The Future of Restrictive Covenants in Settlements and Severance

by Jay Wolman

The law is ever changing and what is common may, at some point, become unlawful (or already is without folks realizing it).  Recent developments in statutory law and enforcement actions in existing law have really made me think about all of those clauses that commonly appear in agreements with former employees, whether as part of a severance agreement or as a settlement of claims.

For instance, many of these agreements include a confidentiality clause that prohibits the former or soon-to-be former employee from disclosing how much is being received in severance or settlement.  Many of these agreements contain new restrictions on the disclosure of trade secrets (or reaffirmations of prior such covenants), including personnel practices and wage scales.  Many of these agreements contain nondisparagement clauses prohibiting the employee from saying anything that might be deemed as negative against the employer.  Each of these may be or may soon be unlawful.

As noted by Connecticut attorney Dan Schwartz, the Connecticut legislature just passed a bill that prohibits employers from taking action that would bar an employee from disclosing his/her wages or that of another employee.  As noted therein, “wages” means “means compensation for labor or services rendered by an employee, whether the amount is determined on a time, task, piece, commission or other basis of calculation”.  Certainly, to the extent severance or settlement represents such compensation, the law could be read to make settlement/severance payments that were confidential now free and open.  It also would render inapplicable any trade secret clause that prohibits disclosure of a wage scale or other compensation basis.  In fact, in the situation where there was a confidential settlement, where the claimant employee settled for, perhaps, too little, and thus wanted confidentiality, another employee with knowledge might now be free to publicize the settlement amount.

But wait, you might ask, the law says “employee”, not “former employee”, so isn’t that inapposite?  Not necessarily.  In Robinson v. Shell Oil, that noted liberal Justice Clarence Thomas, writing for the Court, held that “employee” for Title VII purposes, included “former employee” in order to effectuate anti-retaliation policy.  Connecticut courts may follow this rationale, and other states may adopt similar legislation.

That said, some of these provisions may already be unlawful nationwide.  Last year, the EEOC challenged CVS severance provisions that, among others, included nondisparagement clauses and prohibitions on disclosing personnel information. CVS won, but on a technicality, not substantively.  And the NLRB has found success in the 5th Circuit in the Flex Frac Logistics case, where a ban on discussing “personnel information and documents” interfered with employee section 7 rights to discuss wages with coworkers and non-employees.  As a hypothetical, imagine that the former employee wants to get hired as a union organizer to organize the workforce of the employer–the nondisparagement, nondisclosure, confidentiality clauses of a severance or settlement would likely interfere with the ability to organize and would probably not survive.

These clauses are very common, but likely are not long for this world.  In the interim, employer counsel may want to rethink the standard severability clause.  Although employers are certainly keen on obtaining as much a release as possible, it may be time to reconsider whether the agreement should survive if the former employee can simply ignore these clauses.  This also might not bode well for former employees, as employers are apt to pay less in severance/settlement if the amount will be subject to public scrutiny.

2 Responses to The Future of Restrictive Covenants in Settlements and Severance

  1. dan says:

    what do you think about the recent very public deck of restrictive covenants in severance packages offered to Disney employees that were made to train their replacements ? Or is that just a Cali thing that won`t pass elsewhere?

    • Jay Wolman says:

      I haven’t seen everything, only what is here: http://www.nytimes.com/2015/06/04/us/last-task-after-layoff-at-disney-train-foreign-replacements.html?smid=tw-nytimes&_r=1

      I don’t see it as limited to California. I’ll leave the H-1B issues to others. However, from what I see, it is rather unusual to go this route, but as a general proposition, there is nothing wrong with requiring an employee to continue doing his/her job in order to earn the promised severance. It is a financial incentive to get the replacements trained.

      Logically, it makes sense. Disney wants the replacements trained. How to accomplish that? Most workers would just say “no”, but many would grind their teeth and do it if paid for it. And that is what the clause accomplishes. If it isn’t enough $, an employee doesn’t have to do it.

      I wouldn’t tend to view it as a restrictive covenant in the sense that it doesn’t impose post-termination obligations.

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