By Lisa M. Casa
The recent downfall of numerous high-profile figures due to revelations of serial sexual harassment left many wondering how such behavior was permitted to continue, unabated, for so long. Nondisclosure agreements and arbitration clauses were criticized for allowing these sexual harassers to maintain their positions and continue their misconduct free of consequences. [i]
New York, as part of the 2018-2019 budget law, enacted sweeping legislation, which broadened protections against harassment in the workplace (the anti-harassment legislation).[ii] Included in this legislation are amendments to the Civil Practice Laws and Rules (CPLR) and General Obligations Law (Gen. Obl. L.). These new statutes prohibit the inclusion of nondisclosure provisions as a condition of settling sexual harassment claims, and prohibit the use of mandatory arbitration clauses for claims of sexual harassment. Employers and employees should review their agreements and policies to ensure compliance with the anti-harassment legislation.
With respect to nondisclosure agreements, the anti-harassment legislation added Section 5-336 to the Gen. Obl. L. and Section 5003-B to the CPLR. These additions prohibit any agreement that bars a complainant from publicly disclosing the underlying facts of the sexual harassment claim. Accordingly, agreements silencing complainants from publicizing their claims, even if they are resolved before any wrongdoing is found by a court or independent factfinder, are proscribed by the anti-harassment legislation.
These statutes provide a carveout, and permit the inclusion of a nondisclosure provision if it is the complainant’s preference to include such a provision.[iii] For such nondisclosure provision to be enforceable, the terms must be provided to all parties in writing, in a separate agreement, and the complainant must have twenty-one days to consider such provision.[iv] Further, even after executing such an agreement, the complainant must be provided with seven days in which to revoke such provision. No agreement is effective until after the revocation period expires.
Even if a nondisclosure provision is included in compliance with the strict requirements of CPLR § 5003-B and Gen. Obl. L. § 5-336, the cost of nondisclosure is now higher. The Tax Cuts and Jobs Act of 2017, which took effect on December 22, 2017, provides that businesses may no longer receive a tax deduction for: “(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement; or (2) attorney’s fees related to such a settlement.”[v] Accordingly, employers should be aware of the tax consequences and cost of including a nondisclosure provision, even when the provision complies with the requirements of the anti-harassment legislation.
The anti-harassment legislation also added Section 7515 to the CPLR, which prohibits “any clause or provision in any contract which requires as a condition of the enforcement of the contract or obtaining remedies under the contract that the parties submit to mandatory arbitration to resolve any allegation or claim of an unlawful discriminatory practice of sexual harassment.”[vi] This provision affects any agreement entered into on or after July 11, 2018.
The prohibition against arbitration of sexual harassment claims extends beyond employment contracts. The anti-harassment legislation also added Section 296-d to the Executive Law, which expanded the protections against workplace sexual harassment to non-employees.[vii] Non-employees are defined as “a contractor, subcontractor, vendor, consultant or other person providing services pursuant to a contract in the workplace” and their employees.[viii] Accordingly, businesses must scrutinize employment contracts – as well as any contract with independent contractors, contractors, subcontractors, vendors and other contractual agreements for services – to ensure that the arbitration provision carves out claims of sexual harassment.
CPLR § 7515 will not prevent the enforceability of an arbitration clause with respect to any other types of claims.[ix] Further, the inclusion of a prohibited arbitration clause “shall not serve to impair the enforceability of any provision of such contract.”[x] Additionally, to the extent there is a conflict between a collective bargaining agreement and CPLR § 7515, the terms of the collective bargaining control.[xi]
Likely Preemption Under the FAA
The enforceability of CPLR § 7515 is debatable. CPLR § 7515 provides that arbitration clauses requiring the arbitration of sexual harassment claims is prohibited “[e]xcept where inconsistent with federal law.”[xii] This clause is a reference to the Federal Arbitration Act (FAA) – a “congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.”[xiii] Reflecting Congress’ preference for arbitration, Section 2 of the FAA provides:
A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.[xiv]
The Supreme Court in AT&T Mobility LLC v. Concepcion, declared that “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.”[xv] Under the Supreme Court’s declaration in AT&T, CPLR § 7515 – which categorical prohibits arbitrating claims involving sexual harassment – would likely be preempted by the FAA.[xvi]
That is not the end of the analysis, however, because employers must consider what types of agreements are covered by the FAA. The FAA applies to “any maritime transaction” or “a contract evidencing a transaction involving commerce.”[xvii] The Supreme Court has interpreted these terms broadly and determined that they encompass any transaction that would fall within Congress’ power to regulate transactions under the Commerce Clause.[xviii] Given the expansive reach of the Commerce Clause, courts have applied the FAA to uphold arbitration clauses in employment contracts.[xix]
There is one category of employment contracts that are not covered by the FAA – “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”[xx] The Supreme Court has narrowly interpreted this provision to apply only to “contracts of employment of transportation workers.”[xxi] “Transportation workers” has been narrowly defined as workers “being a member of an industry that primarily involves the actual, physical movement of goods through interstate commerce.”[xxii] Thus, the exemption has been applied to truck drivers who transport physical goods, but not to car service drivers or airline pilots who transport passengers.[xxiii]
The anti-harassment legislation provides for a sweeping number of protections prohibiting sexual harassment in the workplace. However, while these laws require employers to scrutinize their agreements to ensure compliance with the proscriptions against nondisclosure agreements and arbitration provisions, the full extent of the enforceability and effectiveness of these laws is undetermined. A close look should be taken to see how this new legislation is ultimately interpreted and enforced by the courts.
This article was published in the Nassau Lawyer (January 2019).
[i] See, e.g., Michelle Kaminsky, The Harvey Weinstein Effect: The End of Nondisclosure Agreements in Sexual Assault Cases? Forbes, Oct. 26, 2017. https://www.forbes.com/sites/michellefabio/2017/10/26/the-harvey-weinstein-effect-the-end-of-nondisclosure-agreements-in-sexual-assault-cases/; Hiba Hafiz, How Legal Agreements Can Silence Victims of Workplace Sexual Assault, The Atlantic, Oct. 18, 2017. https://www.theatlantic.com/business/archive/2017/10/legal-agreements-sexual-assault-ndas/543252/.
[ii] See L.2018 c. 57. (eff. April 12, 2018).
[iii] See CPLR § 5003-B.
[iv] See id.
[v] 26 USC § 162(q).
[vi] See CPLR § 7515(2).
[vii] See Exec. L. § 296-d
[viii] See Exec. L. § 296-d.
[ix] See CPLR § 7515(4)(b)(ii).
[x] See CPLR § 7515(b)(iii).
[xi] See CPLR § 75157(c).
[xii] See CPLR § 7515(4)(b)(i).
[xiii] See Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).
[xiv] See 9 USC § 2.
[xv] See AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 341 (2011); see also Preston v. Ferrer, 552 U.S. 346, 353 (2008)(collecting cases).
[xvi] See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 56 (1995) (“After determining that the FAA applied to the parties’ arbitration agreement, we readily concluded that the federal statute pre-empted Alabama’s statutory prohibition.”).
[xvii] 9 USC § 2.
[xviii] See Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265, 281 (1995).
[xix] See, e.g., E.E.O.C. v. Waffle House, Inc., 534 U.S. 279, 289 (2002) (“Employment contracts, except for those covering workers engaged in transportation, are covered by the FAA.”); Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 114 (2001); Badinelli v. Tuxedo Club, 183 F. Supp. 3d 450, 453 (S.D.N.Y. 2016)(“Local employment contracts can clearly be covered.”).
[xx] 9 USC § 1.
[xxi] See Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 119 (2001).
[xxii] Kowalewski v. Samandarov, 590 F. Supp. 2d 477, 484 (S.D.N.Y. 2008).
[xxiii] See id; Jetblue Airways Corp. v. Stephenson, 932 N.Y.S.2d 761 (Sup. Ct. N.Y. Co. 2010), aff’d, 931 N.Y.S.2d 284 (1st Dept. 2011); Singh v. Uber Techs. Inc., 235 F. Supp. 3d 656, 671 (D.N.J. 2017).