New California Law Further Restricts Confidentiality Provisions in Employment, Settlement, and Separation Agreements

California Governor Gavin Newsom recently signed into law the “Silenced No More Act” (SB 331 or the “Act”), which expands limitations on confidentiality provisions in settlement agreements for filed claims, previously applicable only to settlements related to sexual harassment and other sex discrimination claims. The Act, which becomes effective January 1, 2022, will now apply to employment agreements related to all forms of workplace harassment and discrimination—not just those based on sex—including, but not limited to, harassment and discrimination based on race, religion, color, national origin, disability, and gender. The Act further prohibits the use of non-disparagement clauses in separation agreements, starting on January 1, 2022.

Expanded Prohibition of Non-Disclosure Clauses in Settlement Agreements

In 2019, California legislation went into effect that prevented employers from imposing non-disclosure agreements (NDAs) as a condition of settlement of a civil or administrative action in which claims of sexual harassment or discrimination based on sex had been asserted. The Act broadens those restrictions to harassment and discrimination claims on the basis of any protected characteristic that were asserted in a civil or administrative complaint.  

As before, NDAs are permitted when that is an employee’s preference, and provisions to protect a claimant’s identity remain permissible when requested by the claimant. Further, settlement agreements may still incorporate provisions that prevent disclosure of amounts paid to resolve a matter, as well as confidentiality clauses related to threatened or unasserted claims not already filed with a court or administrative agency.

Non-Disparagement Clauses in Employment Agreements

The Act further provides that employers may not require employees, in exchange for a raise or bonus, or as a condition of employment or continued employment, to sign any non-disparagement clause or other language that denies “the employee the right to disclose information about unlawful acts in the workplace.”[1] Such provisions may be included, however, with this statutory disclaimer: “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.” This prohibition will broadly apply to any employment agreement that contains a covered clause, including offer letters.

New Requirements for Separation Agreements

In addition to the NDA restrictions, any agreements related to an employee’s separation from employment (including standard severance agreements) in California may not include language that denies “the employee the right to disclose information about unlawful acts in the workplace.” However, separation agreements may include a non-disparagement or non-disclosure clause that restricts an employee’s ability to disclose information related to workplace conditions, as long as it is accompanied by the same statutory disclaimer, mentioned above, protecting the right to report unlawful acts in the workplace.   

The Act also requires California employers to (i) inform employees of their right to consult with an attorney regarding any separation agreement, and (ii) provide at least five business days for employees to do so. Employees may choose to sign the agreement prior to the end of the five-day waiting period, provided that the employee’s decision to shorten the review period is knowing and voluntary, and not induced through fraud, misrepresentation, threats, or even enhanced incentives (e.g., a threat to withdraw or alter the offer, or a promise to provide different terms for those who sign earlier).

Negotiated settlement agreements[2] that resolve a claim filed by an employee in court, before an administrative agency, in an alternate dispute resolution forum, or through an employer’s internal complaint process are not affected by the Act.

Employers may still include non-disclosure language regarding any amounts paid pursuant to a severance agreement. Further, the Act does not prohibit an employer from protecting its trade secrets, propriety information, or confidential information that does not involve unlawful acts in the workplace.

What California Employers Should Do Now

California employers should act promptly to ensure compliance with the Act, which becomes effective January 1, 2022. Specifically, employers should:

• review their agreement templates for compliance with the Act’s expanded requirements;
• insert the Act’s required disclaimers into employment agreements (including offer letters and confidentiality agreements) and separation agreements that include non-disclosure or non-disparagement clauses; and
• ensure that separation agreement templates include the required five business day review period and reflect the employee’s right to consult with counsel.

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For more information about this Insight, please contact:

Kamil Gajda, a Law Clerk – Admission Pending (not admitted to the practice of law) in the firm’s New York office, contributed to the preparation of this Insight.

ENDNOTES

[1] “Information about unlawful acts in the workplace” includes, 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.

[2] “Negotiated” means that the agreement is voluntary, deliberate, and informed; the agreement provides consideration of value to the employee; and the employee is given notice and an opportunity to retain an attorney or is represented by an attorney.