The Continued Viability of Confidentiality Provisions in Employment Settlement Agreements Under New York Law

Consider the following scenario: a New York-based employee at a large company alleges he was sexually harassed by the company’s owner during a five-month period. Given that the alleged harasser is the public face of the company, the allegations ‒ whatever their merits ‒ could cause serious harm to the business. Both the employer and the employee wish to resolve the matter without going through costly and burdensome litigation. The employer and employee quickly commence negotiations to pursue a swift settlement acceptable to both parties.

In the course of negotiations, the employee’s lawyer states that the employee will readily accept a provision allowing for substantial liquidated damages in the event of breach of confidentiality, and argues that such a provision should be compensated with a significant payout. However, the employer’s in-house counsel tells the company’s owner that no agreement between the employer and the employee can include both a confidentiality provision and liquidated damages in the event of breach. The company’s owner would be happy to pay to resolve the case but is unwilling to pay a steep settlement fee if the agreement has no teeth.

Is in-house counsel correct? In short, not quite. The situation is more nuanced than in-house counsel is presenting. Confidentiality and liquidated damages are possible in one agreement under New York law ‒ although including such a remedy makes it likely that any release included in such an agreement would be unenforceable. The key consideration for employers in these agreements is therefore often the value of the release versus the value of confidentiality. As shall be explained, whichever the employer views as more important, there are additional provisions that savvy employers can include to increase protections ‒ and that potential employee-claimants can themselves suggest maximising the value of the payout.

Background

On 12 April 2018, at the height of the #MeToo movement, New York passed General Obligations Law Section 5-336. This prohibited employers, officers, or employees from including confidentiality or non-disparagement provisions in settlement agreements if doing so would prevent the complainant from disclosing claims related to sexual harassment (see NY Gen Oblig Law Section 5 336; S7507-C, L.2018, Chapter 57, Part KK, Subpart D, Section 1, effective 11 July 2018). However, Section 5-336 included a significant carve-out: a condition of confidentiality could be placed in a settlement agreement as long as:

• the condition was the complainant’s preference;
• that preference was in writing and memorialised in a separate agreement (a “confidentiality preference agreement”); and
• the condition was presented to the complainant 21 days before signing the confidentiality preference agreement.

Additionally, even after executing the confidentiality preference agreement, Section 5-336 permitted the complainant seven days post-execution to revoke that agreement. 

On 12 August 2019, New York expanded Section 5-336 to cover discrimination claims more broadly, as opposed to just sexual harassment ‒ although sexual harassment was still included under the amendment by its cross-reference to NY Exec Law Sections 296–296-D (see A8421, L.2019, Chapter 160, Section 7, effective 11 October 2019). The purpose of the amendment was to “build[] off of what was done in 2018 to enact further reforms for sexual harassment” and “to abandon the protection of those who would discriminate and sexually harass in the workplace” (NY Comm Rep, 2019 AB 8421 (NS)).

In line with its purpose, the 2019 amendment also added prohibitions on contracts between employers and employees (including potential employees) that prevented the disclosure of information related to “future claim[s] of discrimination” (ie, claims that may accrue post-execution) (emphasis added).

The 2019 version of Section 5-336 stood until November 2023, when New York overhauled the statute to further broaden its coverage while limiting some of its restrictions. The 2023 amendment was meant to prohibit “settlements of harassment and discrimination claims from including terms or conditions requiring a plaintiff to pay liquidated damages for violating a non-disclosure agreement” (NY Sponsors Mem, 2023 SB 4516). And, according to the legislative history, after the amendment “agreements may not require the complainant to forfeit part or all of the consideration for violating the non-disclosure provisions, nor may they be required to sign an affirmative statement, assertion, or disclaimer stating that they were not subject to discrimination or retaliation”.

Specifically, the 2023 amendment expanded Section 5-336 in the following three ways.

• It made Section 5-336’s coverage of harassment and retaliation claims explicit, clarifying that the law covers claims “involv[ing] discrimination, harassment or retaliation in violation of laws prohibiting discrimination, including discriminatory harassment or retaliation, including but not limited to Article 15 of the executive law”.
• It made the release of such claims unenforceable if the settlement agreement provides for liquidated damages or forfeiture of even some consideration against the complainant if they later violate the agreement’s confidentiality or non-disparagement provisions.
• It made the release of such claims unenforceable if the settlement agreement contains or requires affirmative statements by the complainant that there was no unlawful discrimination, harassment or retaliation.

The 2023 amendment also revised Section 5-336 by removing the required 21-day consideration window. As revised, complainants instead have “up to” 21 days to consider the provisions before signing a confidentiality preference agreement ‒ meaning complainants could opt to waive the waiting period entirely (see S4516, L.2023, Chapter 658, Section 1, effective 17 Nov 2023).

Where do amendments to Section 5-336 leave employees?

As currently constructed, Section 5-336 applies to settlement agreements in the employment context where the underlying claims concern discrimination, harassment or retaliation. Within this context, if the parties choose to settle such claims, the settlement agreement cannot require the complainant to refrain from disclosing the underlying facts and circumstances of the claims unless such a requirement is the complainant’s preference.

If the complainant does prefer a confidentiality clause, that preference must be memorialised in writing in a separate confidentiality preference agreement, which the complainant must be provided up to 21 days to consider. After execution, the complainant has “at least seven days” to revoke the confidentiality preference agreement. Only after this revocation period does the confidentiality preference agreement become enforceable.

Lastly, the release in the settlement agreement is unenforceable if the agreement either:

• imposes liquidated damages or requires forfeiture of all or part of the consideration should the complainant disclose the facts and circumstances underlying the claims; or
• requires the complainant to affirm that they were not subject to unlawful discrimination, harassment or retaliation.

It should be noted that Section 5-336 is not the only New York law that requires a confidentiality preference agreement to be executed before settling discrimination claims. Section 5003-b of the New York Civil Practice Law and Rules (CPLR), which applies to employment discrimination claims that have already been filed, requires that the complainant be provided the full 21-day waiting period before executing a settlement agreement that would prohibit the disclosure of the underlying facts of a discrimination claim in the employment context.

Also, like Section 5-336, Section 5003-b provides the complainant seven days following execution in which to revoke the confidentiality and non-disparagement provisions. In this regard, Section 5003-b has more stringent waiting period requirements than Section 5-336. However, because Section 5003-b applies only to filed claims, its applicability is more limited. It is also less relevant in the context of confidentiality agreements, as presumably the worst allegations already would have been disclosed in the employee’s pleadings.

Effects of Section 5-336 on pre-litigation settlements

The most notable 2023 addition to Section 5-336, Section 5-336(3), addresses some of the most common mechanisms employers use to enforce confidentiality provisions. Under this subsection, “no release of any claim… shall be enforceable, if as part of the agreement resolving such claim” the agreement includes certain enforcement mechanisms such as liquidated damages or forfeiture.

However, Section 5-336(3) says only that the release of claims is unenforceable ‒ not that the confidentiality provision, the enforcement mechanisms, or the agreement itself is unenforceable. As a result, despite law-makers’ stated intent, nothing in Section 5-336 outright prohibits the inclusion of terms such as liquidated damages for breaching a confidentiality provision. Under the statute, the only effect of including a liquidated damages provision or requiring forfeiture if a party breaches the confidentiality provision is to void the release of claims, while the remainder of the agreement remains enforceable.

Consequently, a plain reading of Section 5-336(3) suggests that employers ‒ and employees willing to trade confidentiality for a larger payout ‒ are not nearly as restricted by the law as it would initially seem. Instead, the law requires employers to balance the importance of two distinct goals:

• including a strong confidentiality provision in an agreement with the purportedly aggrieved employee; and
• fully and finally settling all the employee’s potential claims against the employer.

As regards the first goal, a strong confidentiality provision must provide significant disincentive against breach. To that end, it is preferable for the employer to include substantial liquidated damages in the event of breach ‒ perhaps the entire consideration for the agreement. That runs counter to the second goal, however, as such a liquidated damages provision would appear to invalidate the release.

Faced with these apparently irreconcilable goals, what is an employer to do? Before answering that question, it is worth considering protective provisions that can still be kept in settlement agreements in such cases. Foremost among these is a confidential arbitration provision, which requires all claims that exist ‒ or may exist in the future ‒ between the employer and the employee to be submitted to confidential, binding arbitration. (Although New York law technically prohibits mandatory arbitration for the resolution of discrimination claims “[e]xcept where inconsistent with federal law” (see CPLR Section 7515), courts have routinely held the Federal Arbitration Act to allow such provisions.)

It is important to note that a settlement agreement under New York law can require disputes to be submitted to confidential arbitration. Section 5-336 does not prohibit or render unenforceable such a clause. So, even if a release were unenforceable owing to the inclusion of liquidated damages for breach of the confidentiality clause, the employee would still be unable to file their claim publicly ‒ at least not without violating the mandatory confidential arbitration clause as well.

It is also worth noting that this would not run afoul of the federal Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFASASHA), which prohibits mandatory arbitration agreements with regard to sexual harassment or assault claims that have not yet arisen at the time the agreement is made. Given the employee’s claim necessarily will have arisen prior to the time the agreement is made, the EFASASHA does not apply.

With the inclusion of a confidential arbitration provision, the path forwards for the employer (and the path that maximises payouts to claimant-employees) becomes much clearer: the worth of the release of the claim itself diminishes greatly in value. In the context of meritless claims alleging serious misconduct, the value to the employer is frequently the confidentiality provision rather than the release. That is because the publicity of allegations of serious misconduct could do massive damage to the company regardless of their truth, whereas the likely damages assessed by a court (or arbitrator) for a frivolous claim would be zero.

Of course, there would be litigation costs associated with defending against a frivolous claim, even in confidential arbitration. Nevertheless, how many claimants, having successfully negotiated a large payout to be subject to a confidentiality provision, would turn around and bring a frivolous claim in confidential arbitration? The answer is not many ‒ especially if the confidential arbitration provision includes shifting attorney’s fees, which could impose significant costs on a frivolous claimant whose arbitration claim fails. (Such fee-shifting provisions, however, must not be so prohibitive as to prevent employee-claimants from vindicating their rights in the arbitral forum (see Brady v Williams Cap Grp, LP, 14 NY3d 459, 466, 928 NE.2d 383, 387 (2010) (citing Green Tree Fin Corp-Alabama v Randolph, 531 US 79, 90 (2000)).)

Consequently, where the value of a confidentiality provision is extremely high for a company faced with apparently frivolous claims, it is entirely rational for the company to opt to include significant disincentives for breach ‒ even though such disincentives (eg, liquidated damages) would likely make the release unenforceable.

In the context of non-frivolous claims, however, the calculus changes. The value of a release of such claims may be substantial to the company. In that case, the company could rationally make the decision not to include any provisions that could make the release unenforceable, such as liquidated damages. Even in that case, though, the final agreement could still include some clauses that would strongly disincentivise breach of the confidentiality requirements. By way of example, a confidential arbitration clause for future claims ‒ again, providing for attorney’s fees ‒ would suggest to the employee that defending against a claim for breach could be exceptionally costly.

Conclusion

Although the legislature set out with broad aspirations, the resulting statute turned out to be more nuanced, leaving ample room for savvy employers and employees to still be able to negotiate for the terms that are most important to each side.

For employers, Section 5-336 makes it more difficult to enforce confidentiality obligations in settlements with employees who have raised discrimination, harassment and retaliation claims. However, with a good understanding of Section 5-336’s boundaries and a little creative thinking, employers can still get most of what they want.

As regards employees, Section 5-336 allows them to trade confidentiality for significant compensation by expressing their affirmative preference for confidentiality and entering into protective confidentiality agreements. Alternatively, it also allows employees to preserve their disclosure rights if that is what they prefer.