New California Employment Laws for 2019: Limitations On Post-Dispute Gag Clauses For Harassment Claims

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Recent amendments to California employment law change the rules for resolving sex harassment litigation. In our prior post on SB 1300, we looked at a number of substantive changes strengthening California anti-harassment law. Here, we look at three recent changes to California (and note a federal law) that impact confidentiality and gag clauses for harassment claims when a lawsuit results in a settlement agreement.

First: FEHA Waivers Are OK In Certain Settlement Agreements (But Not for Ordinary Employment Perks).

In our SB1300 post, we noted that employers cannot offer to give an employee “ordinary employment” payments (aka “consideration”), like raises or bonuses in exchange for having employees sign away their FEHA rights. However, there is a carveout for settlement agreements of FEHA claims that were filed:

  • (a) in court,
  • (b) before an administrative agency,
  • (c) in an alternative dispute resolution forum, or
  • (d) through an employer’s internal complaint process.

If a claim was filed in one of those four places, then employers can include things like waivers of rights, nondisparagement agreements, or gag clauses preventing employee from speaking about unlawful workplace events. (See Gov’t Code § 12964.5)

So the law permits waivers, nondisparagement (talk nice or not at all), and gag clauses in settling FEHA claims filed in these specific forums. Note that a pre-litigation settlement may not qualify as any of these 4 permitted situations. That can happen sometimes with attorney demand letters, so exercise caution with those, defense practitioners.

Employer Internal Complaint Process As Pre-Req

Hold up, does this mean an employer can have its lawyers draft a release waiving an employee’s FEHA rights (and buying employee’s silence as to fact issues) after an employee complains internally? Yes, it absolutely means that. Freedom of contract means we can negotiate and sign contracts that change our rights.

The requirements for enforcing such waiver are:

  • agreement must be “voluntary, deliberate, and informed” (no “sign-or-else”); and
  • agreement provides “consideration of value to the employee” (read here: any value is sufficient; how hungry is the employee? what’s the minimum amount employee would take?); and
  • employee must get notice and must have the opportunity to retain counsel (or else employee must be actually represented).

(See Gov’t Code § 12964.5)

Employees Waiving FEHA Rights In Direct Negotiation With Employer

What’s wrong with this? Are we against freedom? No of course not. However, in cases where the employee has just complained themselves (either internally or perhaps to the DFEH) and the employee has not retained counsel, there are two points worth looking at.

Point One: Sophistication

We are all free to negotiate with/against any other person/multinational and sign whatever agreements we think benefit us. This works ok for lawyers who have the training to read these agreements and understand the implications of them. This also works ok for corporate persons with resources to hire lawyers to write agreements that benefit them.

What about regular folks? We have capacity to contract so we can sign things that help us get more rights (like buy land) or sign away rights (like promise never to sue). In the real world, however, regular folks look at the dense “legalese” in a settlement agreement and they may or may not read anything beyond the first paragraph or two.

Point Two, Transaction Cost.

Any “consideration” is probably enough. How hungry is the employee? Do they earn minimum wage? Do they have kids? Employers have a lot of information about their employees so this is hardly an “arm’s-length transaction” (as the law likes to pretend every contract should be).

A smart employer will know what amount will be enough to get an employee to sign. Whatever that amount is will automatically be reduced by however much the employee must pay to get an attorney to review the agreement. Or, if the consideration isn’t much, the employee will likely forego paying a lawyer. After all, hiring a lawyer will mean sacrificing a portion of the value of the contract. These employees may just opt to sign it “blind” without really understanding the waiver or the value of the rights being waived.

It can be difficult to legislate in a world where inherent power and wealth disparities exist.

We next turn to other protections that have been enacted recently relating to gag clauses and harassment.

Second: AB 3109 Adds Civil Code 1670.11: No Gag Clauses Barring Harassment Testimony In Court, Administrative, or Legislative Proceedings

Civil Code 1670.11 voids contracts that prevent someone from being subpoenaed or requested to testify about criminal conduct or sexual harassment. It only applies to: administrative, legislative, or judicial proceedings. (Civil Code § 1670.11) Nothing in this statute mentions ADR proceedings.

This looks like some glomming-on to the #MeToo movement. It seems very likely such a settlement provision would have already been void under existing law.

What about adding gag provisions about subjects other than criminal conduct and other than sexual harassment? We saw above that SB1300 included ADR forums. Does an argument exist that because the legislature here, in 1670.11, decided not to ban gag clauses for other subjects, that we will start seeing settlement agreement gag provisions saying the signor agrees to not respond to lawful subpoenas for testimony about: gender-identification-based discrimination, retaliation, or other laws? Probably not, because there are lots of reasons an attorney would refrain from interfering with the courts’ administration of justice and ascertainment of truth. Does an attorney also have similar disincentive about constraining what may happen in a private, contractual arbitration?

Key Omission From AB 3109: Arbitration Gag Clauses

Again: there is no protection here for gag clauses limiting participation in alternative dispute resolution (ADR) forum testimony. With recent decisions forcing more employment disputes into private arbitration, this warrants a look.

Arbitration’s Inherent Limitations

No Contempt Power. Arbitrators do not have the power to hold anyone in contempt (contempt = jail until you fix your attitude, or unlock your laptop, or otherwise decide to change your stance adverse to the court). Arbitrators also cannot dial the Sheriff by hitting “9-XXXX” on their phone. Private judges may not then ask the Sheriff to go retrieve the witness and deliver them to the courtroom. Arbitration may be faster, cheaper, and more final than court proceedings. However, arbitration of employment disputes removes the state from the process of enforcing civil rights and privatizes that process. Arbitration further gives the employer the power to select among various private, for-profit ADR companies. Employers can choose which ADR company the employer will designate to conduct those private arbitration proceedings.

Civil Code § 1670.11 makes that problem worse. Nothing in 1670.11 prevents a gag clause in a settlement agreement preventing that key witness from participating in a later arbitration.

Hypothetical: Bury the Witness

Hypothetical. Employer has a valid arbitration agreement which all employees signed mandating private contractual arbitration before JAMD, an established ADR company. The HR Vice President for Employer receives four employee complaints of harassment against Employer’s CEO. The four employees do not all know about each other. HR VP was also previously sexually harassed by the same CEO but failed to act within a year. HR VP recommends outside investigations of these four complainants to company control group. CEO (the alleged harasser) objects to the expense of this and orders HR VP to handle it internally and make these go away.

HR VP does not make them go away as ordered. Instead HR VP approaches COO with the problem and explains HR VP’s prior personal experience with CEO. Company presents the HR VP with a generous severance agreement with a provision stating that all facts relating to her employment are confidential, that HR VP must under no circumstances attend any JAMD proceeding relating to sexual harassment and that HR VP must immediately forward anything from JAMD directly to the company without opening it. VP HR takes the deal and dutifully sends the multiple JAMD packages off to Employer, unopened. (Employer oddly has no record of getting those.)

Hypo Analysis

So, this isn’t law school, so we won’t go through this fully. Based on the text of the section, Employer would not be barred under this law from gagging the VP HR from ADR proceedings. There are other arguments available that this gag-clause would perhaps be against public policy, but if the violation never comes to light because this witness never complains about forwarding the JAMD envelopes to her employer, then who will raise these concerns? The JAMD Arbitrator cannot compel that HR VP to attend nor to testify.

Suffice to state Civil Code 1670.11 omits ADR proceedings so those are not explicitly void under this law. More concerning that this, 1670.11 introduces an argument that the Legislature intentionally excluded ADR disputes as a forum.

Third: SB820 Adds CCP § 1001, Banning Gag Clauses As To Factual Information on Sexual Harassment

No gag clauses as to factual information relating to sexual harassment. This relates only to settlement agreements that relate to claims filed in (a) a civil action (court); or (b) an administrative action (e.g. DFEH). (Code of Civil Procedure § 1001.)

Only Court/Administrative Actions Covered

Again, omitted from this are resolutions that happen related to an internal complaint, or pre-litigation, or perhaps if pending in a contractual ADR forum. If the case is before an arbitrator (perhaps never having been filed with DFEH, as may happen with an Unruh Act Claim), it is less clear what is prohibited. It seems that such actions would perhaps be outside the plain meaning of this statute.

What Constitutes “filed in an administrative action”?

Does getting a “right to sue” letter from the DFEH constitute a claim of sexual harassment filed in an administrative action? This seems much less clear because the administrative “action” consisted only of checking some boxes on an online form. That box-checking resulted in an instant “right to sue” letter. No human ever touched that process. Moreover, any “administrative action” was over instantaneously when the right to sue notice was generated. Nonetheless, a complaint was “filed in” an “administrative” agency. If the complainant first asked DFEH to investigate, then there seems to be a better argument that the complaint initiating that preceded an “administrative action” (the investigation).

Only Harassment/Discrimination/Retaliation Based on Sex Covered

This law also inexplicably protects only harassment or discrimination based on sex (plus retaliation based on reporting such harassment/discrimination). SB 1300 has expanded California law to prohibit harassment based on a panoply of protected categories, as we discussed here. There are numerous claims, such as harassment based on gender expression, which should probably have been included here in conformance with the SB1300 amendments.

There appear to be some gaps here which the Legislature may want to address in future sessions. This is how the sausages (and laws) are made – the machine has a lot of moving parts; compromises happen; committees have a lot to do. All efforts at advancing civil rights are worth applauding, even where refinements may make them better in the future.

Internal Revenue Code §162(q): No Tax Deduction for Sexual Harassment Settlements Subject to Gag Clause

This came into effect in 2017, but since it’s on the same subject of gag clauses, we include it here. Specifically, Section 162(q) provides, in substance:

  • No deduction is allowed for any settlement or payment related to sexual harassment or sexual abuse if the settlement or payment is subject to a nondisclosure agreement;
  • No deduction is permissible for attorneys’ fees related to a confidential sexual harassment settlement or payment.

The motivation here is the same in attempting to deter the burying of this type of misdeed. Nothing on this site is tax advice – please consult a tax attorney to find out how this impacts your particular situation. We leave the analysis of the Internal Revenue Code to other attorneys who practice tax law, such as this excellent piece by Sandra R. Brown.

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