By Nicolas A.Lussier, and Nicholas H. De Baun

Seyfarth Synopsis: On November 17, 2023, New York Governor Kathy Hochul signed into law S4516, a significant amendment to Section 5-336 of the New York General Obligations Law. This legislation marks a critical expansion in the state’s ongoing efforts to regulate settlement agreements, particularly with respect to non-disclosure agreements (NDAs) in settlements involving claims of discrimination, harassment, or retaliation.

Liquidated Damages for Breach of an NDA are Prohibited

While agreements settling claims of discrimination, harassment, or retaliation may still contain NDAs at the option of the complainant, the new law immediately restricts the enforceability of certain terms within those agreements that address the consequences if the complainant breaches the NDA. In particular, the new law prohibits provisions that:

 (1) impose liquidated damages for breaches of NDAs,

(2) require forfeiture of settlement consideration for violation of an NDA, and

(3) require complainants to represent that they were not subject to unlawful discrimination, harassment, or retaliation

Waiting Period is Now Sometimes Waivable

One of the law’s notable revisions to the existing framework is the modification of the 21-day consideration period for NDAs. The prior framework required the parties to wait the entire 21 days before signing the agreement.  The revisions have instead made the waiting period waivable, similar to the waiting period under the OWBPA. Significantly, however, this change does not affect Section 5003-B of the New York Civil Practice Law & Rules (CPLR), which still mandates that where parties are settling actual litigation, a full, non-waivable 21-day waiting period is required before signing an agreement containing an NDA. This distinction underscores the nuanced approach to pre-litigation and litigation scenarios under New York law.

Are Separation Agreements Implicated by the Amendment?

Another critical aspect of this legislation is its applicability to separation agreements. The original text of Section 5-336 was confined to resolutions of asserted claims, but there is at least a plausible argument, albeit an uncertain one, that the new amendment broadens the scope of covered agreements because it bars releases of “any claim” of discrimination, harassment, or retaliation, which could arguably encompass both asserted and unasserted claims.

That said, there are stronger arguments that the amendment does not encompass standard separation agreements releasing unasserted claims. The language of Section 5-336(3), alongside legislative justifications, suggests that the statute targets only resolutions of asserted harassment, discrimination, or retaliation claims. This interpretation is supported by the fact that the statute refers to the individual party to an NDA as the “Complainant” – implying that an actual complaint must have occurred for the law to apply. Employers should monitor how courts interpret the amendment to ensure its scope is not broadened to encapsulate separation agreements reached outside the context of a contested proceeding (e.g., a lawsuit or agency charge) or a threatened claim (e.g., in response to a lawyer’s demand letter).

Applies to Independent Contractors

Moreover, the law’s implications extend beyond the traditional employee-employer relationship, encompassing independent contractors too. This expansion signifies a growing recognition of diverse workplace arrangements and the need for legal frameworks that address a broader spectrum of working relationships.

Economic Damages for Breach are Still Available

Finally, employers should take note that while liquidated damages or forfeitures of consideration are now prohibited for violations of NDAs, other remedies remain available.  In the event of a breach of an NDA, the employer may still seek actual economic damages sustained as a result of the breach, and employers may want to consider including language to this effect in their agreements going forward.

In response to these legislative changes, it is imperative for employers to diligently review their settlement agreements and stay abreast of developments in the event courts construe the law to apply to separation agreements. Seyfarth will continue to monitor developments in this space and provide updates when available.