Staying Updated on Restrictive Provisions in Employment and Severance/Separation Agreements

Staying Updated on Restrictive Provisions in Employment and Severance/Separation Agreements


While we are not lawyers here at CA Search Advisors, tracking key topics in employment law and sharing resources is important to us as executive recruiters. The hiring process often involves various employment and severance/separation agreements that include non-disclosure, non-solicitation, non-disparagement, and non-compete language. Over the past few years, agreements with restrictive provisions have come under scrutiny. The #MeToo movement brought to light the use of non-disclosure agreements to keep sexual harassment victims quiet. Stories of employees bound by tough non-compete agreements after being laid off and then sued upon finding a new job have caused several state governments and federal agencies to review non-compete language that poses an “undue hardship.” The Federal Trade Commission and National Labor Relations Board are working to strictly regulate the use of non-compete provisions so that employees are not unfairly restricted from pursuing better employment opportunities.

Several states have enacted or updated laws regarding these agreements. For example, on November 17, 2023, New York Governor Kathy Hochul signed a law amending General Obligation Law Section 5-336 limiting the ability of employers to use nondisclosure agreements when resolving discrimination, harassment, and retaliation claims. In June 2023, the New York State legislature passed Senate Bill S3100A banning non-compete agreements and Governor Hochul stated last week that she would like to see changes made to the proposed bill before she considers signing it.

 

Non-Disclosure Agreements:

Again, New York may have recently amended their non-disclosure agreement laws, but confidentiality agreements have come under fire in many states. California, Oregon, Maine, Virginia, and Nevada are examples of states that placed limits on non-disclosure agreements, with the State of Washington enacting the broadest ban in June 2022. Companies that attempt to enforce illegal agreements in their states face penalties such as paying fines, damages, and an employee’s attorneys’ fees.

New York’s amendment to GOL 5-336 took effect on November 17, 2023. Fox Rothschild LLP’s article published on November 28th via JD Supra summarizes the main points very well. Taken directly from the article:

  • Employers cannot include nondisclosure language within an employment agreement, separation agreement, release agreement, or similar agreement involving claims of discrimination, harassment, or retaliation unless it is the individual’s preference to include such language. This preference must be memorialized in writing.
  • For pre-litigation releases, the 21-day consideration period may be waived. The waiver must be expressly acknowledged in writing.
  • Releases cannot include language requiring an individual to pay liquidated damages or forfeiture of consideration for breach of the confidentiality provision.
  • Releases cannot include language where an individual states that they were “not in fact subject to unlawful discrimination…harassment, or retaliation.”

Washington State’s “Silenced No More Act” or Engrossed Substitute House Bill 1795 went into effect in June 2022 and has placed the broadest ban on non-disclosure and non-disparagement language in both employment and contractor agreements. It prohibits “provisions from employers regarding illegal acts of discrimination, harassment, retaliation, wage and hour violations, and sexual assault, that is recognized as illegal under Washington state, federal, or common law, or that is recognized as against a clear mandate of public policy.” An “employee” means a current, former, or prospective employee or an independent contractor. The “Silenced No More Act:”

  • Applies to all employers as well as any company that engages at least one contractor in the State of Washington.
  • Affects any agreement with a non-disclosure or non-disparagement provision signed by employees or contractors who are residents of the state.
  • Refers to any provisions in agreements between current, former, or prospective employees or contractors.

 

Non-compete Agreements:

According to the Federal Trade Commission’s Non-Compete Clause Rulemaking, one in five or approximately 30 million American workers are bound by non-compete clauses. These are employees at all levels within companies, not simply executives. The FTC has been using federal antitrust law to effectively challenge non-compete agreements. In January 2023, the Federal Trade Commission proposed a rule that would ban most non-competes. The commission is expected to vote on its final rule in April 2024.

In early 2023, the current National Labor Relations Board issued the McLaren Macomb decision and a memorandum reinforcing that employers are prohibited from enforcing agreements (confidentiality, non-disclosure, severance, non-solicitation, no-poaching, non-compete, etc.) with provisions requiring employees to broadly waive their Section 7 rights. The view of the NLRB’s General Counsel, Jennifer Abruzzo, has been that non-compete language used by many employers in their employment agreements is typically too broad.

While New Yorkers wait to see how negotiations between Governor Hochul and the legislature play out, the toughest states with regards to non-compete agreements are California, Colorado, Minnesota, North Dakota, and Oklahoma. These states have extremely narrow exceptions for non-compete agreements.

California reinforced its stand on non-compete agreements this fall when Governor Newsome signed Senate Bill 699 and Assembly Bill 1076. These two laws prohibit employers from entering into or attempting to enforce non-compete agreements with California employees that are void under California law. SB 699 aims to enforce California’s non-compete law with regards to agreements signed outside of California if the employee relocated to California since signing or is seeking employment with a California company.

 

Takeaways:

With legislature, there are usually questions with regards to application that will only be clarified through litigation. This includes issues as to whether a state can dictate provisions in agreements that employers make with employees outside of that state as an example. Regardless, employers need to consult with knowledgeable in-house and/or outside counsel to:

  • Review current, in-process, and future agreements to ensure the language complies with applicable state and federal laws and modify if necessary.
  • Be aware of any new laws or amendments, as well as understand when they take effect and if there are any retroactive provisions.
  • Understand how an “employee” is defined according to applicable laws.
  • Understand how those laws affect agreements with current and former employees, as well as employees outside of the applicable state, plus if and when notices need to be sent to current and former employees.
  • Evaluate the current use of restrictive provisions and become educated on alternatives.
  • Address any additional issues, questions, or concerns regarding these types of agreements.

Employees today are better educating themselves with regards to “market” compensation ranges and benefits packages for their job level, industry, and geographic location. It is not too far of a leap to believe that current employees and candidates are going to educate themselves with regards to restrictive provisions in employment and separation/severance agreements. Again, seeking knowledgeable counsel in order to remain updated on the ever-changing landscape of these types of agreements is important.

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Amy Bauer, Co-Founder and Managing Principal
443-784-2555

 

Katie Becker, Co-Founder and Managing Principal
312-802-0300