Complying With New Agency Rules on Severance Agreements

In a previous post, we provided a checklist to follow when making the decision to let go of an employee. A recent ruling by the National Labor Relations Board is changing how employers may write their confidentiality and non-disparagement agreements.

NLRB Ruling Overrules Previous Cases

The National Labor Relations Board (NLRB) held in a recent opinion, McLaren v. McComb, that confidentiality and non-disparagement clauses in a severance agreement are violations of Section 8(a)(1)¹ of the National Labor Relations Act (NLRA) if they prohibit employees from engaging in a protected activity.² Protected activities include: criticizing employer policies with coworkers and former coworkers; discussing severance, wages, and other terms and conditions of employment; and cooperating in NLRB investigations.³ This decision overrules previous NLRB decisions.

This case began with 11 union employees in Michigan. They were laid off from a hospital and offered a severance agreement. The agreement stipulated that they were not allowed to share the terms of the agreement with anyone except a spouse or professional advisor, or unless compelled to do so by law. It also included a non-disparagement clause prohibiting the employee from speaking negatively about the hospital to former co-workers or the general public.

What are Confidentiality and Non-Disparagement Clauses?

Confidentiality and non-disparagement clauses are common provisions of separation or severance agreements. Typically, these clauses have been required for severance pay. The clauses in this case were fairly standard.

• Confidentiality clauses typically prohibit a former employee from disclosing the terms and conditions of the separation agreement to other people; exceptions may be family, tax professionals, and lawyers.
• Non-disparagement clauses prohibit a former employee from speaking negatively about the employer.

The confidentiality clause in the McLaren case prohibited disclosure to any third party except lawyers, tax professionals, or as required by law. It would not have allowed the employee to report the alleged unlawful activity to the Board or communicate with former co-workers or the union about the separation terms. The NLRB decided that this was problematic.

The non-disparagement clause did not define disparagement, was not limited to matters related to employment, and would not have permitted disclosures regarding alleged violations of the NLRA. It did not have a time limit and applied to various affiliated entities in addition to the employer, its officers, directors, employees, agents, and representatives. The NLRB decided that the clause was “sweepingly broad” and prohibited “the exercise of Section 7 rights by the subject employee.”⁴

Practical Implications for Employers Going Forward

It is likely that the validity of the NLRB’s position will be tested (either its authority to make a sweeping rule against confidentiality and non-disparagement clauses, or the constitutionality of the rule it made in the light of freedom to contract). In the meantime, employers who do not want to be involved in such litigation will want to be careful. Employers should review their confidentiality and non-disparagement clauses in light of this recent guidance.

Are all confidentiality and non-disparagement clauses in separation agreements now considered unlawful?

Many employers regularly enter into severance agreements including confidentiality and non-disparagement clauses. These clauses are not unlawful generally, but the standards set forth in the decision may prove difficult for employers.

Until there are clear answers, employers writing and offering separation agreements should weigh the risks of including confidentiality or non-disparagement clauses or at least make sure they are not overly broad. For example, employers could include in the provision that the separation agreement does not prohibit the employee’s right to engage in concerted activity under the NLRA. Unfortunately, the NLRB chose not to provide any sample language of what it considers acceptable.

Any confidentiality or non-disparagement promised by the employer to the employee should be fine; unfortunately, it is usually the employer that considers such clauses worthy of offering severance pay. An unintended consequence of this decision may be to severely limit severance pay offered to employees.

Does this decision apply to unions and non-unions alike?

Yes. The McLaren case involved unionized employees; however, the ruling applies to any employee granted rights under the NLRA. All employees, unionized or otherwise have protected rights to engage in concerted activities under Section 7 of the NLRA. There are limitations to employers the NLRA protects; for example, the NLRA does not cover government employees, independent contractors, or in some cases supervisors. The application of Section 7 to religious organizations and religious employees may also be limited under the principles of church autonomy.

Conclusion

In light of the McLaren decision, employers will want to omit confidentiality and non-disparagement clauses or draft them carefully to fit their circumstances and type of organization. Current templates should be reviewed with counsel.

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¹ NLRA 29 U.S.C. §§ 151-169 (8(a)(1))

² file:///C:/Users/michael/Downloads/Board%20Decision.pdf

³ NLRA 29 U.S.C. §§ 151-169 (7)

⁴ file:///C:/Users/michael/Downloads/Board%20Decision.pdf

Featured Image by Rebecca Sidebotham.