Non-Disclosure Agreements and Arbitration Clauses in the #MeToo Era

Miles & Stockbridge P.C.

With the proliferation of the #MeToo movement in late 2017 came concerns over the role that employment contracts and settlement agreements played in concealing abuse by high-level executives. Confidentiality, non-disclosure and “forced arbitration” clauses came under particular scrutiny with reports that accusers were silenced by such agreements or required to litigate their claims in confidential arbitration proceedings out of the public eye. These personal accounts have prompted the passage of laws across the U.S. restricting or prohibiting non-disclosure agreements and arbitration clauses for sexual harassment and other employment related claims. This legislative trend has continued through the early part of 2019.  

In Maryland, Governor Larry Hogan signed into law the Disclosing Sexual Harassment in the Workplace Act (“DSHWA”) on May 15, 2018. See Md. Code Ann., Lab. & Emp. § 3-715. The DSHWA limits mandatory arbitration clauses in Maryland by nullifying a term in any employment agreement entered into on or after October 1, 2018 that waives, inter alia, any “substantive or procedural right or remedy” for a future claim of sexual harassment. Md. Code Ann., Lab. & Emp. § 3-715(a). The DSHWA also requires that Maryland employers with 50 or more employees submit a survey to the Maryland Commission on Civil Rights by July 1, 2020, identifying: (1) the number of settlements reached after an allegation of sexual harassment by an employee; (2) the number of settlements concerning an allegation of sexual harassment “against the same employee over the last ten years of employment;” and (3) the number of settlements concerning sexual harassment that included an agreement by both parties to keep the terms of the settlement confidential. [1] Disclosing Sexual Harassment in the Workplace Act of 2018, H.B. 1596, 2018 Sess. (Md. 2018).  

Along with Maryland, the following seven states now restrict or prohibit the application of arbitration and/or confidentiality clauses:

NJ – On March 18, 2019, New Jersey Governor Phil Murphy approved one of the most sweeping examples of #MeToo era legislation affecting employment contracts and settlement agreements with the signing of Senate Bill 121, 218th Sess. (N.J. 2019).  Effective immediately, S.B. 121 renders unenforceable provisions in employment contracts that “waive[] any substantive or procedural right or remedy” relating to discrimination, retaliation or harassment. S.B. 121 also provides that any employment contract or settlement agreement “which has the purpose or effect of concealing the details relating to a claim of discrimination, retaliation, or harassment” shall be unenforceable against current and former employees. [2] New Jersey’s law sweeps more broadly than Maryland’s DSHWA, as it nullifies “forced arbitration” and confidentiality clauses relating to a wide variety of employment related claims, regardless of whether the alleged conduct was motivated by the claimant’s sex.   

CA – California also passed #MeToo legislation effective January 1, 2019, that applies to a wide variety of claims, beyond just sexual harassment. California has generally barred employers from requiring an employee to sign any document that denies the employee the right to disclose information about unlawful acts in the workplace, whether concerning sexual harassment or other unlawful behavior. Cal. Gov't Code § 12964.5(a)(2). Settlement agreements are exempted from this law, but California has also amended its Civil Procedure Code to prohibit any provision of a settlement agreement that prevents the disclosure of factual information concerning a claim filed for sexual assault, sexual harassment, or discrimination based on sex. Cal. Civ. Proc. Code § 1001(a). [3] 

NY – New York has similarly restricted arbitration and confidentiality clauses, but has taken a more limited approach than New Jersey and California. Specifically, as of July 11, 2018, New York employers shall have no authority to include in any settlement agreement concerning a claim, “the factual foundation for which involves sexual harassment,” a condition that would prevent the disclosure of the underlying facts of the claim “unless the condition of confidentiality is the complainant’s preference.” [4]  N.Y. C.P.L.R. § 5003-b; N.Y. Gen. Oblig. Law § 5-336. New York has also barred employers from entering into contracts with their employees that “require as a condition of the enforcement of the contract or obtaining remedies under the contract that the parties submit to mandatory arbitration to resolve any allegation or claim of an unlawful discriminatory practice of sexual harassment.” N.Y. C.P.L.R. § 7515.    

VT – On May 28, 2018, Vermont Governor Phil Scott signed into law “[a]n act relating to the prevention of sexual harassment,” which shares several characteristics with the New Jersey, California and New York laws discussed above. Beginning July 1, 2018, Vermont employers shall not require, as a condition of employment, that an employee sign an agreement that prohibits the employee from disclosing or reporting sexual harassment, or “purports to waive a substantive or procedural right or remedy available to the employee with respect to a claim of sexual harassment.” Vt. Stat. Ann. tit. 21, § 495h(g). Vermont has not prohibited confidentiality clauses as part of agreements to settle claims for sexual harassment, but is the only state to prohibit a settlement term that “restrict[s] the employee from working for the employer” and related entities. [5] Vt. Stat. Ann. tit. 21, § 495h(h)(2).

WA – Effective June 7, 2018, Washington State will void a provision in any employment agreement that requires an employee to: (1) submit a claim of discrimination to confidential arbitration; (2) waive the right to publicly pursue a claim under state or federal anti-discrimination laws; or (3) waive the right to publicly file a complaint with an appropriate state or federal agency. Wash. Rev. Code Ann. § 49.44.085. Employers also may not require, as a condition of employment, employees to sign non-disclosure agreements preventing the disclosure of sexual harassment or sexual assault “occurring in the workplace, at work-related events coordinated by or through the employer, or between employees, or between an employer and an employee, off the employment premises.” Wash. Rev. Code Ann. § 49.44.210(1). There are three notable exceptions to the bar of non-disclosure clauses under this law: settlement agreements between an employer and employee, human resources personnel, supervisors, or managers that are expected to maintain confidentiality as part of their job responsibilities, and individuals participating in an ongoing investigation into sexual harassment that are requested to maintain confidentiality during the pendency of the investigation. Wash. Rev. Code Ann. § 49.44.210(4).  

TN – Effective May 15, 2018, Tennessee enacted a rather straightforward piece of #MeToo era legislation, providing that Tennessee employers shall not require employees “to execute or renew a non-disclosure agreement with respect to sexual harassment in the workplace as a condition of employment.” Tenn. Code Ann. § 50-1-108.

AZ – Finally, although Arizona has not prohibited confidentiality or “forced arbitration” clauses, outright, it does allow individuals to breach such agreements in order to disclose information relating to a sexual offense or obscenity when: (1) “[r]esponding to a peace officer’s or a prosecutor’s inquiry[,];” or (2) “[m]aking a statement not initiated by that party in a criminal proceeding.” Ariz. Rev. Stat. Ann. § 12-720.  

Similar bills prohibiting or limiting arbitration clauses and non-disclosure agreements were also proposed in Illinois, Hawaii, Louisiana, Texas, and Connecticut during the current legislative session.  

In light of this changing landscape, employers should continue to monitor developments in jurisdictions where they operate, and consider the application of appropriate exceptions when drafting settlement agreements and employment contracts in accordance with state law. Employers should also keep in mind that the Federal Tax Cuts and Jobs Act prevents a tax deduction for “any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement,” including the attorney’s fees related to such a settlement. 26 U.S.C.A. § 162(q) (emphasis added). Thus, even if a confidentiality or non-disclosure agreement is permissible under state law, employers will pay a price for attempting to silence employees’ sexual harassment claims.  

On the other hand, the Internal Revenue Service has clarified that § 162(q) would not preclude a plaintiff from claiming a deduction for his or her attorney’s fees where the settlement is subject to a non-disclosure agreement. See U.S. INTERNAL REVENUE SERVICE, SECTION 162(Q) FAQ. Moreover, several states have rendered non-disclosure agreements unenforceable only against the employee, or have created exceptions to the ban on non-disclosure agreements if the claimant prefers to include such a term in the settlement agreement. See discussions of New Jersey, California and New York, supra. Accordingly, although employers typically endeavor to maintain confidentiality irrespective of the settlement agreement, employees settling claims in these jurisdictions may still insist that the settlement be subject to a non-disclosure clause.

In light of the recent laws banning confidentiality provisions, more employees are likely to publicize claims of sexual harassment and discrimination against their employers. While laws banning “forced arbitration” are similarly intended to increase the number of harassment claims filed in public forums—as opposed to confidential arbitration—the ultimate impact of such laws is more uncertain since the Supreme Court has generally interpreted the Federal Arbitration Act to preempt state laws that categorically prohibit arbitration of certain claims. See, e.g., AT&T Mobility v. Conception, 563 U.S. 333, 341 (2011). Practitioners should therefore expect a preemption challenge to #MeToo inspired legislation affecting arbitration agreements in the near future.  

[1] While the “aggregate number of responses from employers” for each category will be published on the Commission’s website, the information in the second category will be available for each employer upon request by members of the public.  Employers must submit an additional survey by July 1, 2022. 

[2] Under S.B. 121, “[i]f the employee publicly reveals sufficient details of the claim so that the employer is reasonably identifiable, then the non-disclosure provision shall also be unenforceable against the employer.”

[3] This law allows for two exceptions: 1) “a provision that shields the identity of the claimant and all facts that could lead to the discovery of his or her identity, including pleadings filed in court,” where such provision is included at the request of the claimant; or 2) “a provision in any agreement that precludes the disclosure of the amount paid in settlement of a claim.” Cal. Civ. Proc. Code § 1001(c), (e).  

[4] According to FAQs issued by the State of New York, the complainant’s preference for confidentiality is demonstrated through a three-part process, whereby: 1) the confidentiality term or condition is provided to all parties, and the complainant has 21 days to consider same; 2) after the 21 days, the complainant’s preference for confidentiality is memorialized in a separate agreement signed by all parties; and 3) the complainant has seven days following the execution of the agreement with the confidentiality provision to revoke the agreement. NEW YORK STATE, COMBATING SEXUAL HARASSMENT: FREQUENTLY ASKED QUESTIONS: NONDISCLOSURE AGREEMENTS,  

[5] Under Vermont’s law, any settlement agreement for a claim of sexual harassment must also explicitly state that it does not prohibit the complainant from:
(i) lodging a complaint of sexual harassment committed by any person with the Attorney General, a State's Attorney, the Human Rights Commission, the Equal Employment Opportunity Commission, or any other State or federal agency; (ii) testifying, assisting, or participating in any manner with an investigation related to a claim of sexual harassment conducted by the Attorney General, a State's Attorney, the Human Rights Commission, the Equal Employment Opportunity Commission, or any other State or federal agency; (iii) complying with a valid request for discovery in relation to civil litigation or testifying in a hearing or trial related to a claim of sexual harassment that is conducted by a court, pursuant to an arbitration agreement, or before another appropriate tribunal; or (iv) exercising any right the individual may have pursuant to State or federal labor relations laws to engage in concerted activities with other employees for the purposes of collective bargaining or mutual aid and protection. Vt. Stat. Ann. tit. 21, § 495h(h)(2)(A).

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation.The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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