Employers terminating employees frequently offer severance payments in exchange for the employees’ entry into a separation agreement. Generally these separation agreements include a release of claims along with other provisions requiring confidentiality and nondisparagement. A recent decision by the National Labor Relations Board (the “Board” or “NLRB”) calls into question the viability of some of these routine and important contractual terms.
The NLRB is the federal agency that oversees employees’ right to unionize. The Board’s authority, however, also impacts private employers without a unionized workforce. Specifically, through its enforcement of Section 7 of the National Labor Relations Act (the “NLRA”), the Board also acts to prevent and remedy unfair labor practices committed by private sector employers and unions.
Under the Trump administration, two decisions issued by the NLRB—Baylor University Medical Center, 369 NLRB No. 43 (2020) and IGT d/b/a International Game Technology, 370 NLRB No. 50 (2020)—broadly permitted employers to include confidentiality and nondisparagement provisions in their severance agreements. On February 21, 2023, the NLRB overturned those decisions in the case of McLaren Macomb, 372 NLRB No. 58 (2023).
As described in more detail below, the McLaren decision holds that offering separation agreements with nondisparagement and confidentiality provisions constitutes unlawful interference with employees’ Section 7 rights under the NLRA. More recently, the NLRB’s General Counsel issued a memorandum that expands on the McLaren decision.
After a successful union election in 2019, McLaren Macomb (“McLaren”), a unionized teaching hospital in Michigan, laid off 11 employees through a permanent furlough. McLaren presented each of these employees with a severance agreement. In addition to a release of claims, the severance agreements included a prohibition on sharing the terms of the severance agreement with anyone other than the employee’s spouse or professional advisors, or unless the employee was compelled to do so by a court or administrative agency. The agreement also contained a nondisparagement clause that prohibited the employee from disparaging McLaren or its affiliated persons or entities, whether to McLaren’s current employees or to the general public.
Section 7 of the NLRA affords employees “the right to . . . engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Section 8(a)(1) of the NLRA makes it an “unfair labor practice for an employer to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed” by Section 7. Critically, these provisions apply to both unionized and non-unionized workforces.
The main issue presented in the McLaren case was whether the employer violated Section 8(a)(1) of the NLRA by offering a severance agreement to the 11 employees it permanently furloughed. The Board first found that agreements containing broad proscriptions on employee exercise of Section 7 rights have long been held unlawful because they purport to create an enforceable legal obligation to forfeit those rights. The Board also noted that proffers of such agreements to employees have also been held to be unlawfully coercive.
The Board concluded: “the nondisparagement and confidentiality provisions interfere with, restrain, or coerce employees’ exercise of Section 7 rights. Because the agreement conditioned the receipt of severance benefits on the employees’ acceptance of those unlawful provisions, we find that [McLaren’s] proffer of the agreement to employees violated Section 8(a)(1) of the Act.” The Board in McLaren specifically overturned the two Trump era decisions referenced above, describing this reversal as a “return to [its] prior, well-established principle[s].”
Who is Impacted
The NLRA applies to all “employees” within the meaning of its Section 2(3). Any such “employee,” whether a union member or not, can file a charge with the NLRB asserting a violation of their Section 7 and other rights. However, generally, the Board has held that executives, managers, supervisors and independent contractors are not “employees” within the meaning of Section 2(3) of the NLRA.
On March 22, the NLRB’s General Counsel issued Memorandum GC 23-05 (the “Memo”) explaining and expanding upon the McLaren decision in order to assist Regional NLRB Directors and officers in responding to inquiries from workers, employers, labor organizations and the public about implications stemming from that case. While not a legally binding precedent, the Memo does reflect how the NLRB will decide unfair labor practice claims based on the McLaren decision. Key points of the Memo:
- Severance agreements in and of themselves are not banned by the McLaren decision.
- Merely offering an agreement with the prohibited language is in and of itself an unfair labor practice, even if the employee does not sign it.
- The decision does not apply to supervisory employees (unless they are retaliated against for refusing to engage in an unfair labor practice).
- The McLaren decision is retroactive, meaning it applies to agreements proffered within the past six months (which is the limitations period for unfair labor practices) and to new efforts to enforce prohibited provisions of even older agreements.
- The NLRB will generally make decisions based solely on the unlawful provisions and would seek to have those voided as opposed to nullifying the entire agreement.
- Former employees are entitled to the same Section 7 protections as current employees.
- Only confidentiality clauses that are narrowly-tailored to protect proprietary or trade secret information for a period of time based on legitimate business justifications are considered lawful.
- Narrowly-tailored, justified, nondisparagement provisions limited to employee statements about the employer that meet the definition of defamation, as being maliciously untrue, made with knowledge of their falsity or with reckless disregard for their truth or falsity, may be found lawful.
- A general savings clause or disclaimer language preserving employees’ Section 7 rights might be useful to resolve ambiguity over vague terms, but it would likely not cure overly broad provisions.
McLaren may petition the US Court of Appeals for the Sixth Circuit for a review of the NLRB’s decision; however, the decision will not be stayed pending appeal, and has taken effect immediately regardless of whether McLaren appeals.
What Employers Should Do
Based on the Board’s decision, there are a number of potential steps employers may take when offering non-supervisory employees a separation agreement. None of the choices available to employers, however, are perfect solutions, and employers should consult with legal counsel to choose the most appropriate course of action under the circumstances.
One option would be to remove all language requiring the employee to keep the terms of the severance confidential and all language prohibiting the employee from disparaging the employer. This approach, of course, takes away some of the value employers attribute to such agreements, but it is clearly the safest approach in light of the Board’s decision and the Memo.
Another alternative would be to narrowly tailor the confidentiality and nondisparagement provisions, while adding language making clear that nothing in the agreement is intended to impinge on any employee’s Section 7 rights. To be clear, NLRB has not expressly sanctioned such a disclaimer as being adequate protection of the employee’s rights, and the Memo expressly states that such language is insufficient to cure overly broad confidentiality and nondisparagement language, so this approach will entail a significant degree of risk.
An employer may also consider omitting the confidentiality provision but including a narrowly tailored nondisparagement provision that is designed to track language that would appear to be acceptable under the Memo. For example: “Employee will not make any maliciously untrue statements about the Company, i.e., statements that are made with knowledge of their falsity or with reckless disregard for their truth or falsity.”
Finally, if the employer elects to include any language around confidentiality and nondisparagement, the agreement should include a severability provision that preserves the remainder of the agreement if the confidentiality and nondisparagement clauses are found to be unenforceable. This approach, however, could still lead to a violation of Section 8(a)(1) of the NLRA, but should preserve the effectiveness of other portions of the agreement.