NLRB decision upends use of standard severance agreement terms

Blog Post

In an uncertain economy, layoff announcements seem to be in the news on a daily basis. Along with those layoffs, the use of separation agreements has become a routine process for employers to provide exiting employees with severance pay and other transition assistance. With the separation agreements, employers also seek to limit their post-employment related risks by requiring employees to agree to certain terms in order to receive severance benefits, such as a release of claims, non-disparagement terms, and confidentiality obligations.   

In a February 21, 2023, decision, the National Labor Relations Board (NLRB) has now upended this standard process by finding that the type of broad non-disparagement and confidentiality provisions often found in severance agreements violate the rights of many employees to engage in protected concerted activity. Because the National Labor Relations Act provides employees -  both union-represented and non-union – the right to engage in protected concerted activity, this decision will require most employers to review and modify the terms of standard severance agreements.

The McLaren Macomb decision

In the McLaren Macomb decision, the NLRB reviewed whether a severance agreement provided to a group of furloughed hospital employees violated the National Labor Relations Act (NLRA or “Act”) by limiting the employees’ rights to engage in protected concerted activity. The agreement included terms prohibiting disparaging statements about the employer and required confidentiality regarding the terms of the severance agreements, except to a spouse or professional advisors.  

The severance agreement contained the following provisions:

  • 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 representatives.

Although the employees each signed the agreement, their union challenged the agreement’s broad nondisparagement and confidentiality provisions. In an unfair labor practice (ULP) charge, the union asserted that the terms violated the employees’ Section 7 rights under the NLRA to engage in protected concerted activities, such as sharing information about terms and conditions of employment with current and former co-workers and the union.

Overturning its own precedent allowing the use of such terms, the NLRB held that the nondisparagement and confidentiality provisions in the severance agreement interfered with the employees’ exercise of their Section 7 rights and, as a result, the terms were impermissible.     

More specifically, the NLRB found that the nondisparagement provision violated employees’ Section 7 rights because employees’ “[p]ublic statements … about the workplace are central to the exercise” of rights under the Act.  Further, the non-disparagement provision’s broad and undefined scope chilled employees’ “efforts to assist fellow employees, which would include future cooperation with the Board’s investigation.”

Regarding the confidentiality provision, the NLRB found that its broad restrictions also violated employees’ Section 7 rights to discuss the terms with current and former coworkers who may receive similar agreements and to disclose an “unlawful provision contained in the agreement.”

Significantly, the NLRB found that merely offering a severance agreement with the prohibited provisions amounted to a ULP, even if the employer did not actually enforce the offensive provisions.  

Considerations and next steps for employers

This decision is significant and has broad implications because most non-managerial, private sector employees - whether union or non-union - have Section 7 rights under the NLRA. Employers should consider the following when evaluating next steps: 

  • While the NLRA (and the McLaren Macomb decision) covers most non-managerial workers, employees who qualify as “supervisors” (i.e., a manager) under the NLRA are  outside the scope of the Act and this decision. This means that agreements with employees in positions considered “supervisory” under the Act are not affected by this decision. However, determining who is a “supervisor” under the NLRA is not always easy. The Act’s definition of “supervisor” considers multiple factors including whether the employee has authority to hire, fire, discipline, or responsibly direct the work of other employees. As employers refine their standard severance documents, they must understand and consider this distinction and its impact on certain severance agreement terms.
  • The decision does seem to acknowledge that nondisparagement and confidentiality provisions that are “narrowly tailored” will not impermissibly limit Section 7 rights. This will require employers to consider carefully the interests they truly need to protect and to scale back the scope of overly broad terms that may impinge on Section 7 rights. 
  • The McLaren Macomb decision also leaves open the possibility that use of a disclaimer in a severance agreement that acknowledges that the terms do not prevent employees from engaging in Section 7 rights may be helpful as well. Such a disclaimer would need to acknowledge the employees’ right to file ULP charges, assist others in doing so, and the right to participate and cooperate with the NLRB’s investigative process.   
  • While many employers use template severance documents and may not always seek legal review, the McLaren Macomb decision means this is no longer business as usual. Without review and modification, the template severance documents may include impermissible terms that can result in a ULP charge.  

Employers will now need to work with their employment counsel to determine the best steps to limit risks related to terminations and at the same time ensure that their severance agreements are legally enforceable. The outcome of that review may look different for each employer based on the nature of the termination, interests protected, and an employer’s risk tolerance. 

While the McLaren Macomb decision is a significant shift, it is not unexpected. The NLRB under President Biden, the self-proclaimed “most pro-union president” ever, has signaled its intent to rollback Trump-era decisions that it now believes restrict Section 7 rights.  Employers should expect the NLRB to continue to upend business as usual by re-visiting standard handbook terms and assessing their impact on Section 7 rights.   

For assistance in reviewing and developing compliant severance agreements or if you have questions about the implications of the McLaren Macomb decision, please contact a member of the McDonald Hopkins Labor & Employment Team.  

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