ABA LABOR AND EMPLOYMENT LAW SECTION 1999 ANNUAL MEETING PROGRAM. Negotiating Settlements of Employment Claims

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1 ABA LABOR AND EMPLOYMENT LAW SECTION 1999 ANNUAL MEETING PROGRAM Negotiating Settlements of Employment Claims Sheryl J. Willert Williams, Kastner & Gibbs PLLC Seattle, Washington

2 Confidentiality Clauses in Settlement Agreements: Outside of the releasing language contained in a settlement agreement, the next most important clause to an employer is generally the confidentiality clause. Conversely, the confidentiality clause is one of the least liked clauses for those who believe that they have been the subject of some form of inappropriate conduct arising out of their employment. However, confidentiality clauses are generally considered a standard part of settlement agreements. The effect of including such clauses in settlement agreements is to promote resolution short of trial. 1 However, regardless of one s view of confidentiality clause, confidentiality issues must be drafted very carefully in order for to ensure enforceability. A. What Will be Held in Confidence: Decide what specific information about the settlement or within the settlement agreement will be confidential: It is impractical to believe that a party will be able to keep the fact of settlement of a claim or a lawsuit confidential, although many employers would like to prevent anyone from knowing that a party has even contemplated litigation. Therefore, it is not at all unusual for settlement agreements to contain language that restricts parties from discussing the specific dollar amount or other terms of the agreement but permits revelation of the fact of settlement. Sample Language: The parties agree that the only reference to the resolution of this matter will be a statement that the matter has been resolved to the satisfaction of both parties. 1 Of course, the counter argument regarding confidentiality clauses is that it permits employers and wrongdoers in general to hide behind the privacy of the agreement thereby never having incentive to correct inappropriate behavior. 2

3 When proposing confidentiality agreements, it is the general instinct of parties to insist on mutual agreements. However, employers should be particularly cautious about entering into mutual confidentiality agreements since most employers have little or no ability to control all of their employment workforce. Moreover, unless the situation which has given rise to the settlement agreement involves an unusually small number of people, there will be a large number of people who will either have knowledge of the settlement or a desire (and perhaps a legitimate right) to know something about the resolution of the matter. Therefore, the following guidelines should be followed by parties who choose to enter confidentiality agreements: B. Who will be bound by the confidentiality provisions: 1. Employers: Because there are often multiple individuals who have access to either the fact of settlement or the amount of settlements, it is incumbent upon parties to identify which specific individuals will be bound by the confidentiality agreement. Give consideration to each individual who will have access to the information contained in the agreement or who has knowledge because of their participation in the process. Included in this employer group could be the following: anyone who has to participate in approving the settlement such as members of boards of directors, chief executive officers; anyone responsible for issuance of settlement funds or financial aspects of the business such as chief financial officers, accountants, controllers and bookkeepers, others who were involved in the defense of the matter such as supervisors, human resource managers and other managers. Of course, there is the group of individuals who really should not be privy to such information but have become privy to the information because of the general need within the workplace to communicate that which they know such as co-workers and spouses. 3

4 When reciting the specific individuals who will be bound by an agreement, employers should be careful to identify only those individuals over whom they believe there is an ability to control. Thus, it is generally prudent not to include non-management employees as individuals who will be bound by the confidentiality provisions of a settlement agreement. Likewise, it is not prudent to include non-employees as individuals who will be bound absent a specific agreement with the non-employees. 2. Employees: For the plaintiff, the group of individuals with knowledge may be somewhat different. This group may include spouses, children, relatives, financial advisors, accountants, psychologists or other health care providers, guardian ad litems and attorneys. Whenever possible, it is prudent to include individuals who fall within the categories most often associated with employee/plaintiffs. It is also prudent to obtain signatures on the documents which require confidentiality if these individuals are present and willing, even if they are non-parties. Failing an ability to have the non-parties sign the confidentiality provisions of the agreement, the agreement should recite that the plaintiff/employee agrees that the terms of the agreement are confidential and that a breach of the confidentiality agreement by any of the plaintiffs agents, heirs assigns, etc will constitute a breach of the agreement. C. Future Litigation: To the extent permitted by public policy, confidentiality agreements should also contain provisions which provide that the confidentiality extends to discoverability in future litigation. The agreements should further indicate that to the extent that such information is sought, the party who has been requested to provide the information will seek a protective order from a court 4

5 of competent jurisdiction in order to avoid breach of settlement contract. Finally, a term should be included stating that disclosure of the agreement pursuant to court order is not a breach of contract. D. Penalty Clauses: Consideration should be given to including penalty clauses for specific breach of confidentiality clauses in a settlement agreement. The addition of such penalty clauses will emphasize the importance of the confidentiality agreement. These penalty clauses can take several forms. 1. Specified Liquidated Damages Clause: Example: In the event either party is in violation of the Confidentiality Clause set forth in this agreement, either party may move to enforce it, and for damages and reasonable attorneys fees and costs incurred to establish violation and/or breach, which shall be awarded to the prevailing party. The parties further agree that damages for violation of the confidentiality undertaking are hard to assess and that should a court find that [the employee or his/her agents, heirs or assigns or the employer] violated such provision of this Agreement, it shall order the repayment of all consideration paid hereunder as liquidated damages in addition to any additional damages [the employee/plaintiff/employer/defendant] establishes that it or they suffered. This agreement shall be governed by the internal laws of the state of without regard to any doctrine relating to conflicts or choice of laws. Withholding of a certain amount of money for a specified period of time which can be released on subsequent dates can provide incentive for confidentiality. However, regardless of what form a penalty clause takes, parties will not be able to include such clauses in an agreement unless they are specifically the subject of negotiation and accompanied by some form of consideration. 5

6 E. Public Sector Exception: Confidentiality agreements are not generally available to parties where one of the parties is a public sector employer because tax payers and the public in general are entitled to know the manner in which public funds Non-Waivable Employee Rights: Provisions of settlement agreements that prohibit an employee from aiding the Equal Employment Opportunity Commission (EEOC) in its investigation of a charge are unlawful. Therefore, an employer may not interfere with the protected right of an employee to file a charge or participate in any manner in an investigation, hearing or proceeding. 2 Non-assistance agreements generally attempt to bar employees from volunteering information to the EEOC or cooperating with its investigators. Generally, an employer attempts to limit an individual s right to file a charge or participate in an EEOC proceeding by requiring him or her to sign an agreement in which he or she relinquishes these statutory rights. 3 Any such promise or agreement is null and void as a matter of public policy and may amount to separate and discrete violations of the anti-retaliation provisions of the civil rights statutes. A. Public Policy 1. Interference with Investigation The EEOC is a federal agency commissioned to vindicate the public interest in the eradication of employment discrimination. 2 These rights are non-waivable under the federal civil rights laws and therefore applicable to Title VII of the Civil Rights Act of 1964 (Title VII), 42 U.S.C. 2000e et seq., the Americans with Disabilities Act (ADA), 42 U.S.C et seq., the Age Discrimination in Employment Act (ADEA), 29 U.S.C. 621 et seq., and the Equal Pay Act (EPA), 29 U.S.C. 206(d). 3 Such language sometimes appear in contracts requiring the use of mediation or arbitration agreements, waiver agreements, employee handbooks, employee benefits plans, and non-compete agreements. 6

7 The EEOC is not merely a proxy for the victims of discrimination.... Although it can secure a specific relief, such as hiring and reinstatement..., on behalf of discrimination victims, the agency is guided by the overriding public interest in equal employment opportunity... asserted through direct Federal enforcement. General Telephone Co. v. EEOC, 446 U.S. 318, 326 (1980) (quoting 118 Cong. Rec (1972)). Strong public policy forbids interference with the endeavors of governmental law enforcement. In sum, agreements that prevent employees from cooperating with EEOC enforcement proceedings interfere with law enforcement activities since they deprive the EEOC of valuable testimony and evidence needed to establish whether a violation has occurred. Moreover, because the use of non-assistance agreements make it is difficult for the EEOC to prosecute past violations, an atmosphere is created for future violations. In EEOC v. Astra USA, Inc., 94 F.3d 738 (1 st Cir. 1996), the employer obtained settlement agreements from employees which prohibited them from assisting the EEOC in investigating acts of harassment against the employer. The court stated, while invoking the importance of public policy, that Congress entrusted the Commission with significant enforcement responsibilities in respect to Title VII. Id, at 744, (citing, EEOC v. Shell Oil Co., 466 U.S. 54, 69 (1984)(the Commission s ability to investigate charges of systemic discrimination must not be impaired). The Astra court further asserted,... clearly, if victims of or witnesses to [employment discrimination] are unable to approach the EEOC or even to answer its questions, the investigatory powers that Congress conferred would be sharply curtailed and the efficacy of investigations would be severely hampered.... The EEOC acts not only on behalf of private parties but also to vindicate the public interest in preventing employment discrimination. 7

8 Id, citing, General Telephone v. EEOC, 446 U.S. at 326. Hence, because public policy clearly favors the free flow of information between victims of employment discrimination and the agency entrusted to right the wrongs inflicted upon the victims held, any agreement that materially interferes with communication between an employee and the Commission sows the seeds of harm to the public interest. Id, at ; see also, EEOC v. U.S. Steel Corp., 671 F.Supp. 351, (W.D. Pa. 1987)(retirement plan provision that conditioned higher benefits on retiree s promise not to assist in EEOC investigation invalidated as contrary to public policy). 2. Interference with Right to File a Charge There is also a strong public policy prohibiting interference with the right to file a charge with the EEOC. The purpose of a charge is to place the EEOC on notice that someone... believes that an employer has violated [one of the anti-discrimination statutes]. EEOC v. Shell Oil Co., 466 U.S. at 68; 4 Such notice triggers law enforcement proceedings, which result in an investigation of the charge(s) and, if there is a finding of discrimination, may include conciliation and litigation. In essence, every charge filed with the EEOC has two potential claims for relief: (1) the charging party s claim for individual relief, and (2) the EEOC s claim to vindicate the public interest in preventing employment discrimination. General Telephone Co. v. EEOC, 446 U.S. at 326. An individual s right to file charges with the EEOC has consistently been recognized by the court to be non-waivable. 5 4 See also, EEOC v. Cosmair, Inc., 821 F.2d 1085, 1089 (5 th Cir. 1987)(primary purpose of a charge under ADEA is not to seek recovery from the employer but rather to inform the EEOC of possible discrimination ). 5 See, Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28 (1991)(individual who signs an agreement to submit an employment discrimination claim to arbitration remains free to file a charge with the EEOC); EEOC v. Cosmair, Inc., 821 F.2d at 1090 (former employee s promise not to file a charge with the EEOC is invalid because it would impede EEOC enforcement of the civil rights laws and is void as against public policy); EEOC v. U.S. Steel Corp., 671 F.Supp. at (retirement plan provision that conditioned higher benefits on retiree s promise not to file charges with EEOC is invalid and contrary to public policy). 8

9 B. Prohibition Against Retaliation Most statutes enforced by the EEOC include provisions barring retaliation. These provisions were the result of Congress effort to ensure that employees remain free to report suspected violations to the government without penalty imposed by their employer. 6 Because nonassistance agreements try to restrict individuals from filing a charge or participating in an EEOC investigation, the agreements are said to impose a penalty upon those who are entitled to engage in protected activity. It is by their very existence that such agreements have the capability to chill the willingness and ability of individuals to come forth with critical information that may be of import to the EEOC and therefore, to the advancement of public interest in the elimination of unlawful employment discrimination. 7 C. EEOC s Position is Consistent with Public Policy On April 25, 1995, the EEOC announced its support of efforts by employers and employees to voluntarily resolve employment discrimination disputes. More specifically, the EEOC stated that it supports efforts by employers to develop voluntary internal ADR programs to address workplace discrimination disputes, because the interests of employers and employees will be served by the development of fair, credible, internal ADR programs that resolve 6 See Veprinsky v. Fluor Daniel, Inc., 87 F.3d 881, 889 (7 th Cir. 1996)( Given the instrumental role individual employees play in the statutory scheme, the protection of those individuals from retaliatory acts by the employer is essential to accomplish the purpose of Title VII. ) (quoting EEOC v. Pacific Press Pub. Assn., 676 F.2d 1272, 1281 (9 th Cir. 1982)); Garcia v. Lawn, 805 F.2d 1400, 1405 (9 th Cir. 1986)(retaliation is likely to cause irreparable harm to the public interest in enforcing the law by deterring others from filing charges. ); cf. NLRB v. Scrivener, 405 U.S. 117, (1972)( Congress has made it clear that it wishes all persons with information about [unlawful practices] to be completely free from coercion against reporting them to the [government.]... This complete freedom is necessary... to prevent the [government s] channels of information from being dried up by employer intimidation of prospective complaints and witnesses. )(construing anti-retaliation provisions of the National Labor Relations Act). 7 See, e.g., EEOC v. Board of Governors, 957 F.2d 424 (7 th Cir.), cert. denied, 506 U.S. 906 (1992)(unlawful retaliation for collective bargaining agreement to allow the termination of an administrative grievance proceeding upon the filing of a charge with EEOC); EEOC v. Cosmair, Inc., 821 F.2d at 1089 (impermissible retaliation arises when payments to which one is otherwise entitled are stopped merely because a charge is filed with EEOC); EEOC v. U.S. Stell Corp., 671 F.Supp. at 358 (retaliation under 4(d) of the ADEA results when an employer revokes enhanced pension benefits for persons who file charges or otherwise participate in EEOC proceedings) 9

10 discrimination disputes satisfactorily. See 80 DLR, 1995; Alternative Dispute Resolution Alert, vol. 1, No. 4 (June, 1995) at 1. However, while a private settlement agreement may eliminate an individual s right to personal recovery, it cannot interfere with the EEOC s right to enforce an individual s protected rights pursuant to Title VII, the EPA, the ADA or the ADEA. 8 Hence, the advancement of enforcement actions for purposes of public interest are within the EEOC s vested authority to vindicate rights belonging to the United States as sovereign. Goodyear Aerospace Corp., 813 F.2d at 1543 (citation omitted). Severability Provisions Severability provisions in a settlement agreement legally provide for the continued enforcement and effect of remaining settlement provisions, should particular provisions conflict with federal or state law(s). Such provisions are effective, leaving the settlement agreement free from nullity, where the agreement contains a severability clause and the objectionable provision is severable. Although some courts have held, even in the absence of a severability clause, that illegal provisions in an agreement are severable and do not affect the validity of the remainder of the agreement, it is most judicious to include such a clause when it reflects the parties intent. Hence, the presence of a severability clause may be the key ingredient to avoiding nullification of an entire settlement agreement. Example: SEVERABILITY PROVISION. If any term, covenant, condition, or provision of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining terms, covenants, and provisions shall remain in full force and effect and be in no way affected, impaired, or invalidated. 8 See, EEOC v. Harris Chernin, Inc., 10 F.3d 1286, (7 th Cir. 1993); EEOC v. Goodyear Aerospace Corp., 10

11 INDEMNIFICATION Generally included as boilerplate in most negotiated agreements, indemnification clauses should not be overlooked or underestimated. Contractual indemnity can be a complicated transaction between an employer and employee that are attempting to enter into a contractual agreement. Indemnity is a manner in which an employer can contractually shift the risk of loss to the employee. In essence, liability exposure can be managed by transferring responsibility for possible future claims and lawsuits, directly to the employee. When negotiating a settlement agreement, it should be the employer s goal to minimize any and all future costs, fees, penalties and actions by including an indemnification provision wherein the employee agrees to hold the employer harmless of specified claims. Example: HOLD HARMLESS PROVISION. [Employee] hereby agrees to indemnify [employer] and hold it harmless from and against all claims brought by any health care provider, insurer, the State of [X], including its Employment Security Department, or the Internal Revenue Service arising out of or related to [the employee s] employment, or this Agreement and the payment made pursuant thereto, including, but not limited to, lien and subrogation claims and all costs and attorney fees incurred in the defense of such claims. HOLD HARMLESS PROVISION: [Employer] agrees to pay [the employee] the sum of X dollars as and for general damages for emotional distress, humiliation, embarrassment and mental anguish. Because this sum does not represent back pay, [the employer] will not with hold any taxes or other withholding from it, and [the employer] will provide [the employee] with a 1099 tax form for this amount. [The employee] shall be solely responsible for any and all taxes which may be due on this payment and shall hold [the employer] harmless and indemnify it from any liability thereon except for liability for the employer s share, but not penalties or interest, of FICA and FUTA. Said payment will be made by check payable to [X]. NON-SOLICITATION: 813 F.2d 23, 25 (5 th Cir. 1975); EEOC v. McLean Trucking Co., 525 F.2d 1007, 1010 (6 th Cir. 1975). 11

12 Non-solicitation restrictions are commonplace in many settlement agreements. These agreements are generally considered an extension of contracts or agreements not to solicit or compete or reveal confidential information that exist during the pendency of employment. Nonsolicitation agreements generally address the protection of employer customers and remaining employees. Unlike many other provisions in settlement agreements, however, it is important to consider whether such agreements are enforceable, even if sufficient consideration has been given for their inclusion in a settlement agreement. Much of the law that governs non-solicitation agreements finds its interpretive basis in the law that governs covenants not to compete and trade secret law. 9 Therefore, prior to including a non-solicitation provision in any settlement agreement relating to either employees or customers, consideration should be given to whether the clause in the agreement meets the standards of reasonableness which will be applied by the court should the court be called upon to interpret the agreement. In making interpretations of such agreements, the court will consider the following factors: a) the nature of the employer s business, b) the type of employment involved, c) the situation of the parties to the agreement, d) the employer s legitimate business interest, e) amount of time the limitation or restriction will be enforced, f) the geographic scope of the non-solicitation agreement and, g) the ability of the employee to earn a livelihood should the restriction be enforced. If you believe that you can meet the appropriate standards under existing state law, then it is equally important to be sure that the terms in question are appropriately defined. Otherwise, a court vested with the responsibility to interpret this agreement will use the plain and ordinary 12

13 meaning of the terms. The application of the plain and ordinary meaning of such terms could result in a prohibition against a client to even accept applications for employment from individuals who are simply responding to generic internet or newspaper advertising. To avoid such a consequence, language such as the following may prove to be helpful: ABCorporation agrees that it will not directly or indirectly solicits any of XYZ s employee for a period of year(s), provided, however, ABC Corporation is free to place advertisements to the general public in trade publications, newspapers or the internet, and ABC Corp is free to respond to inquiries from XYZ Corp. employees who respond to such advertisements or otherwise initiate contact with ABC corporation during said year period. Just as negotiating is an art, so is drafting of an enforceable and effective settlement argument. 9 At least one court has distinguished between solicitation and servicing of customers, finding that the concepts are different. See, Kephart v. Hair Returns, Inc., 685 So. 2d 959, IER Cases 1151, 22 Fl. L. Weekly D80 (Fla. 4th Distr. Ct. App. 1996), rehearing denied, 695 So. 2d 699 (Fla. 1997). 13