Legal Updates

New State Laws Restrict Employers' Use Of Non-Disclosure Agreements

Over the past few years, an increasing number of states have passed legislation restricting the permissible scope of non-disclosure agreements (“NDAs”) for employees. The recent legislative attention to NDAs is a response to the #MeToo movement, which highlighted the use of NDAs by “bad actors” to silence victims of sexual harassment.

However, NDAs are also widely used for other purposes, such as protecting intellectual property and other confidential or proprietary information. Additionally, employers that opt to settle weak (or even frivolous) claims by employees to avoid the costs and disruption of litigation have a legitimate interest in keeping the terms of such settlements confidential.

Given the number and variety of the new state laws in this area, employers must ensure that their NDAs are compliant with all applicable requirements.

Background

Over a dozen states have passed new laws restricting NDAs since the advent of the #MeToo movement. These states include Arizona, California, Hawaii, Illinois, Louisiana, Maine, Maryland, Nevada, New Jersey, New Mexico, New York, Oregon, Tennessee, Vermont, Virginia, and Washington.

The new NDA laws vary in scope from sweeping to narrow and do not treat NDA issues uniformly. NDA restrictions under these statutes can be divided into two basic categories: those that prohibit the use of NDAs in all circumstances involving workplace discrimination; and those that more narrowly target sexual harassment. However, within those two basic categories, there are a wide variety of differences.

Examples Of State NDA Laws

Washington State’s “Silenced No More” Law – Sweeping RestrictionOon NDAs

Washington’s NDA restrictions are probably the most extensive. Signed into law in March of 2022 and based on the same model legislation that California used for its most recent NDA statute (the “Silenced No More” model legislation developed by #MeToo advocates), the Washington law voids all blanket NDAs and non-disparagement clauses entered into as a condition of employment, no matter when they were signed (retroactively and prospectively).

In settlements with whistleblowers, employers may no longer ask employees to sign comprehensive NDAs. In discrimination cases, such NDAs are no longer permitted even if the employee requests it, one of the strongest worker protections included in any of the recent statutes.

The Washington law—like all of the other new statutes restricting NDAs—still allows NDAs concerning trade secrets, proprietary information, or confidential information not involving allegations of illegal acts. It also includes a carve-out for settlement agreements under which the employee was paid compensation, but a restriction is only allowed for the settlement's monetary amount; the employer cannot prevent a worker from discussing any other aspects of the dispute or settlement.

Employers that attempt to enforce illegal NDAs in Washington State face a potential $10,000 fine or actual damages, whichever is greater, in addition to paying employees’ attorneys’ fees.

California’s “Silent No More” Statute – A Slightly More Modest Approach

California passed its version of the Silenced No More Act (SB 331) in October 2021. Unlike in Washington, the California statute does not retroactively void all existing agreements, but it does significantly restrict future NDAs. Specifically, agreements entered on or after January 1, 2022, cannot prohibit disclosure of allegations of harassment or discrimination based on any protected category, not just sex.

SB 331 makes exceptions for the confidentiality of a settlement amount, intellectual property, and other legitimate, proprietary company information. The statute also specifies that a claimant’s identity may remain confidential if the claimant prefers.

SB 331 contains some additional parameters that do not apply to negotiated settlements of claims filed in court or with an administrative agency or submitted through an internal workplace complaint procedure, but that are important for employers in the normal course of business. In entering into employment agreements, separation agreements, or other general agreements with current employees:

• Employers cannot require a release of claims or rights in exchange for a raise or bonus, or as a condition of employment or continued employment;

• Employers have an affirmative obligation to include the following specific language in any NDA: “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;”

• In a separation agreement, the employer must tell the departing employee she/he has the right to consult an attorney before signing an agreement and must allow the employee at least five days to consider the agreement before executing it.

New Jersey’s NDA Restrictions – A Third Way

In New Jersey, the state recently passed legislation that bans any provision in 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” – in other words, an NDA.

The New Jersey law also voids provisions in employment contracts purporting to waive “any substantive or procedural rights or remedies relating to a claim of discrimination, retaliation or harassment.” While the law does not define the phrase “employment contract,” the scope of this prohibition appears quite broad.

One likely limitation on this waiver prohibition is the Federal Arbitration Act (“FAA”), which generally makes arbitration agreements enforceable. On its face, the New Jersey law would seem to prohibit agreements under which employees agree to submit any claims to arbitration. But the federal courts have enforced the FAA broadly and may find that it preempts New Jersey’s new statute on this point.

The New Jersey law allows the parties to agree to a confidentiality provision, but it does not prevent employees from breaking confidentiality. Conversely, an employer remains bound by a confidentiality provision unless “the employee publicly reveals sufficient details of the claim so that the employer is reasonably identifiable,” in which case the employer may disclose relevant facts about the matter but has no legal remedy against the employee.

The law requires that every settlement agreement involving harassment, discrimination, or retaliation claims includes a bold, prominent notice that “although the parties may have agreed to keep the settlement and underlying facts confidential, such a provision in an agreement is unenforceable against the employer if the employee publicly reveals sufficient details of the claim so that the employer is reasonably identifiable.”

The New Jersey law is prospective only, so existing NDAs are not rendered unenforceable. Current employees who enter into new NDAs would be covered, however. Finally, New Jersey’s law carves out space for agreements to protect intellectual property and other confidential materials.

Other States: A Patchwork Of Still More Ways To Restrict NDAs

The NDA legislation landscape has quickly become varied to a confounding degree. Washington and California both began with the same model legislation, but their laws differ enough that a single approach won’t work for employers operating in both states.

Many states have enacted NDA-restricting legislation not based on the #MeToo model legislative template. Some state laws–including New Jersey, Illinois, Maine, New York, and Oregon–go beyond sex-based harassment to cover a broader array of issues.

For instance, New York passed a whole raft of legislation in 2022, much of which applies to any workplace harassment claim, not just sexual harassment. New York extended protections against harassment to employees previously uncovered by the state’s human rights law, enlarged the statute of limitations for harassment claims from three to six years, created protections from retaliation for anyone helping a victim of harassment, and banned “no rehire” provisions against contractors or employees who claim harassment under New York law.

Meanwhile, other states, such as Hawaii, New Mexico, Louisiana, Nevada, Tennessee, Virginia, Maryland, and Vermont, have passed NDA laws with a more limited scope. As an illustration, Vermont’s act, though robust in restricting NDAs, limits its scope to claims of sexual harassment and does not apply to other forms of workplace harassment.

Maryland’s law, like Vermont’s, applies only to NDAs covering claims of sexual harassment. However, in Maryland, there is no employee headcount requirement for coverage, so the law applies to any employer in the state; and the law applies with equal force to out-of-state employers with employees working in Maryland (including teleworking).

None of these state laws falls into an easy categorization. For instance, in some states, like New York and California, NDAs are generally banned in employment settlement agreements, but not if a complainant wants one. By contrast, in Washington, not only is it prohibited for an employer to ask for an NDA in an employment settlement agreement, but such provisions are prohibited even if requested by the employee.

Some of these laws (e.g., New Jersey) prevent employers from enforcing an NDA against an employee only prospectively, while other state laws (such as Maine’s) make most existing NDAs unenforceable as well (unless entered into as the result of a compensated settlement). An up-to-date, state-specific understanding of these new requirements is crucial.

Federal Legislation On The Way: The Speak Out Act

In addition to the recent state laws, legislation limiting the use of NDAs in cases of sexual harassment has recently been advanced by both houses of Congress. The House Judiciary Committee advanced the Speak Out Act in July, and the Senate followed with its version of the bill on September 15, 2022. The bill targets pre-dispute sexual harassment claims and would nullify any NDA that purports to cover them. The federal law would add a layer of regulation but would carry the benefit of being uniform in all fifty states.

Recommendations For Employers

What should employers, faced with a complex, shifting landscape of NDA-limiting laws, do, as a practical matter? The answer, of course: it depends—principally on the identity or identities of the state(s) where an employer has employees or does its recruiting.

Here are some fundamental questions employers should consider (and discuss with their employment counsel) to ensure solid footing in the new NDA landscape:

• Should the employer revise its existing agreements for all or some of the states in which it operates? This issue rests on the specific NDA restrictions at issue, as well as the employer’s overall goals with employment, severance, and settlement agreements.

• Should employers leave NDA provisions in employment, severance, and settlement agreements, even if there are doubts as to their enforceability? Or should they be eliminated? In most states, it is only seeking to enforce an NDA that would potentially get an employer into trouble under the new legislation, and not merely proposing or including an NDA in an agreement. But employers need to look closely at applicable state laws.

• Since these laws vary significantly from jurisdiction to jurisdiction, what should employers with employees in multiple states do? Draft their agreements to comply with the most restrictive jurisdiction? Or have separate model agreements and language for every state?

• What should employers do with their employee handbook or personnel policy language to avoid making statements during recruitment or onboarding that might violate the new NDA laws or complicate the settlement of potential future claims? Recruiting, hiring, and website materials should be reviewed to meet the requirements of the applicable jurisdiction(s), some of which now require specific language and prohibit anything that appears to require confidentiality about specific issues.

Finally, there are several other states with proposed legislation on these matters, in addition to the pending federal bill. It is critical, then, for employers to stay up to date on developments in this area.

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If you have questions about these recent state laws or other issues involving NDAs, please contact one of our experienced employment lawyers.