ALERT: NLRB Imposes Broad Restrictions on Severance Agreements
On February 21, 2023, the National Labor Relations Board (“NLRB” or “Board”) again issued a landmark ruling in holding that the mere offering of a draft severance agreement containing broad confidentiality and non-disparagement provisions violated the National Labor Relations Act (“NLRA” or “Act”). Because the severance agreement provisions before the Board included extremely broad restrictions that stifled the employees’ Section 7 rights under the Act, the Board overturned the Administrative Law Judge (“ALJ”)’s August 31, 2021 decision and held the severance agreements to be in violation of the Act. The immediate impact of this decision is unknown but is creating uncertainty for employers and causing them to reconsider the language used in their severance agreements.
In McLaren Macomb, 372 NLRB No. 58 (Feb. 21, 2023), the legality of certain provisions contained in form severance agreements proffered to 11 furloughed bargaining unit members was challenged. In issuing its decision, the entirety of the Board agreed with the ALJ’s decision that the employer had violated the Act by both failing to notify the union of the furloughs and communicating directly with the members in lieu of the union. However, the Board differed with the ALJ concerning the legality of the severance agreements. Here, the Board held that because the severance agreements included broad, boilerplate style provisions, they effectively prohibited all communications about the agreement or any legal proceedings based on the terminations, as well as any statements that would “disparage” or “harm the image” of the employer. The Board also noted that any violation of these provisions would result in “substantial monetary or injunctive relief,” even though the severance payment amounts were quite small.
With these facts before it, the Democratic majority overruled two Trump-era Board decisions, Baylor University Medical Center, 369 NLRB No. 43 (March 16, 2020) and IGT d/b/a International Game Technology, 370 NLRB No. 50 (November 24, 2020) and held that the provisions at issue under this fact pattern violated the Act. With respect to the non-disparagement provision, the Board reasoned that “[p]ublic statements by employees about the workplace are central to the exercise of employee rights under the Act.” Further, according to the Board, “any statement asserting that the [employer] had violated the Act” included “employee conduct regarding any labor issue, dispute, or term and condition of employment” and interfered with “efforts to assist fellow employees, which would include future cooperation with the Board’s investigation.” The Board also found the confidentiality provision to be unlawful because it prevented employees from “disclosing even the existence of an unlawful provision contained in the agreement,” which would interfere with their ability to file Board charges or participate in an investigation. Moreover, the Board determined that the confidentiality provision would have interfered with the ability of employees to speak with their co-workers and their union about the contents of their severance agreement.
The Board went further and held that the employer’s mere offering of the draft agreements violated the Act. The Board reasoned that in offering the agreements that include the prohibited provisions, the employer’s actions “coerced” the employees from exercising their Section 7 rights to communicate with others regarding their terms and conditions of employment.
Because the facts here involve union represented employees, as well as a failure to abide by the requirement to negotiate such agreements with the bargaining representative, the impact of the decision is unclear as it applies to narrower agreements and non-union situations. One consideration is whether the decision will extend to supervisors and managers. The decision – and the Act — applies only to “employees” as defined under the Act, not to supervisors or managerial employees, and does not directly impact severance agreements entered into by supervisors and management. Because there was a failure to negotiate with a bargaining representative in this case, whether the same restrictions would apply to severance agreements negotiated with an employee’s counsel or with a union was not decided. Although standard severance templates generally provide exceptions to confidentiality provisions that impinge on such matters such as speaking to investigators, participating in agency hearings, or filing charges with federal agencies, specifying an exception for Section 7 rights has not been standard.
Based on our experience with the NLRB in negotiating severance agreements, the NLRB provides guidance on specific language that it recommends and standardly requires that severance agreements (1) must carve out an exception for Section 7 rights under the Act; (2) cannot prohibit speech other than that which is defamatory towards the employer; (3) cannot demand confidentiality regarding the terms of a severance agreement outside of the financial terms; and (4) cannot seek unduly harsh penalties in the event of a breach of the severance agreement. To ensure compliance with these requirement, we recommend employers review and evaluate their severance agreements to ensure they are narrowly tailored to serve only necessary business interests. In particular, it might be worth considering whether a confidentiality or non-disparagement clause in a severance agreement with a non-supervisory employee is truly necessary to protect the employer’s interests. In some scenarios, they might be. In other instances, however, such as where the agreements are issued as part of a large scale reduction in force (“RIF”) or when an employee did not have access to confidential information or trade secrets, those provisions may have little value and only frustrate the negotiations and ultimate execution of the severance agreement. Employers should also be mindful of federal and state laws that might further restrict the scope of their confidentiality or non-disparagement policies, including the federal Speak Out Act.
While this recent decision has potentially far-reaching implications, the Board has given guidance on well-tailored severance agreements that protect employer confidentiality interests while limiting their impact on Section 7 rights. We suggest that employers review their severance agreements and consider revising severance agreement language, where appropriate. We are working with clients on updating their severance agreement to include appropriate language, and welcome the opportunity to work with you to do the same.