USA – NEW YORK Trends and Developments Contributed by: Joshua Stanton, David Russell and Torie Feldman, Perry Law
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 employ- er 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 set- tlement 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 liq- uidated damages in the event of breach of con- fidentiality, and argues that such a provision should be compensated with a significant pay- out. 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 liq- uidated 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 liq- uidated damages are possible in one agree- ment under New York law ‒ although including such a remedy makes it likely that any release included in such an agreement would be unen- forceable. 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 employ- ee-claimants can themselves suggest maximis- ing the value of the payout. Background On 12 April 2018, at the height of the #MeToo movement, New York passed General Obli- gations Law Section 5-336. This prohibited employers, officers, or employees from includ- ing confidentiality or non-disparagement provi- sions 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 confidenti- ality could be placed in a settlement agreement as long as: • the condition was the complainant’s prefer- ence; • that preference was in writing and memorial- ised in a separate agreement (a “confidential- ity preference agreement”); and • the condition was presented to the complain- ant 21 days before signing the confidentiality preference agreement. Additionally, even after executing the confiden- tiality preference agreement, Section 5-336 per- mitted the complainant seven days post-execu- tion to revoke that agreement. On 12 August 2019, New York expanded Sec- tion 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,
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