Sweeping new law requires employers to re-examine nondisclosure and non-disparagement provisions
Note: This is the first of two alerts covering the Colorado POWR Act. Find the second one here.
As the most substantive worker rights bill from this year’s legislative session, Colorado’s newly enacted Protecting Opportunities and Workers’ Rights (POWR) Act radically changes state employment laws. Imposing a new threshold for discrimination and harassment claims, cumbersome new recordkeeping requirements and strict requirements governing nondisclosure and non-disparagement restrictions in agreements with workers, the POWR Act requires Colorado employers to revisit their policies, practices and existing forms of various agreements.
In this client alert, we address the POWR Act’s impact on nondisclosure and non-disparagement provisions. Part 2 will address changes related to harassment, discrimination and recordkeeping requirements and related issues.
Among other changes, the POWR Act places several new restrictions on nondisclosure and non-disparagement provisions that place limits on disclosure or discussion of alleged “discriminatory” or “unfair” employment practices, as those terms have been expanded under the Colorado Anti-Discrimination Act (CADA). These changes are nuanced but will likely require a significant overhaul of various employment-related agreements.
New Requirements for Employment-Related Nondisclosure and Non-Disparagement Provisions
The POWR Act added C.R.S. Section 24-34-407, which imposes strict limitations on provisions in agreements between an employer and an employee or prospective employee that limit the individual’s ability to disclose or discuss, either orally or in writing, any alleged discriminatory or unfair employment practice. This applies to agreements entered into or renewed on or after the POWR Act’s effective date, Aug 7, 2023. Although not expressly stated in the new statutory section, the phrase “unfair employment practice” presumably is limited to conduct based upon characteristics such as disability, race, sex and other protected categories as outlined in CADA Section 24-34-402.
Specifically, any such provision is void unless it meets each of the following factors:
- The provision must apply equally to all parties to the agreement;
- The provision must expressly state that it does not restrain a party from disclosing the underlying facts of any alleged discriminatory or unfair employment practices under various circumstances outlined in the statute, including: (i) to immediate family members, religious advisors, medical or mental health providers or support groups, legal counsel, financial advisors and tax preparers; (ii) to any local, state or federal government agency for any reason or in response to legal process (in each case, without prior notice to the employer); and (iii) for other purposes as required by law;
- The provision must expressly state that disclosure of the underlying facts as outlined above does not constitute disparagement;
- If the agreement contains a non-disparagement provision, it must include a condition that, if the employer disparages the employee or prospective employee, the employer may not seek to enforce the non-disparagement or nondisclosure provisions of the agreement or seek damages against the individual for violating those provisions (although all other provisions remain in effect); and
- The agreement must include an addendum signed by all parties that attests to compliance with these requirements.
This constitutes a significant change to existing law. While it appears that the purpose of these provisions was to prevent employers from settling claims and “muzzling” employees to prevent them from discussing practices alleged to be in violation of CADA (such as harassment and discrimination), the statutory language is not so limited. These new requirements can be construed to apply to confidentiality and other restrictive covenant agreements, employment agreements and offer letters, employee handbooks and policies and various other employment-related agreements (such as equity grants), as well as to settlement and release agreements.
Damages and Penalties Under the POWR Act
Section 24-34-407 also includes new limitations on liquidated damages provisions in nondisclosure agreements. Specifically, a liquidated damages provision may not constitute a penalty or punishment. In order to be enforced, it must provide for an amount of damages that is reasonable and proportionate in light of the anticipated actual economic loss that a breach of the agreement would cause, with the amount varying based on the nature and severity of the breach.
Employers may be liable for actual damages, attorneys’ fees and costs, and a penalty of $5,000 for each instance in which an employee or prospective employee is presented with an agreement containing non-compliant provisions, regardless of whether the employer actually tries to enforce such provisions. (There is, though, a narrow “good faith” defense that employers may invoke to attempt to reduce the penalty.) Claims may be brought immediately (i.e., with no administrative prerequisites) by the Colorado Civil Rights Commission and the employee or candidate, and punitive damages are available in certain circumstances.
What Should Employers Do Next?
The new law is extremely broad, and on its face applies well beyond agreements involving settlement of claims of unlawful or unfair employment practices under CADA.
It also leaves many unanswered questions. For instance, who is considered to be acting as the “employer” for purposes of disparagement? Would disparaging statements by a coworker constitute disparagement for purposes of defeating the employer’s ability to enforce nondisclosure and non-disparagement provisions in an agreement? Likewise, what does “disparaging” mean as it pertains to the employer? Is there an exception for truthful statements, such as reporting to the state unemployment commission the basis for an employee’s “for cause” termination? The statute does not expressly include standard carve-outs for employers for truthful statements, responding to legal process or other similar purposes.
We expect that the scope of this law will become better defined through guidance and case law going forward, but for now, employers should to exercise caution. Specifically, employers would be wise to work with legal counsel to promptly review any and all agreements (including handbooks and policies acknowledged by employees) to determine whether revisions might be necessary to avoid running afoul of this new law. This includes not just new agreements but also those being “renewed,” as outlined above. Potential revisions include:
- Carving out disclosure of alleged discriminatory and unlawful employment practices from confidentiality and nondisclosure provisions, making sure to define “unfair employment practices” appropriately, as contemplated by CADA. Various carve-outs already are dictated by applicable law, and these new ones can simply be added to the section of the applicable agreement covering protected disclosures.
- Adding an acknowledgment by the employee confirming (if true) that the employee is not aware of any alleged discriminatory or unlawful employment practices under CADA as of the date of execution of the agreement.
- Considering whether a non-disparagement provision is truly necessary and worth the additional burden, given the bilateral obligations and significant potential downside, and removing it where appropriate.
The POWR Act changes the landscape significantly for employers with respect to nondisclosure and non-disparagement provisions. Companies should act promptly to mitigate any potential exposure moving forward.
If you have any questions concerning these new requirements and modifications that may be needed to agreements and policies, reach out to one of the authors or to your regular Brownstein attorney.
This document is intended to provide you with general information regarding Colorado's POWR Act. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.