Breaking A Culture of Silence

By Chelsea E. Rauch.  

How lawmakers are reining in expansive pre-dispute agreements

Over one-third of the United States’ workforce are bound by non-disclosure agreements (“NDAs”), which—by the very nature of such a covenant—chill employee speech and the free flow of information between employees and jobseekers.[1] Historically, NDAs between an employer and employee have been used to protect the employer’s confidential and/or proprietary information from being disclosed to competitors. However, the breadth of information most NDAs now cover is so expansive that it ultimately renders complete silence from employees, barring them from disclosing confidential information but also from speaking out about unlawful activities that occur in the workplace, including sexual harassment and assault.[2]

This past spring, employers and employees have seen sweeping federal and state legislative action related to arbitration, confidentiality, non-disclosure, and non-disparagement agreements that aim to combat the expanse of information they now tend to cover. As a result, employees have stronger voices to disclose the good, the bad, and the ugly about their jobs and corporate culture, but at what cost to their employers?

Timely Amendments to and Interpretations of the Federal Arbitration Act

On March 3, 2022, President Biden signed into law the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021,” which amends the Federal Arbitration Act (“FAA”) to invalidate pre-existing and future pre-dispute arbitration agreements or joint action waivers relating to claims of sexual assault or sexual harassment.[3]

The amendment applies to any dispute or claim of sexual assault or harassment arising on or after March 3, 2022, rendering preexisting pre-dispute arbitration agreements and joint action waivers invalid and unenforceable. Employees now have the power to choose their own paths forward in pursuing claims of sexual assault or harassment.

Similarly, in May the U.S. Supreme Court handed down an unexpected ruling in Morgan v. Sundance regarding mandatory arbitration agreements and the FAA.[4]  SCOTUS held that “the FAA’s ‘policy favoring arbitration’ does not authorize federal courts to invent special, arbitration-preferring procedural rules.”[5] Rather, the FAA “is about treating arbitration contracts like all others, not about fostering arbitration.”[6]

The ruling is significant because prior to this decision, a majority of federal circuit courts had adopted a prejudice requirement in order for a party to waive an arbitration agreement, justified by the FAA’s “policy favoring arbitration.”[7]As a result, employees who were contractually obligated to arbitrate but pursued litigation instead could waste time, money, and resources if their employers participated in the litigation process, only to later enforce an arbitration agreement when it became apparent that arbitration would result in a more favorable outcome.

The recent amendments to the FAA and SCOTUS decision in Morgan suggest that slowly, employees are gaining more federal protection from broad arbitration agreements and strict waiver requirements.

Legislative Changes to Non-Disclosure and Non-Disparagement Agreements in Washington State

In addition to these new federal developments, Washington employees have also been granted the freedom to discuss conduct that they reasonably believe to be illegal or against public policy.

On June 9, 2022, the Silenced No More Act (codified under RCW 49.44) came into effect, which significantly impacts Washington employers’ use of current and future confidentiality, non-disclosure, and non-disparagement agreements.[8]

The legislation bars employers from prohibiting current, former, or prospective employees or independent contractors from disclosing or discussing conduct—or the existence of a settlement involving such conduct—that they reasonably believe to implicate unlawful actions including illegal discrimination, harassment, or retaliation; wage and hour violations; sexual assault; or any other matter “recognized as against a clear mandate of public policy.”

The law applies to conduct occurring in the workplace, at work-related events, between employees, and between an employer and employee on and off work premises. Perhaps most notably, it also applies retroactively to pre-existing agreements, essentially prohibiting any employer from enforcing such provisions executed before June 9th.

In practical terms, employers are broadly prohibited from requesting or requiring an employee or independent contractor to sign confidentiality agreements concerning any conduct that they reasonably believe(s) to be illegal, even as part of a settlement agreement. Indeed, a settlement or severance agreement may no longer bar an employee from speaking out about the substance of his or her claim long after it has been settled.

The law does provide three narrow carveouts attorneys should ensure their clients are aware of:

(1) The law does not apply retroactively to settlement and/or severance agreements entered into before June 9, 2022;

(2) Employers may still require confidentiality as to the severance or settlement amount of a claim; and

(3) Employers may still require and enforce confidentiality or non-disclosure agreements related to trade secrets, proprietary information, and confidential business information that do not involve allegations of an illegal act.

Violators could be liable for actual or statutory damages of $10,000 in addition to reasonable attorneys’ fees and costs.

Impact on Employers

How will these pieces of legislation be implemented in employers’ day-to-day operations? Do any protections remain for an employer seeking to preserve their name and protect their business in Washington?

We don’t have the answers just yet; after all, Washington is among the earliest of states to implement such legislation. But, we can look beyond Washington’s borders to states that have adopted other kinds of narrowing legislation to determine how—if at all—employers have been affected.

In a recent study, researchers turned to California, Illinois and New Jersey as examples of states that have recently implemented “narrowing NDA” laws that prohibit the use of NDAs and other contracts to conceal unlawful activity in the workplace.[9] By creating an algorithm that included examining statistics from Glassdoor.com reviews before and after such laws were passed, the study found that narrowing NDAs across an average industry decrease the likelihood of a “five-star rating” by 14.5% and increase the likelihood of a “one-star rating” by 16%.[10]  Generally, employees who held a position where they had likely been bound by an NDA reported more negative information about their jobs and employers online once they were no longer barred from such conduct.[11] And, perhaps not so surprisingly, employees tended to spend more time online detailing their experiences with their employers through qualitative comments, resulting in a 2.4% decrease in positive feedback about the company after NDAs narrowed and a 7.8% increase in the length of negative feedback.[12]

Further, after NDAs were narrowed in these states, the Equal Employment Opportunity Commission (“EEOC”) saw a rise in complaints by both men and women.[13] The Occupational Safety and Health Administration (“OSHA”) also experienced a rise in complaints, although the study notes that several factors—including the COVID-19 pandemic—likely had some influence on those numbers.[14] Generally, these patterns suggest that broad NDAs deter workers from bringing claims of misconduct to official agencies.[15]

In summary, the amendments made to the FAA and state law give employees freedom to choose how to pursue sexual harassment and assault claims, and to speak out against activity they perceive to be unlawful in the workplace. Evidence suggests that narrow NDAs open the flow of negative information from employees about their employers (which could impact their desirability to future jobseekers), while broad NDAs deter claims of misconduct filed with official agencies.

Only time will reveal how employers and employees will apply these updates and how courts will interpret the new restrictions. In the meantime, employment attorneys practicing in Washington State should advise clients to take a careful look at the scope of their arbitration, confidentiality, non-disclosure, and non-disparagement agreements or risk noncompliance.

 

Chelsea E. Rauch is an associate attorney with Gordon Thomas Honeywell’s Labor & Employment Group. In her practice, she provides employment law advice to employers throughout the Pacific Northwest, partners with businesses to create policies that fulfill their obligations to employees, and guides both employers and employees through difficult employment decisions and claims.

[1] Orly Lobel, NDAs are Out of Control. Here’s What Needs to Change., Harv. Bus. Rev. (Jan. 30, 2018), https://hbr.org/2018/01/ndas-are-out-of-control-heres-what-needs-to-change.

[2] Id.

[3] 9 U.S.C. § 402.

[4] See Morgan v. Sundance, Inc., No. 21-328, 2022 WL 1611788 (U.S. May 23, 2022).

[5] Morgan v. Sundance, Inc., No. 21-328, 2022 WL 1611788, *4 (U.S. May 23, 2022) (quoting Moses H. Cone Memorial Hospital v. Mercury Const. Corp., 460 U.S. 1, 24 (1983)).

[6] Id. at *1.

[7] Id. at *2. Circuits imposing the prejudice requirement adhered to the following precedent: “a party waives its contractual right to arbitration if it knew of the right; ‘acted inconsistently with that right’; and—critical here—’prejudiced the other party by its inconsistent actions.'” Id. at *3 (quoting Erdman Co. v. Phoenix Land & Acquisition, LLC, 650 F.3d 1115, 1117 (CA8 2011)).

[8] See additions and amendments to RCW 49.44.

[9] See Jason Sockin, Aaron Sojourner, & Evan Starr, Non-Disclosure Agreements and Externalities from Silence (W.E. Upjohn Inst. for Emp. Rsch., Working Paper 22-360, Jan. 20, 2022),  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3900285. At the time this research was conducted, California had prohibited employers from requiring an employee from signing an NDA or other covenant denying them the right to disclose information about unlawful acts that occur in the workplace; Illinois had passed a law prohibiting an employer from requiring an employee from entering into any agreement that is a unilateral condition of employment and prevents an employee from disclosing unlawful practices; and New Jersey had barred any provision in an employment contract to prohibit employees from disclosing details regarding discrimination, retaliation, or harassment claims. Id. at 8-9.

[10] Id. at 18.

[11] Id. at 19.

[12] Id.

[13] Id. at 22.

[14] Id. at 23.

[15] Id.