California Tightens “Non-Disparagement” Terms in Employment Settlement and Severance Agreements

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The State of California has adopted a number of laws in the past few years that are designed to limit “non-disclosure” provisions in employment agreements.

What is a Non-Disclosure Clause?

A non-disclosure clause in an employment agreement is a provision that prohibits an employee from unauthorized disclosure of the employer’s confidential information. Employers also use nondisclosure agreements to keep employees from stealing, misusing, or unlawfully disclosing the business’ trade secrets and confidential information to which the employee may have access in their tenure in the organization. The non-disclosure clause or agreement’s objective is to prevent employees from stealing the employer’s protected information or using it in a manner that will hurt the company.

California’s laws concerning non-disclosure clauses in employment settlement and severance agreements were enacted in response to the “Me Too” movement. These laws limited non-disclosure provisions in settlement agreements for lawsuits and administrative agency charges involving sexual harassment allegations. Moreover, these recently enacted statutes also restrict employers from negotiating non-disclosure provisions in exchange for a raise or a bonus, or as a condition of employment or continued employment.

AB 749 and SB 331

Approved by the governor on October 12, 2019, AB 749 restricts the use of “no-rehire” provisions in employment settlement agreements. Specifically, the bill prohibits:

an agreement to settle an employment dispute from containing a provision that prohibits, prevents, or otherwise restricts a settling party that is an aggrieved person, as defined, from working for the employer against which the aggrieved person has filed a claim or any parent company, subsidiary, division, affiliate, or contractor of the employer.

In addition, the bill stated that a provision in an agreement entered into on or after January 1, 2020 that violates this prohibition is void as a matter of law and against public policy.

SB 331, approved by governor on October 07, 2021, moves the notion forward by more broadly restricting the use of non-disclosure provisions in various types of employment agreements—such as settlement and separation agreements. The new legislation modifies two of the laws from 2019. It goes into effect on January 1, 2022.

Settlement Agreements in California Employment Discrimination Cases

As the laws currently stand, California Code of Civil Procedure section 1001 states that a settlement agreement can’t prevent the disclosure of facts concerning a lawsuit or administrative agency charge about sexual assault, sexual harassment, discrimination based on sex, or retaliation against a person for reporting harassment or discrimination based on sex. Section 1001 also permits parties to agree to conceal the identity of the claimant as well as the dollar amount of a settlement. Plus, a term may be added to a settlement agreement at the request of the claimant that also shields any facts that could lead to the discovery of his or her identity, such as the court pleadings. However, this doesn’t apply if a government agency or public official is a party to the settlement agreement.

With the passage of SB 331, the law adds to these restrictions to include not only sexual harassment and discrimination, but any kind of discrimination prohibited by the Fair Employment and Housing Act (FEHA). As a result, this includes allegations of discrimination on the basis of race, religious creed, color, national origin, ancestry, physical disability, mental disability, medical condition, genetic information, marital status, sex, gender, gender identity, gender expression, age, sexual orientation, or veteran or military status.

FEHA, specifically, California Government Code section 12964.5, prohibits various actions as unlawful employment practices unless the employer acts based upon a bona fide occupational qualification or applicable security regulations established by federal or state law. FEHA makes it an unlawful employment practice for an employer, in exchange for a raise or bonus, or as a condition of employment or continued employment, to require an employee to sign a non-disparagement agreement that acts to deny an employee’s right to disclose information about unlawful acts in the workplace, including sexual harassment or discrimination.

However, in a settlement agreement concerning a previously-filed lawsuit or charge, SB 331 still permits for the identity of the claimant and all facts that could aid in the discovery of the claimant’s identity to remain confidential at the request of the claimant. Nonetheless, the new law doesn’t prohibit the parties from agreeing to keep confidential the settlement amount paid. Moreover, this new law also restricts the use of non-disclosure provisions in other types of employment agreements—such as severance agreements—even if there’s been no litigation, claim, or internal complaint filed.

The current law states that its limitations don’t apply to a negotiated settlement agreement to resolve pending litigation. That includes a settlement from a court, an administrative agency, or any type of alternative dispute resolution (ADR). It also includes the settlement a complaint in employer’s internal complaint process.

SB 331 defines the term “negotiated” as meaning that the agreement is “voluntary, deliberate, and informed, provides consideration of value to the employee, and that the employee is given notice and an opportunity to retain an attorney or is represented by an attorney.”

In addition, this section of SB 331 doesn’t prohibit the entry or enforcement of a provision in any agreement that precludes the disclosure of the amount paid in a severance agreement; further, this section doesn’t prohibit an employer from protecting the employer’s trade secrets, proprietary information, or confidential information that doesn’t involve unlawful acts in the workplace.

Also, SB 331 modifies the phrase, “information about unlawful acts in the workplace.” The law eliminates “including but not limited to sexual harassment” and defines the terms as including “but is not limited to, information pertaining to harassment or discrimination or any other conduct that the employee has reasonable cause to believe is unlawful.” This change is similar to the changes for settlement agreements. Again, the amendments expands the scope of the prior law—which was effectively restricted to claims involving sex harassment or discrimination. Now, it will include claims involving discrimination on any basis, such as race, religious creed, color, national origin, ancestry, physical disability, mental disability, medical condition, genetic information, marital status, sex, gender, gender identity, gender expression, age, sexual orientation, or veteran or military status.

New Law Limits What Can Be Included in Separation or Severance Agreements

The amended law also specifically limits what terms may be included in a separation or severance agreement. With identical language as the current statute for non-disparagement agreements, SB 331 prevents employers from using a term in an employment separation or severance agreement that prevents the disclosure of “information about unlawful acts in the workplace,” apply the new definition stated above.

However, California employers should note that SB 331 law doesn’t restrict the use of non-disparagement clauses in a “negotiated settlement agreement” and doesn’t limit the ability of parties to keep in the payout in a severance agreement confidential. In addition, the new law doesn’t limit employers from protecting its trade secrets, proprietary information, or confidential information “that does not involve unlawful acts in the workplace.” SB 331 provides some sample verbiage that allows for a contract provision by which the parties exclude certain provisions in a general confidentiality clause in any agreement between an employer and employee. This sample language states:

Nothing in this agreement prevents you from discussing or disclosing information about unlawful acts in the workplace, such as harassment or discrimination or any other conduct that you have reason to believe is unlawful.

SB 331 also says that a California employer offering an employee or former employee a separation agreement must notify the employee that he or she has a right to consult an attorney regarding the agreement. The employer must also provide the employee with a reasonable time period of not less than five business days in which to do so. To that end, an employee may sign a separation agreement before the end of that time period, provided his or her decision to accept the shortening of time is “knowing and voluntary and is not induced by the employer through fraud, misrepresentation, or a threat to withdraw or alter the offer prior to the expiration of the reasonable time period, or by providing different terms to employees who sign such an agreement prior to the expiration of such time period.”

Takeaway

California employers should be prepared to comply with these new restrictions. To start, business owners should review any pending disputes, along with current employment relationships to see if they can be resolved before SB 331 takes effect. Again, the law goes into effect on January 1, 2022.

Also, employer policies and provisions on confidential information and trade secrets should be examined to see if they’re affected by the new law.

Contact us today for questions about how these new laws might impact your business contracts.

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