Are nondisclosure agreements (NDAs) and mandatory arbitration standard employment procedures or barriers to workplace diversity, equity, and inclusion?
In 2020, as part of a $310 million settlement of shareholder lawsuits alleging the company created a toxic work environment, Alphabet (Google’s parent) agreed to let employees more openly discuss harassment and discrimination cases.1 The year prior, PepsiCo changed its separation agreements to inform employees that they aren’t restricted from talking about allegations of harassment and discrimination.2 What prevents employees from talking about these issues in the first place?
In short, contracts. During the hiring and exit processes, companies use nondisclosure agreements (NDAs) to protect corporate information, such as intellectual capital and trade secrets. However, these same agreements typically bar employees from speaking openly about harassment, discrimination, and other unlawful acts.
NDAs aren’t the only employment contract language under scrutiny. Employees who experience harassment or discrimination and seek redress from the company may find themselves in front of a private “arbiter” instead of in court, without the legal rights they are accustomed to.
Critics say that mandatory arbitration keeps employment disputes out of the public eye and fails to hold corporations accountable.3 Proponents say it saves money and time compared to the court system, where lawsuits can take months or years to play out.
According to the American Association for Justice (the industry group for trial lawyers), arbitration cases are increasing in the US. The organization reports that arbiters are mostly male and overwhelmingly white, and that this lack of diversity can impact outcomes; for example, female arbitrators rule in favor of employees more often than male arbitrators and typically award higher settlement amounts.4 Additional research shows that low-wage workers and industries like retail with large numbers of female and Black employees disproportionately experience mandatory arbitration.5 Overall, this process results in money for the employee about 1.6% of the time.6
State lawmakers build a regulatory patchwork
Public opposition to NDAs and mandatory arbitration has led to a patchwork of state legislation. Lawmakers in California passed the Silenced No More Act in October 2021, expanding a “#MeToo”–era law to broadly ban NDA clauses related to harassment and discrimination.7 The act’s sponsor, Ifeoma Ozoma, has pushed tech companies to explicitly state in their employment agreements that nothing prevents employees from discussing unlawful acts in the workplace, such as harassment or discrimination.
New Jersey and Illinois also passed anti-NDA laws where NDAs are being used to conceal unlawful activity. And in 2019, California banned mandatory arbitration, though court rulings on this law have been characterized as “unclear.”8
Shareholders weigh in
Last spring, shareholder resolutions at the Goldman Sachs Group and Sunrun received majority support as they asked companies to report on the use of mandatory arbitration by their employees and workplace culture.9 A similar resolution with Tesla received support from 45% of shares, up from 27% in 2020.
In 2022, shareholders may have the chance to weigh in additionally. Nia Impact Capital―the firm behind the Sunrun and Tesla resolutions―filed a resolution with Apple for an anticipated spring 2022 annual meeting, asking the company to evaluate whether its use of nondisclosure agreements exposes the company to unnecessary risk.10 Apple lawyers previously declined to add Ozoma’s suggested language. Recently, some Apple employees have publicly voiced concerns that the company makes it difficult for them to discuss wages and working conditions.11
Apple recently initiated a “no-action” challenge with the US Securities and Exchange Commission (SEC), asking if the company could exclude Nia’s shareholder resolution because it had been “substantially implemented.” However, the SEC did not agree with Apple, and the resolution is still headed toward a vote in March.12
The Apple resolution will soon be joined by others. Whistle Stop Capital―an ESG consultant that worked with Nia on the Apple resolution―is planning additional shareholder resolutions to tackle nondisclosure related to harassment and discrimination in the tech industry and the broader economy. Aperio clients concerned with these issues will have opportunities to sponsor Whistle Stop’s resolutions.
It remains unclear how much support these resolutions will receive from institutional investors. Recent history suggests that resolutions requesting risk assessments rather than policy changes can expect support from at least 20%–30% of shares. While not a majority, these levels of support are often the impetus for management to seriously engage with advocacy organizations to address their concerns.
The bottom line
NDAs and mandatory arbitration are examples of ways in which corporations may affect social justice outcomes, though not everyone will agree with this assessment. Some proponents will argue that these practices are standard employment agreement terms that protect companies and improve efficiency while opponents will describe them as barriers to workplace diversity, equity, and inclusion.
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