USA – NEW YORK Trends and Developments Contributed by: Joshua Stanton, David Russell and Torie Feldman, Perry Law
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 resolv- ing 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 mech- anisms, 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 liqui- dated 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 ini- tially 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
tion, the complainant has “at least seven days” to revoke the confidentiality preference agree- ment. 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 confidential- ity 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 dis- crimination 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 discrimi- nation claim in the employment context. Also, like Section 5-336, Section 5003-b pro- vides the complainant seven days following execution in which to revoke the confidential- ity and non-disparagement provisions. In this regard, Section 5003-b has more stringent wait- ing 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 confi- dentiality agreements, as presumably the worst allegations already would have been disclosed in the employee’s pleadings.
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