New York Further Limits Scope of Non-Disclosure Agreements in Employment Discrimination Cases

December 11, 2023
Rachel E. Green

On November 17, 2023, New York Governor Hochul signed a bill into law making significant changes to New York’s law on nondisclosure agreements.  The amendments went into effect immediately and apply to agreements entered into on or after the effective date.  There are three key changes that further restrict the use of NDA provisions in certain employment settlement agreements. On the whole, these changes are good for New York employees who have experienced harassment, discrimination, or retaliation in the workplace.

New York’s Non-Disclosure Agreement Laws
First, to provide some background on New York’s Non-Disclosure law: in 2018, in the midst of the #MeToo movement, the New York legislature passed into law budget bill S. 7507–C, which provided for the addition of an entirely new section into the New York General Obligations Law, Section 5-336.  Section 5-366, one of the original #MeToo statutes, was intended to limit the use of confidentiality agreements that prevent victims of sexual harassment from disclosing the harassing conduct in a way that might prevent future harassment.

Originally, Section 5-336 provided that no employer could include a non-disclosure condition in a “settlement, agreement or other resolution of any claim” involving sexual harassment, unless the “condition of confidentiality is the complainant’s preference” and the complainant was provided twenty-one days to consider the condition plus seven days to revoke the agreement after signing it.  In other words, a non-disclosure could only be included in an employment settlement involving claims of sexual harassment if the term was the complainant’s choice, and if the parties complied with the twenty-one day consideration time period, plus the seven-day revocation period.  Bill S. 7507-C also added a new section to New York’s civil practice law, NY CPLR § 5003-b, which applied the same restrictions to non-disclosure agreements included in stipulations, decrees, or settlement agreements for filed claims or causes of action.

In 2019, New York amended the statute with bill A. 8421 to ensure that the law’s non-disclosure restrictions apply to any prohibited discrimination: the 2018 law only applied to claims invol+ving sexual harassment.  The 2019 amendments also required that any such non-disclosure condition must be provided in writing in plain English (and, if applicable, the primary language of the complainant) before the twenty-one day consideration time period could start.

In addition, the 2019 amendments clarified that any such nondisclosure condition is void if it restricts the complainant from participating in several activities, including testifying or complying with a subpoena conducted by the appropriate local, state, or federal agency, or filing or disclosing facts required to receive unemployment insurance or other public benefits to which the complainant is entitled.

Finally, the 2019 amendments expanded the law’s applicability to a “contract or other agreement” between an employer and an employee or potential employee that “prevents the disclosure of factual information related to any future claim of discrimination” unless such provision notifies the employee or potential employee that the provision does not prohibit them from speaking with law enforcement, the Equal Employment Opportunity Commission, the state division on human rights, a local commission on human rights, or an attorney retained by the employee or potential employee.  While not as expansive as the 2018 and 2019 restrictions to nondisclosure conditions included as a part of post-claim settlement agreements, the 2019 amendment importantly extended some boundaries to employment contracts to restrict employers from limiting employees and prospective employees from later speaking out about claims of discrimination under the enumerated circumstances.

Gaps in New York’s Non-Disclosure Agreement Laws Pre-2023
As discussed above, originally, Section 5-336 prohibited employers from requiring a nondisclosure provision in a release agreement involving claims of discrimination, unless confidentiality was the employee’s preference and the employee was given twenty-one days to consider the agreement and then seven days to revoke it.  In practice, this meant that, even if the employee preferred the inclusion of a nondisclosure agreement in the release agreement, the agreement could not go into effect (and the employee could not receive any settlement payment) at least until after the passage of twenty-eight days.  This lengthy delay had little, if any, effect on employees’ desire (or lack thereof) to include a nondisclosure provision in the agreement, and only resulted in considerable delay in finalizing settlements.

Furthermore, originally, employers were permitted to include penalizing liquidated damages and clawback provisions in nondisclosure agreements.  These sometimes required the employee to pay back the entire settlement payment plus exorbitant liquidated damages in the case of breach.  These extreme provisions sometimes spooked employees from settling, fearful that a vindictive employer might accuse them of breach to embroil them in an expensive lawsuit about whether a breach had occurred.

Finally, originally, Section 5-336 applied only to claims involving “discrimination,” but did not specify whether it also applied to claims involving retaliation for reporting discrimination, or for claims involving discriminatory harassment.  This meant that some employees who had experienced discriminatory harassment in the workplace, or who had reported discrimination and were retaliated against for doing so, could be forced into signing nondisclosure agreements without any of the restrictions provided by Section 5-336.

The Key Changes to New York’s Non-Disclosure Agreement Law
Responsive to these shortcomings, New York bill S4516, signed into law and effective immediately on November 17, 2023, amends Section 5-336 of the New York General Obligations Law in three ways.

First, and most prominently, employers settling claims of unlawful discrimination, including discriminatory harassment, or retaliation, may not include a term or condition that requires the employee to:

  1. Pay liquidated damages if they violate the nondisclosure or nondisparagement clause;
  2. Forfeit all or part of the consideration (payment) for the agreement if they violate the nondisclosure or nondisparagement clause; or
  3. Make an affirmative statement, assertion, or disclaimer that the employee was not subject to unlawful discrimination, harassment, or retaliation.

It is not entirely clear whether Section 5-336, as amended, applies to asserted claims that are being resolved by agreement as well as to standard separation agreements where no claim has been asserted.  The newly added Section 5-336(3) states that “no release of any claim” shall be enforceable if the above unlawful provisions are included.  The broad “no release of any claim” language suggests that the legislature intended this section to apply to all release agreements, including standard separation agreements or any agreement before claims have been asserted, such as the employment contracts discussed above.  However, some paragraphs in the statute, including Section 5-336(3), are limited to agreements “resolving such claim[s],” which may indicate that the amended section applies only to agreements resolving asserted claims and not to pre-claim release agreements.  Until a court clarifies whether the requirement applies only to agreements resolving asserted claims, parties might elect to remove these terms from pre-claim release agreements to ensure compliance with the new law.

Note that the 2023 amendments expand Section 5-336 to address the gap mentioned above: now, nondisclosure conditions in settlements resolving claims of discrimination, discriminatory harassment, or retaliation, are all restricted by the same measures.

The second key change added by the recent amendments effective November 17, 2023, is that the previously mandatory twenty-one-day consideration period is now waivable (“the complainant shall have up to twenty-one days to consider [a confidentiality provision]”) pre-litigation.  However, the twenty-one-day consideration period is still mandatory if the discrimination claim has been filed in court, pursuant to N.Y. CPLR § 5003-B.  Furthermore, the amendments do not change the seven-day revocation period.  Therefore, while an employee may choose to waive the twenty-one-day period for a nondisclosure provision in a pre-litigation settlement agreement, the seven-day revocation period is still mandatory.  Hopefully, this will ease up tensions at the end of settlement negotiations and permit employees and employers to resolve their disputes quickly.

Third, in addition to the above key changes, the recent amendments state that Section 5-336 now applies to independent contractors, in addition to employees and potential employees.  As of October 2019, the New York State Human Rights Law (NYSHRL) protects both employees and nonemployees, such as contractors, subcontractors, temporary workers, “gig” workers, and other non-employee persons providing services pursuant to a contract, from discrimination, discriminatory harassment, and retaliation.  With the 2023 amendments to Section 5-336, now independent contractors already protected from discrimination by the NYSHRL can take advantage of the same protections from nondisclosure agreements as employees.

Impact of the Amendment and Implications for Employees
These amendments are sure to have a considerable impact on employees’ settlement negotiations with employers.  New York employers are still able to pursue claims for breach of nondisclosure or nondisparagement clauses, but they are no longer able to set an agreed-upon liquidated damages amount or clawback the consideration provided.  This change therefore places more power in the hands of employees.  However, employers may feel more vulnerable to breach following these amendments, and offer lower settlement amounts because they are less willing to settle absent a liquidated damages or clawback provision.  However, if one goal of amending the law is to equalize the parties’ bargaining power, these amendments are one step towards that goal because they reinforce the principle that employers should not be able to, and now cannot, pressure employees into draconian liquidated damages and clawback provisions.

Importantly, these amendments also forbid the inclusion of an affirmative disclaimer that the employee was not subject to unlawful discrimination, harassment, or retaliation.  While in practice, these disclaimers seem to be of limited practical value, employers have historically pushed for their inclusion in settlements involving these claims.  It is therefore good news for employees that these disclaimers are now unlawful.

Failure to abide by the new law may render nondisclosure provisions with these objectionable terms unenforceable.  Employees and their counsel should carefully review their New York separation, severance, and settlement agreements to ensure compliance with the amended Section 5-336.

We recognize that employees reading this page may feel complex emotions about pursuing legal action against their employers.  Katz Banks Kumin has a team of compassionate attorneys who are experienced in representing people who have experienced workplace harassment, discrimination, and retaliation, and can help you decide whether to take legal action.

 

Our Offices

Washington, DC
Katz Banks Kumin LLP

11 Dupont Circle NW, Suite 600
Washington, DC 20036

Phone: 202-299-1140
Philadelphia, PA
Katz Banks Kumin LLP

1845 Walnut St., 25th Floor
Philadelphia, PA 19103

Phone: 215-735-2171
San Francisco, CA
Katz Banks Kumin LLP

150 California St., 16th Floor
San Francisco, CA 94111

Phone: 415-813-3260