Employers Beware: Non-Disparagement and Confidentiality Covenants in Severance Agreements Under Attack
Thursday, March 2, 2023

The National Labor Relations Board (NLRB) recently has issued a decision that is causing heartburn for many businesses by restricting employers’ use of confidentiality and non-disparagement provisions in separation agreements. Although the NLRB’s main focus is on unions and union employees, non-union employees also have protected rights. All employers need to be aware of this new ruling when drafting employee severance agreements.

At issue in the case, McLaren Macomb and Local 40RN Staff Council Office and Professional Employees International Union, AFL-CIO, 372 NLRB No. 58 (2023) (McLaren), was whether the employer violated employees’ rights under the National Labor Relations Act (NLRA) by offering a severance agreement including broad confidentiality and non-disparagement provisions to several employees permanently furloughed during the COVID-19 pandemic.

The NLRB found that the severance agreement’s broad non-disparagement and confidentiality provisions tended to interfere with employees’ exercise of their rights under Section 7 of the NLRA. Section 7 protects employees who engage in protected “concerted activities,” which activities can be as basic as employees coming together to discuss wages or working conditions.

Of note: The NLRB does not protect the rights of managers or supervisors—that is, individuals who have authority to make employment decisions such as hiring, firing, promoting, or disciplining other employees, or who have the authority to effectively recommend such actions. This is important because this ruling does not affect an employer’s use of confidentiality and non-disparagement provisions in separation agreements for managerial level employees.

The McLaren decision reflects a significant shift in the NLRB’s mindset because it overturns two cases from the Trump era, which used a more flexible facts-and-circumstances standard in reviewing confidentiality and non-disparagement provisions in severance agreements (Baylor University, 369 NLRB No. 43 (2020) and IGT, 370 NLRB No. 50 (2020)). As explained in McLaren, under those prior cases, employers committed an unfair labor practice by including such provisions in a severance agreement only when “deemed coercive, independent of the agreement itself”—for example, when the employer also committed a separate unfair labor practice when tendering the agreement to an employee. Unlike those cases, the NLRB in McLaren reasoned that merely offering a severance agreement with such broad provisions is unlawful, regardless of whether the employer intended to chill employees’ Section 7 rights, regardless of whether any employee actually signs the agreement, and regardless of whether the employer ever tries to enforce such provisions.

Specifically, the NLRB found that the non-disparagement clause “on its face substantially interfere[d] with employees’” statutory rights by prohibiting any communications that could disparage or “harm the image” of the employer, including any statements claiming the employer had violated the NLRA.

The NLRB found similar issues with the confidentiality clause’s broad prohibition against disclosing the agreement’s terms “to any third person” because it prevented the employee from communicating with others—such as another employee or a union—about the employment relationship. The NLRB further observed that such confidentiality terms would prevent the employee from informing the NLRB about the employer’s interference with employees’ Section 7 rights or discussing the terms with former co-workers who might eventually find themselves in similar circumstances of deciding whether to accept a severance agreement.

Takeaways

Against that backdrop, what should employers do now?

Unfortunately, McLaren leaves employers with many unanswered questions, including:

  • To what extent can employers include more tailored confidentiality and non-disparagement provisions in separation agreements?

  • Will a carveout to these provisions allowing employees the right to communicate with each other about wages and terms and conditions of employment do the trick?

  • Will a severability clause protect the remainder of the agreement if an agency or a court finds a confidentiality and/or non-disparagement provision to be unlawful?

  • Does the ruling apply retroactively to existing severance agreements?

  • Does the ruling also apply to settlement agreements of claims entered into with employees represented by counsel?

  • Will this ruling also extend to other types of agreements containing non-disparagement covenants, such as those entered into at the outset of the employment relationship?

The answers to these questions are currently unsettled but presumably will play out in the coming weeks and months.

Naturally, a uniform approach may not work for every business. How an employer moves forward in the wake of the McLaren decision largely depends upon their tolerance for risk. Some employers may opt to eliminate all non-disparagement and confidentiality provisions in their severance agreements altogether. Other employers may decide to modify their existing non-disparagement and confidentiality provisions by more precisely including language that preserves employees’ rights. Others may simply choose to rely on a severability clause that preserves the enforceability of the remainder of the agreement in the event any individual provision is held to be invalid. Still others may just hunker down and wait to see if a Court of Appeals will enforce the ruling or if the NLRB retreats to its previous more flexible standard.

Regardless of which path your business chooses, we encourage you to thoroughly assess all relevant considerations and determine the approach that meets your “sleep at night” test. And, of course, it is always best to consult with your Much Labor & Employment counsel for guidance to make informed decisions for your business.

 

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