How California limits non-disclosure agreements in work contracts

California employers often rely on their contracts with workers to protect them from misconduct and negative publicity. The inclusion of non-disclosure agreements or non-disparagement clauses in employment contracts or severance agreements is somewhat common. Such contract inclusions help prevent scenarios in which current or former employees cause significant damage to a business’s reputation or publicly share trade secrets that give the organization a competitive edge. The right contract inclusions can mitigate some of the risk inherent in hiring new staff members.

Many businesses choose to include non-disclosure agreements and non-disparagement clauses in the contracts they sign with workers. However, lawmakers in California have passed legislation in recent years limiting the use of such clauses. What limitations does the state impose?

Companies cannot hide misconduct with contract clauses

Several high-profile cases, including some from the entertainment sector, have prompted California lawmakers to restrict the use and enforceability of non-disclosure agreements and non-disparagement clauses. Specifically, since the passage of SB331, businesses can no longer enforce non-disclosure agreements or non-disparagement clauses related to sexual assault and similar misconduct. If a business settles a complaint related to sexual harassment, for example, it usually cannot enforce contractual inclusions intended to silence the party subject to harassment.

Non-disclosure agreements are typically only enforceable in California if they specifically apply proprietary algorithms, trade secrets, information about business negotiations, customer/supplier information, company financial/accounting information, business plans and intellectual property. The worker typically should have received something of valuable consideration when signing the contract. Even the language used can affect the validity of the agreement.

New laws do not actually prevent businesses from misusing contracts to control or confuse their workers. Employers sometimes still seek to trick workers by including such clauses when doing so is not appropriate and acting as though they are enforceable. They might even threaten to sue someone for an alleged violation.

Workers who have experienced misconduct in the workplace or who now face threats of legal action from a current or former employer may benefit from learning more about how California laws limit non-disclosure agreements, non-disparagement clauses and other restrictive covenants. Learning about state laws can empower workers and help them advocate for themselves and others who may experience similar abuses in the workplace.