By John J. Cannon III, Doreen E. Lilienfeld, Gillian Emmett Moldowan, Matthew Behrens and Daniella Villatoro: Shearman & Sterling LLP
Lexology, February 5, 2024
For many companies, the use of “form” employee documents is an efficient practice that ensures consistent treatment. That said, reliance on forms can often breed complacency. In this new year, companies should consider a wholesale review of their existing forms of offer letters and employment agreements, separation agreements, restrictive covenant agreements (including proprietary information and confidentiality agreements), equity award agreements and employee handbooks to ensure they adequately address recent changes in employment laws, the enforcement priorities of relevant regulators and evolving standards of best practice.
This publication outlines items for consideration for public and private companies with respect to both existing and future agreements with employees.
Restrictive Covenants
The enforceability of restrictive covenants has been a focus of lawmakers and regulators at both the federal and state level. In addition to a proposed federal rule, several states have recently imposed restrictions or outright bans on non-competition covenants with the addition, in some cases, of civil penalties.
Federal Law: In January 2023, the Federal Trade Commission (FTC) proposed a rule providing that it is an unfair method of competition for an employer to enter into or attempt to enforce a non-compete clause with a worker. The rule has not yet been finalized, but it is expected that the FTC will vote on the rule in April 2024. As proposed, the rule would ban non-compete covenants with any service provider, including independent contractors and executives, whether paid or unpaid. Other restrictive covenants, such as non-disclosure agreements, may be subject to heightened scrutiny by courts to determine whether they are, in fact, non-compete restrictions in disguise. The final rule may differ in breadth from the proposed rule, but to the extent any rule is enacted at the federal level, it is likely to meaningfully impact the use of employment-based restrictive covenants.
State Law: State lawmakers have been active in imposing and enhancing restrictions on competition. Of particular note, under recently enacted statutes in California, employers are required to notify employees who are subject to prohibited non-compete agreements[1] by February 14, 2024 that the provisions are not valid. Failure to provide adequate notice may result in civil penalties of up to $2,500 for each violation. The extent to which the notice requirement applies to a company that is neither headquartered in, nor incorporated in, California is not specifically addressed under the statute.
Other states that impose penalties on employers attempting to enforce impermissible non-competes include Colorado,[2] Illinois, Maine, Nevada, Oregon, Virginia, Washington state and Wisconsin. Additional developments in this space include legislative activity in New York, with expected limitations on the use of non-compete covenants to be enacted in the state later this year.
Whistleblower Protections
Recent enforcement actions by the Securities and Exchange Commission (SEC) highlight an increasing interest in protecting the rights of corporate whistleblowers under Rule 21F‑17(a) of the Securities Exchange Act of 1934, which bans companies (and their agents) from penalizing individuals who report securities law violations to the SEC. These actions have resulted in fines ranging from $225,000 to $18 million. Other regulators, including the Equal Employment Opportunity Commission, have taken interest in this area as well.
Companies should ensure that all agreements that contain non-disclosure and confidentiality provisions:
- do not prohibit otherwise permitted communications with regulators concerning alleged violations of the law;
- do not require that an employee notify the employer prior to contacting a regulator; and
- do not require a confirmation from the employee that the employee has not filed a complaint or charge with a regulator against the employer.
Companies should also confirm that employees are not limited in their ability to recover whistleblower rewards for reporting alleged violations of securities law to the SEC or any governmental agency or entity.
Confidentiality
In a February 2023 decision, the National Labor Relations Board (NLRB) held that offering an employee a severance agreement that requires the individual to broadly waive their rights under Section 7 of the NLRA constitutes a violation of the National Labor Relations Act (NLRA). Companies should review severance agreements to ensure that employees who are protected by the NLRA are not asked to provide such a waiver.
Other recent developments that are impacting confidentiality provisions are changes in state law that prohibit or limit non-disclosure and non-disparagement covenants that would prevent an employee from discussing discrimination, harassment and related claims. Companies should also confirm that they are in compliance with the federal Speak Out Act, which prohibits the enforcement of non-disclosure or non-disparagement agreements where there is an allegation of sexual assault or harassment, and any state analogs.
Further, as discussed above, confidentiality provisions may also receive enhanced scrutiny in light of the increasing interest in protecting corporate whistleblowers and new laws applicable to restrictive covenants. Companies should review any confidentiality provisions to confirm they do not prevent an employee from reporting alleged violations of the law to regulators and ensure that confidentiality provisions are not so restrictive that they function as non-compete covenants in violation of applicable law.
Cause Definitions
In the wake of the #MeToo movement, companies face a material risk to their reputation for failing to adhere to a zero-tolerance policy with respect to allegations of sexual assault or harassment. To enhance the tools available in the event it is necessary for a company to address these types of allegations, companies should update the definition of “cause” in their plans, agreements and policies to ensure behaviors causing reputational harm, in addition to monetary harm, to companies are captured.
Social Media Policies
Multiple states have enacted legislation that limits employer access to the personal social media accounts of a prospective or current employee. Most recently, New York passed A.386, which will become effective in March 2024, and prohibits New York employers from requesting, requiring or coercing an employee or prospective employee to disclose their username and password for their personal social media accounts. The bill also prohibits employers from retaliating against individuals who refuse to provide such information. California has passed similar legislation and also prohibits employers from requiring an employee or prospective employee to log into their social media account in the presence of the employer. Companies should review their employment policies and hiring policies to ensure compliance with laws applicable to the control employers are allowed to have over the social media presence of employees.
Separations and Releases
Companies should remain mindful of timing requirements for obtaining a valid release of claims. As many are familiar, to obtain a release of claims under the Older Workers Benefit Protection Act, which provides protection to employees who are at least 40 years of age, an employee must be provided with 21 days, or 45 days in the case of a group termination (along with additional disclosures regarding the scope of termination), to consider a release of these claims, and seven days to revoke any release after signing. But it is also important to keep in mind that a number of states require review periods for a valid release of claims and, in some instances, valid no-hire and confidentiality provisions (which may otherwise be limited or prohibited).
For public companies, the disclosure consequences arising from executive separations and termination provisions in equity plans are also important considerations. Insufficient disclosure of separation benefits may result in regulatory oversight orders or fines or impact say-on-pay recommendations.
Several meaningful changes in employment law have gone into effect recently and additional legislation is anticipated in 2024. In addition to the issues highlighted in this publication, companies should also continue to watch out for employee/independent contractor misclassification under the Fair Labor Standards Act, recently finalized joint employer rules from the Department of Labor, and clawback policy requirements, all of which are enforcement priorities of regulators. As we have entered into a new year, we advise companies to review employee documentation, in particular forms and policies, to ensure compliance with these new laws.