Employers typically resolve employment disputes with a release of all claims and a confidentiality clause that obligates the employee to keep the terms of the agreement – and sometimes the underlying allegations – confidential. Standard severance agreements also routinely contain confidentiality clauses. Until recently, the primary risk associated with such provisions has been the possibility that overbroad clauses could be read to restrict employees from making reports of unlawful practices or disclosing sensitive information to federal agencies, or from participating in government investigations. Many employers have minimized that risk by expressly clarifying that nothing in the agreement purports to restrict employees from engaging in these whistleblowing-related activities.
But recent laws passed in response to the #MeToo movement have created a new type of risk with respect to confidentiality provisions. These new laws’ purpose is to discourage agreements that can be read to prohibit the reporting and disclosure of sexual harassment and sexual misconduct. These laws may well apply to standard settlement or severance agreements containing routine confidentiality provisions and releases that include claims of sexual harassment, sex discrimination, or sexual assault. And even more laws may be on the way.
A summary of the recent laws in this area is below:
Recent state laws nullifying certain nondisclosure or confidentiality provisions
The states of New York and Washington recently passed laws nullifying settlement agreements that prohibit disclosure of sexually harassing conduct.
The New York law states that employers have no authority to include “in any settlement, agreement or other resolution of any claim, the factual foundation for which involves sexual harassment, any term or condition that would prevent the disclosure of the underlying facts and circumstances to the claim or action unless the condition of confidentiality is the complainant’s preference.” New York S. 7507-C, Part KK, Subpart D. The law further states that the employee may have 21 days to consider the employer’s proposal to include a confidentiality/nondisclosure clause, and 7 days to revoke any acceptance. Id. It is unclear whether the law includes situations in which no “claim” has been made (e.g., in a severance agreement), or whether it prohibits an employer’s refusal to settle unless the employee “prefers” a nondisclosure clause.
The Washington law prevents employers from requiring employees to agree not to disclose sexual harassment or sexual assault, or to make agreements that have the “purpose or effect” of preventing such disclosure. See Washington Substitute Senate Bill 5996. As such, the law appears to include agreements other than settlement agreements. Notably, the Washington law expressly carves out settlement agreements that contain mere “confidentiality provisions,” and it permits employers to request that participants in sexual harassment investigations maintain confidentiality during the investigation. Id.
Numerous other states, including California, Massachusetts, New Jersey, and Pennsylvania, are currently considering similar legislation, and it would not be surprising to see even more states, and perhaps the federal government, consider restrictions on nondisclosure or confidentiality provisions in the future.
Federal tax legislation
A little-noticed provision of last year’s tax law, the Tax Cuts and Jobs Act of 2017, also has the effect of discouraging nondisclosure and confidentiality provisions. That provision prohibits companies from claiming deductions for “settlement[s],” “payment[s],” and related attorneys’ fees that are “related to sexual harassment or sexual abuse if such a settlement or payment is subject to a nondisclosure agreement . . . .” See Section 162(q) of the Tax Cuts and Jobs Act of 2017. Unfortunately, the law and its legislative history do not specifically address several important questions about this provision’s scope, including:
- What does “related to” mean? Does it encompass payments for any release that encompasses sexual harassment or “abuse” claims, even if those claims have not been asserted by the employee and are simply part of a boilerplate, full release of claims? (One would not think so, but the law does not expressly address this.) Or must the employee have specifically made claims or allegations of sexual harassment or abuse for the settlement payments or attorneys’ fees to be sufficiently “related to” such claims? What if the employee has asserted multiple different claims? How is it to be determined whether and to what extent a settlement, and the attorneys’ fees incurred, relates to sexual harassment or abuse claims versus other types of claims? Does the nondeductability of attorneys’ fees apply only to employers’ fees, or to employees’ fees as well?
- What exactly is a “nondisclosure agreement”? Does that include a simple confidentiality provision that merely requires the employee to keep the terms of the agreement confidential? What about a provision stating that if the employee is asked about the dispute, she will say “the matter is resolved and nothing more may be said?” Or, instead, is a nondisclosure agreement limited to an agreement in which the employee agrees not to discuss the underlying facts and allegations, as opposed to the terms of the settlement or severance agreement?
The Bottom Line
Nondisclosure and confidentiality provisions – many of which have been included in employers’ template agreements for years – are now under scrutiny. Employers are well-advised to stay abreast of legal developments and to review their template settlement and severance agreements with an eye toward compliance with these new laws. Because state and federal laws will continue to differ in their specifics, employers must assure that they understand and are in compliance with the laws in each jurisdiction in which these issues arise.
In addition, there are important unanswered questions that will affect how employers need to structure their settlement and severance agreements and whether they may continue to deduct certain settlement payments and attorneys’ fees for tax purposes. Those questions will, hopefully, be addressed in future lawmaking and interpretation.