For decades, distributors (like other employers) have used severance agreements to protect themselves from harmful conduct by departing or terminated employees. These protections include restrictions on competition, confidentiality/non-disclosure provisions (Confidentiality Clauses), and non-disparagement provisions (Non-Disparagement Clauses). While this has historically been the standard operating procedure for many companies, a recent decision by the National Labor Relations Board (NLRB) may be the death knell for at least Confidentiality and/or Non-Disparagement Clauses in severance agreements.
Coming on the heels of the Federal Trade Commission’s proposed rule that would effectively eliminate most non-competition agreements (see my article in the March/April 2023 issue of Industrial Distribution Magazine), the NLRB’s Feb 23, 2023 ruling in McLaren Macomb represents another blow to employers’ ability to limit post-employment activity in severance (and possibly other) agreements. Reversing decades of prior precedent, the NLRB held in McLaren Macomb that even offering a severance agreement to a laid-off employee that contains Confidentiality Clauses and/or Non-Disparagement Clauses as a condition of receiving severance benefits violates the employee’s rights under the National Labor Relations Act (NLRA).
The focal point of the McLaren Macomb case was Section 7 of the NLRA, which guarantees employees “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” While that language may sound like it only applies to unionized workers, Section 7 applies to all nonmanagerial or nonsupervisory employees (except, for example, airline and railroad employees), whether they are part of a unionized workplace or not.
Agreements Can’t ‘Preclude an Employee From Assisting Coworkers With Workplace Issues’
In McLaren Macomb, 11 furloughed Michigan-based hospital employees signed severance agreements that contained the following common Confidentiality and Non-Disparagement Clauses that the NLRB ultimately found unlawful:
Confidentiality Agreement. The Employee acknowledges that the terms of this Agreement are confidential and agrees not to disclose them to any third person, other than a spouse, or as necessary to professional advisors for the purposes of obtaining legal counsel or tax advice, or unless legally compelled to do so by a court or administrative agency of competent jurisdiction.
Non-disclosure. At all times hereafter, the Employee agrees not to make statements to Employer’s employees or to the general public which could disparage or harm the image of Employer, its parent and affiliated entities, and their officers, directors, employees, agents, and representatives.
The NLRB found that this confidentiality provision broadly prohibited employees from disclosing any information regarding the terms of the severance agreement, thus preventing discussion with co-workers, and reasonably tending to coerce employees not to exercise their rights under the NLRB.
As to non-disclosure clause, the NLRB determined that “[p]ublic statements by employees about the workplace are central to the exercise of employee rights under the Act.” Accordingly, “a severance agreement is unlawful if it precludes an employee from assisting coworkers with workplace issues concerning their employer, and from communicating with others, including a union, and the [NLRB], about his employment.”
The NLRB not only found the employer to have committed an unfair labor practice (ULP) in violation of federal law by the inclusion of these broad Confidentiality and Non-Disparagement Clauses, but it also concluded that even proposing provisions that restrain employees from discussing the terms of their employment or severance violates the NLRA:
Where an agreement unlawfully conditions receipt of severance benefits on the forfeiture of statutory rights, the mere proffer of the agreement itself violates the Act, because it has a reasonable tendency to interfere with or restrain the prospective exercise of Section 7 rights, both by the separating employee and those who remain employed.
Recent NLRB Guidance Attempts To Clarify Scope of McLaren Macomb
Decisions like McLaren Macomb are the primary means through which the NLRB makes and enforces policy. As such, this case now represents the board’s official position on these provisions in severance agreements. When the board reviews similar agreements in the future, it will rely on the McLaren Macomb decision to guide its analysis.
Understandably, the McLaren Macomb decision has caused much concern, confusion, and consternation among employers. On March 23, 2023, a month after the ruling, the NLRB attempted to clarify matters in a Guidance Memo issued by its General Counsel to provide “guidance on the decision’s scope and effect, such as the retroactive effect of the decision and the application of the decision to supervisors.”
Key takeaways from the lengthy Guidance Memo include:
- Retroactive Effect. The NLRB will apply the decision retroactively such that agreements proffered to employees before February 21, 2023, may be subject to challenge, and can date back past the statute of limitations for ULPs.
- Employers Can Still Protect Trade Secrets and Proprietary Information. Narrowly tailored Confidentiality Clauses that restrict the disclosure of trade secrets or proprietary information are permissible, so long as they are for a limited period and premised on protecting legitimate business interests.
- Financial Terms of a Severance Agreement Can Remain Confidential. Language requiring that the financial terms of the agreement be kept confidential is also permissible.
- Violative Provisions Should Not Void Entire Severance Agreement. The NLRB typically would seek to have unlawful provisions in an agreement “voided out as opposed to the entire agreement, regardless of whether there is a severability clause or not.” Distributors should backstop the risk of voiding an entire agreement by legal language and proper drafting
- Supervisors not Covered. The memo confirms that McLaren Macomb does not apply to agreements or employee communications strictly for supervisors (as defined in the NLRA).
- Not just severance agreements. The Guidance Memo clarifies that the ruling prohibits “overly broad provisions in any employer communication to employees that tend to interfere with, restrain or coerce employees’ exercise of Section 7 rights.” This may well spell scrutiny for all employment agreements with those other than supervisors, such as new-hire covenants and/or other employment agreements.
When coupled with the FTC proposed rule on non-competes, and the late 2022 Speak Out Act (rendering null and void Confidentiality and Non-Disparagement Clauses executed before a sexual assault or harassment dispute), the NLRB’s McLaren Macomb ruling should prompt all business owners to have experienced counsel review or modify not only form severance agreements but also any employment agreements that may be implicated by the ruling.
Should anyone have questions or concerns about the impact of the McLaren Macomb rulings (or other laws) on your company’s existing or future employee and severance agreements, please contact me at 312-840-7004 or email@example.com.