Nondisclosure and Nondisparagement Clauses: Are Your Employment Forms 2023-Compliant?

Employers who regularly use nondisclosure and nondisparagement provisions in their employment forms may need to reevaluate such provisions in light of recent changes at both the state and federal levels. This article provides a short summary of what changes employers may need to implement.

Colorado updates

Colorado’s POWR Act was signed into law in June 2023, and went into effect on August 7, 2023. The purpose of the law is to prevent employers from covering up discrimination or unfair employment practices through the use of nondisclosure provisions.

As used in the new law, “nondisclosure provision” means a provision in an agreement between an employer and employee “that limits the ability of the employee or prospective employee to disclose or discuss, either orally or in writing, any alleged discriminatory or unfair employment practice.”

READ: How Will FTC’s Proposed Ban on Non-Compete Clauses Impact Colorado Law?

A nondisclosure provision in an agreement between an employer and employee entered into after the effective date of the POWR Act is void unless it complies with the new requirements set forth in the Act. Specifically, the nondisclosure provision must comply with all of the following:

1. The provision must apply equally to the employer and employee.
2. The provision must expressly state that it does not restrain the employee from disclosing the underlying facts of any alleged discriminatory or unfair employment practice, and must list several specific instances in which disclosure is permitted.
3. The provision must expressly state that disclosure of the underlying facts of any alleged discriminatory or unfair employment practice does not constitute disparagement.
4. The provision must provide that if the agreement contains a nondisparagement provision and the employer disparages the employee, the employer may not seek to enforce the nondisparagement or nondisclosure provisions or seek damages for an employee violating those provisions.
5. Any liquidated damages provision must not constitute a penalty or punishment and must provide for an amount of damages that is reasonable, proportionate and not punitive.
6. The agreement must contain an addendum, signed by all parties to the agreement, which attests to the compliance with each of the above requirements.

Nondisclosure and nondisparagement provisions are especially prevalent in employee severance agreements and settlement agreements. These forms will need to be modified accordingly. Overly broad nondisclosure provisions in employee agreements and employee handbooks will likewise need to be modified.

However, because the Act only applies to provisions that limit the ability of the employee to disclose alleged discriminatory or unfair employment practices, the new requirements are not necessary in every employee confidentiality agreement.

For example, a typical confidentiality agreement wherein the employee agrees not to disclose the employer’s trade secrets, financial information, or similar material would not implicate the new law because nothing in such agreements prohibits an employee from disclosing alleged discriminatory or unfair employment practices. In these circumstances, employers should add a sentence to the confidentiality provision expressly stating that nothing in the provision should be construed to limit the employee’s ability to disclose or discuss any alleged discriminatory or unfair employment practice of the employer.

Federal updates

The National Labor Relations Board (“NLRB”) is also cracking down on overbroad nondisparagement and confidentiality provisions. The NLRB is an independent federal agency whose purpose is to prevent and remedy unfair labor practices committed by private-sector employers and unions.

Recently, the NLRB has put an emphasis on stopping overbroad nondisparagement and confidentiality provisions. More specifically, the NLRB has ruled that severance agreements which include broad nondisparagement and confidentiality clauses violate an employee’s rights to engage in concerted activity under Section 7 of the National Labor Relations Act (“NLRA”).

However, the NLRB’s recent ruling still allows for narrowly tailored nondisparagement provisions, so long as the  nondisparagement provision only prohibits an employee from making statements about the employer that “meet the definition of defamation as being maliciously untrue, such that they are made with knowledge of their falsity or with reckless disregard for their truth or falsity.”

Likewise, employers may still utilize narrowly tailored nondisclosure agreements that restrict the disclosure of proprietary or trade secret information if the employer has a legitimate business interest in doing so.

One potential solution is to include a statement in the nondisclosure agreement stating that nothing in the agreement precludes employees from exercising Section 7 rights under the NLRA. Finally, because Section 7 of the NLRA only applies to non-supervisory employees, the NLRB’s recent ruling does not apply if the employee in question is a supervisory employee.

Employers who want to use nondisclosure and nondisparagement provisions in agreements with their employees need to comply with these new state and federal requirements to ensure that the provisions are valid and enforceable.

Andrew S. Blaylock of MB Law is a business lawyer with a passion for helping business owners with their legal needs. Andrew loves to help clients make their deals happen, and his litigation background informs his thinking on the pitfalls to avoid in order to stay out of court. Andrew’s practice focuses on business formation, mergers and acquisitions, employment law, corporate governance, real estate transactions, and commercial contracts.