We Can Now Add Civility and Secrecy to the List of Things Money Can’t Buy: NLRB Rules Non-Disparagement and Confidentiality Clauses in Severance Agreements Unlawfully Restrain and Coerce Employees
As we previously reported, the National Labor Relations Board (“NLRB” or “Board”) under President Biden is working to undo much of any employer-friendly actions taken during the previous administration. On February 21, 2023, the Board continued in its trend and wiped away a Trump-era ruling which gave employers certain latitude in drafting and executing severance agreements with their employees. Specifically, the Board, in a divided decision, ruled employers can no longer offer severance agreements containing clauses that (i) prevent employees from making disparaging remarks about their former employer or (ii) compel departing employees to keep the contents of the severance agreement confidential.
The Board’s decision in McLaren Macomb, 372 NLRB No. 58 (2023) concerned a Michigan hospital that, in the midst of the COVID-19 pandemic, permanently furloughed 11 nonessential union employees following the issuance of government regulations prohibiting the hospital from performing elective and outpatient procedures and from allowing nonessential employees to work inside the hospital. In exchange for a severance payment, the hospital asked the permanently furloughed employees to sign a “Severance Agreement, Waiver and Release” that offered to pay differing severance amounts to each furloughed employee if they signed the agreement. Like many severance and release agreements, it contained confidentiality and non-disclosure provisions that barred the employees from making “statements to [the hospital]’s employees or to the general public which could disparage or harm the image of [the hospital], its parent and affiliated entities and their officers, directors, employees, agents and representatives” and from disclosing the terms of the severance agreements to “any third person.” The 11 employees executed the agreements.
The Board agreed with the Administrative Law Judge that the hospital violated Section 8(a)(5) and (1) of the Act by permanently furloughing the 11 employees without first notifying the Union and giving it an opportunity to bargain about the furlough decision and its effects, and that it further violated Section 8(a)(5) and (1) of the Act by communicating and directly dealing with the 11 employees to enter into the severance agreement, while entirely bypassing and excluding the Union. The Board’s three Democratic member majority, however, over the lone dissent from Republican appointee Member Kaplan, reversed the ALJ’s finding under Baylor University Medical Center, 369 NLRB No. 43 (2020) and IGT d/b/a International Game Technology, 3 370 NLRB No. 50 (2020), that the Respondent did not violate Section 8(a)(1) of the Act by merely proffering the severance agreement to the permanently furloughed employees. In Baylor and IGT, the Trump Board addressed whether the mere proffer by an employer of severance agreements containing non-disparagement, non-assistance, and confidentiality provisions interfere with, restrain, or coerce employees in the exercise of their rights under the Act. The Board concluded in Baylor and IGT that, absent outside circumstances that could render the proffers coercive, the mere action of offering these agreements to former employees does not constitute a violation of the Act. See IGT, 370 NLRB No. 50, slip op. at 2; Baylor, 369 NLRB No. 43, slip op. at 1–2. Here, the Board invalidated the severance agreements.
While Member Kaplan’s dissent noted the hospital’s mere proffer of the severance agreements containing the non-disparagement and confidentiality provisions would have been unlawful under Baylor and IGT, the Board majority deemed it necessary to overrule the Trump-era Board rulings because they failed to “analyze the terms of the severance agreements which are the very subject of the alleged unlawful proffer to recipient employees” and overruled both cases. Noting the non-disparagement provision at issue here prohibits employees from making any “statements to [the] Employer’s employees or to the general public which could disparage or harm the image of [the] Employer”—including, it would seem, any statement asserting that the Respondent had violated the Act”, the majority further concluded the non-disparagement proscription “would encompass employee conduct regarding any labor issue, dispute, or term and condition of employment of the Respondent,” a step too far in light of the Act’s well-worn proscriptions against employee communications that are disloyal, reckless or maliciously untrue so as to lose the Act’s protection. Perhaps even more troubling for countless employers, the Board likewise found the confidentiality provision unlawful, stating the broad prohibition from disclosing the terms of the agreement “to any third person” would “reasonably tend to coerce the employee from filing an unfair labor practice charge or assisting a Board investigation into the Respondent’s use of the severance agreement, including the nondisparagement provision.” In framing its decision as a return to long-standing Board precedent, the Board concluded “[t]oday’s decision…explains that simply offering employees a severance agreement that requires them to broadly give up their rights…[and] that the employer’s offer is itself an attempt to deter employees from exercising their statutory rights, at a time when employees may feel they must give up their rights in order to get the benefits provided in the agreement.”
Interestingly, while the Board affirmed the ALJ’s decision to rescind the permanent furloughs that were unilaterally implemented (and for the hospital to cover a variety of damages, such as to compensate the furloughed employees for the adverse tax consequences, if any, of receiving lump-sum backpay and to make them whole for their reasonable search-for-work and interim employment expenses, plus interest, regardless of whether those expenses exceeded their interim earnings), neither the Board nor the ALJ ordered the separated employees to pay the severance payments back to the hospital, the invalidation of the severance agreement notwithstanding.
Going forward, the Board will find a severance agreement unlawful if its terms have a “reasonable tendency to interfere with, restrain, or coerce employees in the exercise of their Section 7 rights,” and the Board will further find that employers’ mere proffer of such agreements to employees is unlawful. In making that determination, the Board will examine the language of the agreement, including whether any relinquishment of Section 7 rights is narrowly tailored. To that end, the Board identified a few critical (and quite common) deficiencies in the employer’s non-disparagement covenant, noting it was not limited to matters regarding past employment, contained no temporal restriction, and otherwise failed to offer any definition for “disparagement.” While this caveat initially gives hope to employers that such limitations are possible and still sufficient, it is likely the current Board will only permit restrictions that are already deemed unlawful in other contexts (such as defamation). Similarly, the Board’s issue with the confidentiality provision (prohibiting disclosure to any third party – including a labor union and co-workers) provides little hope to employers seeking to meaningfully curtail dissemination of the material terms of any severance agreement.
Key Takeaways
Unsurprisingly, this decision is the latest in a series of steps the Biden-era Board has taken to undo most key Trump-era Board decisions, and the validity of post-employment covenants was identified by the General Counsel as being on the chopping block. Importantly, this decision carries significant practical implications for both union and non-union employers alike, who must grapple with a variety of legal and practical considerations, such as:
(a) what does this decision mean for similar severance agreements employers already have in place with departed employees?
(b) will former employees be able to challenge their severance agreements as unenforceable in future lawsuits based on claims they had originally waived in the agreements?
(c) is it even possible to draft modifications to non-disparagement and/or confidentiality provisions that both address the Board’s concerns while also providing meaningful protections for employers?
(d) if similar provisions in an employer’s severance agreement are found unlawful, what is the likely remedy?
There is no one-size fits all solution to these issues, and employers will have to assess the various risks such provisions carry in light of their workforce, the circumstances giving rise to the agreements being offered, and the likelihood that such provisions are even needed. Employers should consult skilled labor counsel to discuss these issues and how best to manage separation agreements in light of the Board’s directive.
