Should Employers Stop Using NDAs for Discrimination Settlements? - American Society of Employers - Anthony Kaylin

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Should Employers Stop Using NDAs for Discrimination Settlements?

nondisclosure agreementAs a general par for course, many organizations routinely use a nondisclosure agreement (NDA) in settlements of discrimination claims.  What the NDA includes are confidentiality provisions and nondisparagement clauses to settle discrimination and other workplace complaints.

Employees cannot speak negatively about the company or discuss the terms of any claim or settlement.  If so, they could be sued and the payments clawed back by the company, and more, for example, liquidated damages, depending how the NDA is written. Also, a non-cooperation provision where a party agrees that he or she will not assist others in pursuing litigation against the other party may be included as well.

Congress, in response to the Harvey Weinstein allegations and #metoo, created a tradeoff for passing the tax law in 2018.  There was a tax limitation to the use of NDAs for sexual harassment and sexual abuse claims.  For amounts paid or incurred after December 22, 2017, section 162(q) provides that no deduction is allowed under section 162 for any settlement or payment related to sexual harassment or sexual abuse if it is subject to a nondisclosure agreement.  In addition, attorney’s fees related to such a settlement or payment are not allowed as a deduction.  For smaller organizations, the tax advantage may be a deterrent from using NDAs, but likely not for larger organizations.

Yet NDAs are still commonly used for discrimination claim settlements.  But that may be changing, although without any carrot for employers.  With the #metoo movement as well as the racial injustice movement that has grown since the death of George Floyd, many claimants are saying no more and refuse to sign an NDA.  Given how many employers have pledged to social justice within the workforce, the use of the NDA appears to be in opposition of their new stance.

The benefit for employers using NDAs is clearly apparent.  The nondisclosure of discrimination claims keeps public relations humming.  But the use is also a security blanket that employers could use to fail to truly investigate causes of discrimination, especially if it could be systemic within the organization.

Some employers are taking different approaches, especially those who need public opinion in their court.  PepsiCo Inc. in 2019 changed its separation agreements to inform employees they could speak openly about any allegations of harassment and discrimination. This year, Condé Nast (magazine publishing) stopped using NDAs in settling allegations of sexual harassment, discrimination, and retaliation and released former employees from existing NDAs for these issues.

States have stepped up in certain cases also limiting or barring the use of NDAs in settlements.

Kerry Notestine, a Houston-based lawyer at Littler Mendelson PC, said that employers are asking for more broadly written separation agreements given the divergence in laws as opposed to a state specific agreement.  “Employers are realizing that they have to be really careful about restricting these kinds of conversations right now,” he said.

Lawyers on both sides of workplace complaints say the use of NDAs benefits employers and employees. “Settlements are only happening because both parties believe they are mutually beneficial—that’s how deals work,” said Dan O’Meara, a Philadelphia-based lawyer with Ogletree Deakins who represents employers.  Yet many employers do not appear to be enforcing confidentiality provisions.  “If the employer tried to enforce that provision, it’s a PR nightmare right now,” said Mr. Notestine. 

Therefore, HR should work with legal counsel on any agreements which might require NDAs. 


Source:  Wall Street Journal 10/20/20, ABA Winter 2019, slnlaw publications


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