Two Can Keep a Secret… If the Contract Holds Up: How to Use Non-Disclosure Covenants in the #MeToo Era

Foley & Lardner LLP

Foley & Lardner LLPThe non-disclosure provision of a routine employment settlement agreement has typically been a common and easily agreed-upon term of resolution.  These provisions—where the employer and employee agree not to publicly discuss the reasons for the employee’s separation or the terms of the agreement—provide a key benefit to both parties. 

Employers can settle meritless claims to protect their reputation and keep allegations out of the public eye, while employees can be assured their complaint won’t follow them to later jobs. However, the #MeToo era has spawned a slate of recent measures that are making confidentiality provisions harder to use.  Since the #MeToo movement gained traction, companies that have used confidentiality clauses, including clauses with heavy financial penalties for breach, have experienced a backlash. Some of these companies have been derided as using unequal bargaining power to stifle public discourse about these issues.  

This criticism first gained the attention of the media and was quickly followed by legislators.  Several states, as well as the federal government, have placed these provisions in the crosshairs, putting at risk the legitimate business benefit these clauses can provide both parties.  For example, the federal Tax Cuts and Jobs Act eliminates the tax deductibility of a sexual harassment settlement if a non-disclosure is included.  

Likewise, several states, including New York, New Jersey, Washington, and others, have passed laws limiting or restricting the use of non-disclosure covenants, such as through requiring informed consent or eliminating enforceability of blanket confidentiality provisions signed before the particular dispute arose.  

In this legislative landscape, however, all is not lost, and non-disclosure provisions can still be used if employers take an informed and thoughtful approach. 

The question then becomes:  How to properly and lawfully use a legitimate non-disclosure covenant in employee settlement agreements?  These guiding concepts can help navigate the minefield: 

  • When using a non-disclosure provision in a settlement agreement, use language that establishes the claimant has been informed and intentionally desires and consents to the provision;
  • Use liquidated damages provisions sparingly and ensure the amount is reasonable—if the amount is so high that the claimant could not realistically make the payment, it can be viewed as a penalty and rejected, and the entire covenant can be voided; 
  • Expressly carve out the claimant’s rights to speak freely to any government agency, such as the EEOC, SEC, NLRB, or OSHA, relating the claimant’s own claim or on behalf of another; 
  • Ensure confidentiality provisions relating to the employer’s confidential and trade secret business information are addressed separately—these promises are still enforceable and highly valuable, regardless of the type of claim; and 
  • Regularly review and revise your forms to stay on top of federal, state, and local laws—a provision that was compliant a year ago may not pass muster today. 

Non-disclosure covenants can still be used to settle employment disputes and can offer meaningful benefits to both employer and employee.  However, if used incorrectly, the covenant can be voided and potentially upset the entire settlement.  Stay up-to-date on the latest rules and carefully craft these once-boilerplate provisions so that the parties can effectively and privately resolve employment claims. 

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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