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New Jersey Bans Some Nondisclosure and Waiver Provisions

March 25, 2019

Gov. Phil Murphy on March 18 signed into law Senate Bill 121 (S 121), which amends New Jersey’s Law Against Discrimination (NJLAD) to make New Jersey the first state to enact broad-brush legislation that significantly restricts employers from, among other things, enforcing certain mandatory arbitration and nondisclosure provisions in employment contracts and settlement agreements. Although initially introduced as part of the #MeToo movement, the New Jersey law evolved during the legislative process into broader law that encompasses not only sexual harassment claims but all other types of discrimination, retaliation, or harassment claims available.

OVERVIEW OF THE LAW

The new law—which took effect immediately upon enactment on March 18—contains a number of provisions that will have serious implications for New Jersey employers, particularly with respect to workplace agreements related to confidentiality and/or that implement common devices such as arbitration clauses and class action or jury trial waivers.

Prohibiting Waiver of Rights or Remedies

Section 1 of the new law renders unenforceable any “provision in any employment contract that waives any substantive or procedural right or remedy relating to a claim of discrimination, retaliation, or harassment.” Section 1 further prohibits any prospective waiver of any “right or remedy under the ‘Law Against Discrimination’ or any other statute or case law.” The only exception appears to be for provisions in collective bargaining agreements.

The law’s use of vague and undefined terms creates significant uncertainty and raises a number of questions. For example, the law does not define “employment contract.” The attempt to prohibit prospective waivers of “any other statute or case law” also likely implicates contractual limitations on the territorial reach of a New Jersey law. Similarly, the statute does not define “case law.” For example, it is not clear whether that extends to any lower court judicial opinion (which, of course, always is subject to overruling by a higher court) or only definitive state Supreme Court cases. Nor is it clear whether the law intends “case law” to refer to federal court law or just New Jersey court law. The law does not explain or define what constitutes “a claim.” To that end, it is not clear whether some formal lodging of a complaint or filing is contemplated – though caution would advise against reading such a requirement into the law.

In addition, parties inevitably will litigate the application of this provision to arbitration agreements – the outlawing of which in discrimination, retaliation, and harassment cases appears to be the primary purpose of Section 1. Specifically, it is widely anticipated that Section 1 will be challenged as preempted by the Federal Arbitration Act (FAA) in any dispute to which the FAA would apply. Finally, the law raises significant questions regarding the extent to which a state law can impact how litigation of federal law claims proceed – whether in arbitration or with or without a jury.

Restriction on Enforcement of Nondisclosure Agreements

While Section 1 of the new law raises significant implications for arbitration agreements, class action, and jury waivers, the most controversial aspect of the new law is Section 2. That provision renders unenforceable against the employee any nondisclosure provision in an employment contract or settlement agreement that has the “purpose or effect of concealing the details relating to a claim of discrimination, retaliation, or harassment.” In other words, agreements to maintain confidentiality regarding the underlying issues involved in a claim—whether they be by way of a confidentiality restriction or one pertaining to non-disparagement—now cannot be enforced by an employer under New Jersey law. Conversely, however, if the parties were to agree to confidentiality, the employee can enforce the provision against an employer so long as the employee had not, up to that point, “publicly reveal[ed] sufficient details of the claim so that the employer is reasonably identifiable.” In other words, if parties to an agreement decide to include a mutual nondisclosure provision, the ability to enforce that provision is one-sided and left to the employee to decide whether to enforce.

Section 2 also requires that “[e]very settlement agreement resolving a discrimination, retaliation, or harassment claim by an employee against an employer . . . include a bold, prominently placed notice that although the parties may have agreed to keep the settlement and underlying facts confidential, such a provision in an agreement is unenforceable against the employer if the employee publicly reveals sufficient details of the claim so that the employer is reasonably identifiable.”

The importance of this restriction, which could become a model in other states, cannot be overstated. In many instances, employers settle cases, including many that are eminently defensible, for the singular purpose of maintaining confidentiality and avoiding the disruption of litigation. That option is now seemingly off the table when it comes to claims of discrimination, retaliation, and harassment in New Jersey. The prohibition on employment contracts or settlement agreements that have a purpose or effect of concealing the details relating to a claim of discrimination, retaliation, or harassment would not seem, however, to extend to a provision keeping confidential the amount or terms of a settlement of such a claim, although plaintiffs may contend otherwise. This is a problem not limited to the employer community. A large majority of the plaintiff-side employment bar were steadfastly opposed to this legislation because it will reduce the opportunities for early settlement and, as some critics have explained, expose allegedly aggrieved individuals to the possibility of reliving the alleged misconduct through litigation. In the past, such claims could have been settled quietly and quickly without the discomfort and cost of depositions and trials.

What is Not Covered

First, the law applies to claims of harassment, discrimination, and retaliation and amends the NJLAD. Seemingly then, the law does not apply to wage and hour claims or to other statutes or common law causes of action outside the harassment, discrimination, and retaliation context.

Second, the prohibition on employment contracts or settlement agreements that have a purpose or effect of concealing the details relating to a claim of discrimination, retaliation, or harassment would not seem to extend to a provision keeping confidential the amount or terms of a settlement of such a claim, although plaintiffs may contend otherwise.

Third, Section 2—in somewhat of a non sequitur—proceeds to state that it is not intended to limit enforceability of nondisclosure agreements that pertain to “proprietary information.” Finally, in yet another non sequitur that appears to have been a nod to business opposition to other proposed legislation that recently has been advanced in New Jersey, the law makes clear that it is not intended to limit noncompete agreements.

Anti-Retaliation

The new law also prohibits “retaliatory action” against anyone who refuses to enter into an agreement or contract that contains a provision prohibited by the new legislation. “Retaliatory action” includes “failure to hire, discharge, suspension, demotion, discrimination in the terms, conditions or privileges of employment, or other adverse action.”

Private Right of Action

As to enforcement, the new law creates a private right of action for “[a]ny person claiming to be aggrieved by a violation” of the law, and provides for a two-year statute of limitations period. A prevailing plaintiff is entitled to “all remedies available in common law tort actions,” as well as reasonable attorney fees and costs. The law also provides for an award of reasonable attorney fees and costs against an employer “who enforces or attempts to enforce” a prohibited provision.

RECOMMENDED NEXT STEPS FOR EMPLOYERS

This law creates significant new challenges for employers across New Jersey. At minimum, employers should closely review their arbitration, settlement, and nondisclosure agreements, as well as any related policies, and consider whether there is an appropriate choice of law other than New Jersey and, assuming not, the application of this law to such agreements – both as a practical matter and for inclusion of the required notice language. Moreover, the new law will have to be considered when employers are considering settlement of claims governed by New Jersey law.

CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Princeton
August W. Heckman, III
Terry D. Johnson
Thomas A. Linthorst
Sean P. Lynch
Joseph A. Nuccio
Richard G. Rosenblatt
Michelle Seldin Silverman
James P. Walsh