NLRB Decision Targets Lawfulness of Important Severance Agreement Terms
Earlier this week, the National Labor Relations Board issued its decision in McLaren Macomb, 372 NLRB No. 58, holding that employers violate federal labor law when they offer severance agreements with terms, such as broad confidentiality or non-disparagement terms, which have a reasonable tendency to interfere with, restrain, or coerce employees in the exercise of their statutory rights under the National Labor Relations Act (NLRA).
The decision marks a reversal of two 2020 Board decisions (Baylor University Medical Center and IGT d/b/a International Game Technology), which had held that offering similar severance agreements to employees was not unlawful absent contextual evidence of interference with employee statutory rights.
In McLaren, the Board examined whether a hospital in Mt. Clemens, Michigan violated the NLRA by offering a “Severance Agreement, Waiver and Release” to eleven bargaining unit employees it permanently furloughed. The hospital had temporarily furloughed these non-essential employees during the COVID-19 pandemic, but later determined that the furloughs would be permanent. As many employers do, the hospital offered departing employees a severance package in exchange for a waiver and release. The Severance Agreement contained the following confidentiality and non-disparagement terms, commonly found in such agreements:
- 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 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 promises and agrees not to disclose information, knowledge or materials of a confidential, privileged, or proprietary nature of which the Employee has or had knowledge of, or involvement with, by reason of the Employee’s employment. 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 representative.
The Board ruled that both provisions were unlawful, finding that their scope restricted employee activities protected by Section 7 of the Act.
The Confidentiality provision was too broad, said the Board, because by prohibiting employees from disclosing any terms of the agreement to any third party, the clause had an impermissible chilling effect on protected activity. In its view, the clause would prohibit employees from disclosing the existence of an unlawful term in the severance agreement, would improperly restrict the employees’ rights to discuss employment matters with their former coworkers, and would discourage employees from filing, pursuing or supporting unfair labor practices filed with the NLRB.
Similarly, the Board ruled that the non-disparagement provision, on its face, substantially interferes with employee rights because public statements by employees about their workplace are “central to the exercise of [their] rights under the Act.” Again, the provision was too broad—barring any statements to the general public that “could disparage or harm the image” of the hospital. This provision also had no temporal limitations, applying “[a]t all times hereafter.”
Because the severance agreement conditioned receipt of benefits on the forfeiture of rights to engage in future protected activity, the Board held that the mere proffer of the agreement violated federal labor law.
The Board’s decision will have broad implications for union and non-union employers. Many employers include confidentiality and non-disparagement terms in severance or settlement agreements. They are designed to protect important business interests in connection with payment of severance in exchange for a waiver and release of potential legal claims by departing employees.
But this decision is not without limitations. It does not prohibit any type of confidentiality or non-disparagement provisions, just ones that restrict and interfere with statutory rights. Although the Board will likely take a broad view of what language interferes with such rights, the decision is not a blanket prohibition. In addition, the decision applies only to agreements implicating employees as defined by the NLRA, which excludes supervisors.
A critical question not addressed or answered by the McLaren decision itself is whether the Board believes it has authority to render an entire severance agreement, including waiver and release terms, void and unenforceable based on a finding that the agreement includes a term that violates the NLRA under this new standard. The Board did not examine the impact of a severability provision in a severance agreement, and any suggestion that the Board has such authority to regulate the general enforcement of contracts in the recent decision should be non-binding dicta because there were other violations of the NLRA which required the employer to reverse the furloughs, reinstate employees, and make them whole. The impact of an unlawful term in violation of the NLRA and whether the remainder of a severance agreement is enforceable should be an issue of controlling contract law, typically state law.
We recommend that employers review their severance and settlement language and contact their Miller Johnson labor counsel to discuss potential impacts of this decision on their operations including what, if any, changes should be made to severance language used.
Please contact the authors or another Miller Johnson labor attorney with any questions.