The risks and consequences arising from non-disclosure agreements (NDAs) are routinely underestimated and rarely explored by solicitors, a major review has found.
But the Solicitors Regulation Authority’s (SRA) thematic review found “no direct evidence” of solicitors drafting NDAs with the deliberate intention of preventing reporting of inappropriate behaviour.
At the same there, there were “a number of common trends or practices which inadvertently might contribute to this happening”.
Following the warning notice on the use of NDAs issued by the SRA in March 2018 and updated in November 2020, the SRA surveyed 150 law firms of different sizes that provided employment services and then conducted in-depth interviews, onsite visits and file reviews with 25 of those firms most active in this area.
Most NDAs complied with the warning notice, although only 64% of fee-earners told the SRA they were aware of it, and knowledge on the issues it covered was “fairly low”; there was little evidence of ongoing NDA-specific training within the firms visited.
Only a quarter of the firms visited had ever questioned a client on whether inclusion of an NDA was appropriate. “Overall we found a fundamental imbalance of power in how NDAs are drafted. Employers will generally dictate the terms of any agreement, sometimes before or without an employee engaging legal advice of their own.
“Firms also tend to use their own standard templates, which often do not take account of the individual circumstances of a given case.
“While we did not see any evidence of clauses intentionally suppressing reports of wrongdoing, in a minority of cases we identified issues that could result in inhibiting or deterring disclosure of information.”
The SRA found agreements/templates which expressly omitted permitted disclosures, restrictive non-derogatory clauses and inappropriate clawback or penalty clauses.
Relying on templates could leave “a knowledge gap in terms of issues not covered within standard forms and guidance and a level of complacency about the risks”, the SRA said.
“Our evidence suggests that the risks posed by NDAs are routinely underestimated and rarely explored. Firms (and clients) instead focus far more on the nature and extent of any possible financial settlement, rather than the specific clauses within any agreement.”
Employers generally set short time limits, typically seven days, for an employee to sign an agreement and that there was “a general sense of urgency permeating the negotiation process”.
With employees were unable or unwilling to pay for legal advice and employers often making a “minimal” financial contribution towards it, in most cases NDAs were rarely amended and/or negotiated by the employee. Only a few firms provided training for fee-earners on vulnerability.
The SRA said it was not its role to stipulate the level of discretionary costs that employers should contribute for others to seek legal advice.
“However, what is clear is that solicitors acting for employees need to be explicit with clients about the extent of the advice they can provide where the budget is limited, and be satisfied that they are able to carry out their role to a competent standard in the time provided…
“Overall, a combination of the employer’s standard agreements with ‘blanket’ NDAs, minimal contributions to costs and employee referrals to preferred firms all risk strategically favouring the interests of employers over employees.
“It also poses ethical risks for firms if commercial interests mean employees are not afforded the time needed for tailored agreements and advice as a result.”
The wider survey found that 14 of the 150 firms had raised concerns with another firm about an unethical or unenforceable clause in an NDA, and only three reported them on to the SRA.
The regulator looked too at how firms used NDAs themselves. Fourteen (all larger firms) of the 25 visited had between them received 112 complaints which stemmed from allegations of inappropriate behaviour in the workplace.
Of these, 18 complaints had been fully or in part upheld – of which 10 were then reported to the SRA – three resulted in disciplinary action and 47 led to settlement agreements that contained NDAs.
Seven firms said they would never enter into an NDA with an employee “because they felt it would have an impact on their culture”.
The review concluded: “NDAs were generally viewed by firms as low risk and fairly straightforward activity. This can lead to some complacency about the scope and relevance of NDAs and the need to tailor templates.
“This is potentially concerning in the context of bargaining power differences within the workplace. While confidentiality clauses may seem standard, often the individual circumstances are not.”
The SRA advised law firms on both sides of an NDA to take “active steps to support clients and help them make informed decisions” and be aware that the circumstances behind many NDAs can often mean clients and third parties involved are vulnerable.
“We are also concerned at the number of firms who admit to concerns about the behaviours of another firm in drawing up an NDA but have not gone on to report their concerns – including to us.
“We would remind firms and solicitors that their obligations in this area are not just to protect the specific client they are dealing with at the time, but also to report to us in order that we are able to action in the wider public interest.”
The SRA said it would now look to review the warning notice and “reinforce those areas where we have identified gaps in knowledge, and deliver webinars and publications to increase the level of knowledge amongst the profession”.
It is also proposing a “co-ordinated programme of public education across the legal regulators”.