Settlement Agreements: Confidentiality Clauses

Settlement agreement confidentiality clauses are standard. Nevertheless, where the scope of the clause extends too far, such clauses can end up being unenforceable due to illegality. For instance, where the effect of the confidentiality clause ends up preventing the employee from exposing wrong doing/criminal acts by prohibiting them from speaking out, then not only are such clauses illegal and unenforceable, but they have often been dubbed "gagging clauses".

Settlement Agreement Confidentiality Clauses

Typically, settlement agreement confidentiality clauses incorporate the following standard terms:

  • That the employee must not disclose any legitimate trade secrets or any information they have come into possession of as a result of working for the employer, to any third parties
  • That the employee must not disclose either the existence of or the terms and conditions of the settlement agreement to any outside third parties, except for their legal adviser, their immediate family, and those organisations where there is an obligation to do so (e.g. the HMRC). Where the employee does disclose details to a member of their family, then that member of the family is also bound by the duty of confidentiality not to disclose those details to any third parties. The purpose of all this is to keep the terms of the settlement agreement private, including the compensation amount and the reasons as to why the parties have entered into the settlement agreement.
  • That the employee must not make derogatory remarks about the employer, its servants or agents. There is also normally a reciprocal clause under which the employer undertakes to use its best endeavours to ensure that its servants or agents do not make any derogatory remarks about the employee

Why Are Settlement Agreement Confidentiality Clauses Controversial?

Confidentiality clauses have become controversial in recent times as some employers extended them too far to the point where they ended up amounting to gagging clauses, as they effectively covered up wrong doing, criminal activity, negligence, incompetence, etc. That is, the employer either sought to, or had been perceived to have sought to, prevent employees from disclosing such information, where disclosure would be deemed to be in the public interest. One example of this was the scandal surrounding Mid Staffordshire NHS Foundation Trust. in which it was found that numerous patients had died due to poor care. It was argued that this issue could have been exposed a lot sooner had potential whistleblowers not been prevented from speaking out by confidentiality clauses. In response to this scandal, the Department of Health stated: “The government has taken a series of steps to encourage an open dialogue, including changing the NHS constitution to enshrine the fact that NHS organisations should support staff who raise concerns, ensure those concerns are fully investigated and ensure that there is someone independent, outside of their team, to speak to. That change also set out a legal right for staff to raise concerns about safety, malpractice or other wrongdoing without suffering any detriment. We have consistently made clear to the NHS that local policies should prohibit the inclusion of confidentiality gagging clauses in contracts of employment and compromise agreements which seek to prevent the disclosure of information which is in the public interest. Sir David Nicholson, head of the NHS commissioning board, has also written to NHS organisations reminding them of their responsibilities in relation to compromise agreements. As we made clear……., the culture in the NHS needs to change and high-quality patient care must be paramount.”

The Enforceability of Confidentiality Clauses

Confidentiality clauses are usually mutually beneficial for both employer and employee and have no wider adverse ramifications for anybody outside of those parties, so long as they are drafted properly. As previously indicated, the standard terms contained within the confidentiality provisions are as follows:-

  • A clause which prohibits the disclosure of both the existence of the settlement agreement, and its terms and conditions
  • A clause which prohibits the disclosure of trade secrets, business sensitive information, and client/customer data.
  • A clause under which the employee undertakes not to make any derogatory remarks about the employer, its servants or agents, and a reciprocal clause under which the employer undertakes to use its best endeavours to prevent its servants or agents from making derogatory remarks about the employee.

So long as the confidentiality clause is confined to those elements, then normally that is perfectly acceptable as such clauses are mutually beneficial for both parties and have no wider adverse impact on anyone outside of the two contracting parties. However, the problems arise where the employer looks to extend the ambit too far, to the point where they seek to prevent the employee from raising legitimate concerns that are in the public interest, thereby rendering the confidentiality clause void and unenforceable. It would become void and unenforceable once it is deemed to obstruct and infringe upon the employees right to make a protected disclosure (i.e. whistleblowing) under the Public Interest Disclosure Act (PIDA) 1998 (as amended by the Enterprise and Regulatory Reform Act 2013). Under that Act, an employee can make a protected disclosure against their employer so long as they have a reasonable belief that disclosure is in the public interest.

Accordingly, when drafting the confidentiality clause for the settlement agreement, it is essential to ensure that it is appropriate given the circumstances, and that is is compliant with the PIDA 1998. In that respect, it should be made explicitly clear within the settlement agreement that the confidentiality clause does not prevent the employee from raising legitimate concerns that are in the public interest, and that it does not either override, supersede, or supplant their right to speak out/provide disclosure under PIDA 1998.

Settlement Agreements: Main Page

What is a Settlement Agreement?

Standard Terms Within Settlement Agreements

What Are The Costs For Advising On A Settlement Agreement?