Increasingly, parties to a lawsuit or claim are demanding confidentiality clauses in NC personal injury and workers’ comp cases, as well as breach of contract, discrimination claims and even divorce actions.  Many employers now require a separate “resignation and release” as a condition of settling a NC workers’ compensation claim, and these agreements often include a confidentiality clause.  The reason is pretty straightforward — employers and businesses are reluctant for their employees and competitors to know what they have paid on a claim.  My own view is that in the vast majority of cases  nobody except the parties much cares what is paid, and its better to not have any remaining post-settlement obligations between the parties.  But defendants frequently feel differently.

Recently, the breach of a confidentiality provision cost an age discrimination claimant his $80,000 settlement.  Patrick Snay, the former Head of School at Gulliver Preparatory Academy Miami, Florida, filed an age discrimination claim against his employer after his 2010-11 contract was not renewed.  The case settled for the payment of $10,000 in back pay plus $80,000.  Unfortunately, Snay apparently told his teenage daughter about the deal and she could not resist posting the result on Facebook, advising her 1200 Facebook followers that “Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT.”  Needless to say, word of the the post got back to Gulliver officials, who promptly advised Snay that he had broken the confidentiality agreement and would not be receiving his settlement.  The Third District Court of Appeal for the State of Florida sided with the school, holding that Snay’s disclosure of the settlement to his daughter violated the confidentiality clause.

Of even greater concern is the potential tax liability associated with including confidentiality clauses in NC personal injury and workers’ compensation cases.   26 U.S.C.A. section 104(a)(2) provides that “gross income does not include the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sum or as periodic payments) on account of personal physical injuries or physical sickness.” So in general, workers’ compensation and personal injury proceeds are not taxed. However in 2003 the IRS ruled that money paid to secure a confidentiality clause is not compensation for personal injuries or physical sickness and so is taxable.  Amos v. Commissioner, 2003 Tax Ct. Memo, LEXIS 330 (2003).  (We have Dennis Rodman to thank for that.  Look it up if you don’t believe me.)  So if you have to sign a confidentiality agreement in your NC personal injury or NC workers’ compensation case consider assigning a specific amount of the settlement to that provision, and plan on paying taxes on that amount.

Finally, here are a few tips if you are considering entering into a confidentiality clause along with your personal injury or workers comp case:

  • Raise the issue of any confidentiality agreement during settlement discussions.
  • Be sure you are allowed to discuss the settlement as required to receive tax and legal advice, meet any obligations to business partners or insurers, or and to comply with any future court orders.
  • Know exactly what is confidential. Does the non-disclosure apply to the terms of the settlement, the nature of the dispute itself, information exchanged between the parties?
  • Understand the consequences of any breach of the confidentiality agreement. Most confidentiality agreements contain a “liquidated damages” clause, setting specific amount of money as the damages for breach of the clause.

Please call or email if you would like to discuss confidentiality clauses in NC personal injury and workers’ comp cases in North Carolina.