue. The Solicitors Regulation Authority is investigating the solicitor firm which drafted the NDA for Harvey Weinstein’s company, which was intended to silence Weinstein’s former personal assistant, Zelda Perkins. In addition, the Law Society has recently published guidance on non-disclosure agreements and confidentiality clauses in an employment law context. This shows that the FCA, the SRA and the Law Society are taking the ethical use of NDAs and sexual harassment in the workplace seriously and companies employing staff should do the same.  

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