NLRB Holds that Severance Agreement with Broad Confidentiality and Non-Disparagement Covenants Violates the NLRA

Background

On February 21, 2023, the National Labor Relations Board (NLRB) held that including broad confidentiality and non-disparagement clauses in severance agreements violates the National Labor Relations Act (NLRA). In McLaren Macomb, 372 NLRB No. 58 (2023), the NLRB held that severance agreements containing such clauses were unlawful because they prohibited or discouraged former employees from exercising their rights under Section 7 of the NLRA, a federal law applicable to all employers that permits employees to collectively band together to improve working conditions, to freely discuss the terms and conditions of their employment with current and former employees, to assist other employees in filing charges with the NLRB, and to assist or cooperate with the NLRB’s investigations.

Prior to McLaren Macomb, the NLRB recognized in prior decisions that employers may include broad confidentiality and non-disparagement clauses if the severance agreement did not involve or relate to an employee being discharged in violation of the NLRA (or another unfair labor practice demonstrating hostility toward the exercise of Section 7 rights). In McLaren Macomb, the NLRB expressly overturned those prior decisions and held that a severance agreement containing broad confidentiality and non-disparagement clauses is unlawful on its face (regardless of the context in which the severance agreement is presented) because such provisions “interfere with, restrain or coerce” employees in the exercise of their Section 7 rights.

Problematic Agreement in McLaren Macomb

In McLaren Macomb, the NLRB explained that a severance agreement is “coercive” if it conditions severance payments on terms that potentially interfere with Section 7 rights, and it found the non-disparagement and confidentiality clauses in the employees’ severance agreements did just that.

The non-disparagement clause at issue prohibited former employees from making any statements to the company’s employees, or to the general public, which would disparage or harm the image of the company, its parents and affiliated entities, and their officers, directors, employees, agents and representatives. According to the NLRB, this clause violated employees’ Section 7 rights because it prohibited making such negative statements even if they were in furtherance of employees exercising their Section 7 rights or were made for the purpose of assisting current and former company employees in engaging in activity protected by the NLRA.

The confidentiality provision was similarly broad, prohibiting former employees from disclosing the terms of the severance agreement to any third person, other than a spouse, or as necessary to professional advisors for the purpose of obtaining legal counsel or tax advice, or unless legally compelled to do so by a court or administrative agency. The NLRB found this provision could “coerce” or “chill” former employees from exercising their Section 7 rights or cooperating with NLRB investigations into whether the severance agreement was compliant with applicable law.

Employer Takeaways & Implications

The NLRB’s decision is effective immediately. Going forward, employers should be aware of the following as it relates to including non-disparagement and confidentiality clauses in severance agreements:

• This ruling does not apply to employees that are supervisors (by its terms, the NLRA does not apply to supervisors, which are defined as any individual having authority to hire, transfer, suspend, layoff, recall, promote, discharge, assign, reward, or discipline an employee). Employers can still provide supervisors with severance agreements containing broad non-disparagement and confidentiality language.
• Merely offering employees a severance agreement with overly restrictive language may constitute an unfair labor practice, even if the company does not seek to enforce the terms or the employee has not agreed to sign the severance agreement.
• Neither clause in the McLaren Macomb agreement contained a disclaimer (e.g., a provision noting that nothing in the agreement prevented the employees from exercising their Section 7 rights). While the decision does not expressly state that a disclaimer would have rendered the severance agreement enforceable, the NLRB’s ruling suggests that it may have had an impact on their decision, provided such a disclaimer permitted the employees to engage in the following:
  • participation in Section 7 activity;
  • filing (or assisting others in filing) of unfair labor practice charges; and
  • otherwise assisting or cooperating with the NLRB’s investigative process.
• A non-disparagement covenant may still prohibit statements from former employees that are “disloyal, reckless or maliciously untrue” as such statements are expressly not protected by the NLRA.
• While the NLRB may issue further interpretive guidance regarding this decision, employers will need to consider how to best comply with the NLRB’s ruling, which could include removing non-disparagement and confidentiality clauses entirely, narrowing the scope and breadth of such clauses, and/or retaining broad language, but relying on a fulsome disclaimer.
• It is unclear whether the NLRB’s decision applies retroactively to severance agreements executed prior to February 21, 2023. If the agreement was drafted at a time when the law allowed such covenants, then this could serve as a defense to any unfair labor practice charge seeking retroactive application (and the NLRB’s procedural rules effectively prohibit employees from filing an unfair labor practices charge that fails to relate back to a violation that occurred within the past six months).

Conclusion

Employers should consider this decision and its broad scope when drafting, offering and enforcing severance agreements. For additional information about the implications of the NLRB’s decision, please contact a Fenwick Employment Practices Group attorney.