Tuesday, July 2, 2019
New Jersey recently passed a law declaring nondisclosure agreements “with the purpose or effect of concealing the details relating to a claim of discrimination, harassment, or retaliation” to be against public policy and therefore unenforceable against the employee. N.J.S.A. § 10:5-12:8(a). According to state Senate Majority Leader Loretta Weinberg, the law aims to allow victims of such abuse “to speak out about their experiences if they so choose.” While a parallel promise by the employer would generally remain enforceable against it, the employer would be permitted to respond if the employee goes public. The law explicitly excludes noncompete agreements or NDAs intended to protect trade secrets.
An outgrowth of the national #MeToo movement, New Jersey’s law will be a test case for competing predictions about the effects of preventing victims from bargaining away their right to speak out. While no one seems to doubt that gag clauses have enabled serial harassers to continue their predations, the defenders of such provision include not only employer-side counsel but many plaintiff-side attorneys who fear that victims will be deprived of one of their more valuable bargaining chips and therefore disadvantage the employees it intended to protect.
In any event, the prospective effects of the new law will largely depend on how employers in the state will respond. For them, settlement agreements are a transactional means of protecting their reputations from the large-scale backlash that has made the Me-Too movement so palpable. Nothing about New Jersey’s new stance changes this reality.
But the new law doesn’t allow them much wiggle room. Two possibilities for creative avoidance are possible, but neither seems likely to be successful. The first is for employers to seek to recover in restitution amounts paid for a now-unenforceable promise once the employee goes public. But § 197 of the Restatement Second of Contracts tells us that courts will normally leave parties as it finds them in such cases, even if this may result in one party retaining a benefit it received as a result of a transaction based on an unenforceable promise. Employers thus have no claim in restitution for payments rendered in return (in part) for the unenforceable promise of their employee’s silence. The Restatement recognizes an exception for “disproportionate forfeiture,” but it seems unlikely to apply here, especially given the strong statutory language disapproving such agreements.
A second possible way for employers to try to work around the statute would be to structure settlement agreements to space out payments over time to create a financial incentive for employees to remain silent. The agreement would be drafted such that the employee does not promise nondisclosure but her silence is a condition on the employer’s promise to make future payments. In other words, there’s never an employee promise to enforce to begin with.
Clever, but probably no cigar in a state whose supreme court has a tendency to read statutes – especially employment regulations – to achieve their purposes regardless of the technical language. In any event, the statute deems any contract or settlement against public policy if it has the “purpose or effect” of concealing discrimination, harassment, or retaliation. Clearly, the legislature’s intent in passing this law was to enable victims to speak publicly about their experiences to guard against serial harassers. By conditioning future payments on silence, such a settlement could certainly have the effect (not to mention the purpose) of concealing discrimination, at least temporarily, by creating a strong financial incentive for the employee to be silent.
A few other points. First, the bar on nondisclosure agreements is only a part of a statute that, on its face, might be read to bar mandatory arbitration agreements. So read, that provision would almost certainly be preempted by the Federal Arbitration Act, and a reviewing court would have to decide whether the ban of nondisclosure agreements could be severed to could survive such invalidation. Second, while the focus of #MeToo and the commentary on this law has been on disclosure of sexual harassment claims, the statute also bars gag rules for discrimination and retaliation claims, which substantially increases its reach. Third, the statute bars retaliation for refusing to enter into an agreement that would be unenforceable under it, but, given that such an agreement is unenforceable, one wonders why a well-advised employee would refuse to sign it in the first place.
Hat tip to Luke Dodge, Seton Hall class of 2021, for his help with this post.
UPDATE: The statute is not retroactive, and this post has been modified to correct a mistake as to that in the original.