The National Labor Relations Board Says Severance Agreements Containing Broadly-Drafted Non-Disparagement and Confidentiality Provisions are Unlawful

What does this mean for employers? It depends. 

By way of background, the case involved a unionized hospital in Michigan called McLaren McComb. The hospital permanently furloughed 11 employees after the government issued regulations prohibiting the hospital from performing certain procedures and from requiring nonessential employees to work inside the hospital. In connection with those furloughs, the hospital – notably, without bargaining with the union – presented the 11 employees with a “Severance Agreement, Waiver and Release” offering severance in exchange for the employee’s signature on the agreement. Among other things, that agreement contained the following two 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.

The Union filed an unfair labor practice charge contending not only that the hospital violated the National Labor Relations Act by laying off employees without bargaining with the union, but also contending that the severance agreement provisions violated Section 7 of the National Labor Relations Act entitling “employees” to “the right to . . . engage in . . . concerted activities for the purpose of collective bargaining or other mutual aid or protection,” as well as the right “to refrain from any or all such activities.” Section 8(a)(1) of the Act makes it unlawful to “interfere with, restrain, or coerce employees in the exercise” of these Section 7 rights. The Board agreed with the union on all counts, including that the hospital violated the Act with the foregoing severance agreement provisions.

Importantly, the Board made it clear that it was overruling several Trump-era issued opinions (two of which were from 2020 known, in short, as Baylor and IGT) which held that the provisions were lawful. In those prior opinions, the Board gave employers wide latitude to include post-employment restrictions on employees in severance agreements that the employees were free to reject or sign. According to these prior opinions, the circumstances under which the agreement was presented were relevant. Specifically, under Baylor and IGT, an agreement was lawful if it was not mandatory, impacted only post-employment activities, and was not being offered in connection with a separate unfair labor practice, such as discriminating against employees for union organizing or engaging in other protected activity. 

With the Board’s McLaren McComb opinion on February 21, 2023, the Board rejected those factors as relevant and brought back an old standard that severance agreements violate the NLRA if they have a “reasonable tendency to interfere with, restrain, or coerce employees’ exercise of their Section 7 rights.” The McLaren McComb Board held that merely offering the severance agreement had a reasonable tendency to restrain or coerce employees to not engage in protected activity. This is because the test of interference, restraint, and coercion does not depend on the employer’s motive or on whether the coercion succeeded or failed (i.e., whether the employee accepts the agreement). Also, the Board held that even former employees have Section 7 rights and even post-employment restrictions can chill protected activity. For example, the Board may be unable to fully investigate and remedy unfair labor practices if a former employee refuses to speak to the Board out of fear the employee will violate the non-disparagement and non-disclosure provisions and, therefore, lose his/her severance.

Ultimately, the Board held that the language in the severance agreement interfered with, restrained, and coerced employees’ exercise of Section 7 rights. The agreement conditioned the receipt of severance benefits on the employee’s acceptance of those unlawful provisions and, therefore, the mere offering of the agreement violated Section 8(a)(1) of the Act. Notably, in this event, the entire severance agreement (not just the objectionable provisions) was deemed unlawful.

So what should employers do now in response to the Board’s sweeping decision?

For those agreements issued and executed before the Board’s opinion on February 21, 2023, according to the Board, it is not a defense that the employer has not enforced or will not enforce the provisions. The mere offering of the severance agreement – even if the employee did not sign it – was an unfair labor practice charge. That said, employers may find solace for a number of reasons:

• The NLRA does not apply to all individuals. It does not apply to managers and most supervisors.
• The NLRB has a short statute of limitations pursuant to which it does not bring charges for conduct that occurred more than six months
• If the agreements were lawful when drafted, the employer may successfully be able to argue that the McLaren McComb opinion should not apply retroactively.
• It is important for employers to understand the likelihood that their particular severance agreements will make their way to the Board’s desk and be the subject of a Board opinion in line with the McLaren McComb It is notable that the McLaren McComb Board became aware of the severance agreements in the context of an unfair labor practice charge the union brought arising from a failure to bargain. That case did not involve a former employee trying to invalidate a severance agreement pursuant to which that employee was paid severance and offered other considerations. In other words, what motivated the complainants in McLaren McComb to go to the Board may be vastly different from what could be a motivation for an employee to complain.

For now, we do expect there to be more decisions from this Board recognizing broader rights for employees and restrictions on employers, but the Board’s view of which opinions got it right – Baylor, IGT, or McLaren McComb – on disparagement and confidentiality provisions may change at some point in the future. Further, employers subject to such a Board decision can seek review from an appropriate appellate court. All of the foregoing issues should be considered before deciding on any action plan related to agreements that were offered and executed before February 21, 2023.

Regarding what employers should do with their agreements going forward, employers should evaluate – on a case-by-case basis – the need for non-disparagement and confidentiality provisions in the first place and whether the potential benefit of including them is worth the potential risk. For the most risk-averse, not including those provisions may be the preferred course. For other employers, carefully-drafted disclaimers and more narrowly-drawn confidentiality and non-disparagement provisions could be sufficient. Employers who continue to use these provisions should also make sure their agreements have severability language so that the entire agreement is not rendered null and void.

Regardless, one takeaway from the McLaren McComb decision is clear. Employers should evaluate their options with experienced labor counsel.  

Co-authors Lee Moylan, Chair and Chuck Ercole, partner are members of the labor and employment practice group at Klehr Harrison.