Employers Required to Give Severance Agreements a Second Look
Last week, the National Labor Relations Board (NLRB) called into question years of common business practices with its recent decision, forcing employers to reevaluate their well-established practices and how they use severance agreements for departing employees. In McLaren Macomb, 372 NLRB No. 58 (2023), the Board examined whether the employer violated Section 8(a)(1) of the National Labor Relations Act (NLRA) by offering severance agreements to a group of employees which contained routine confidentiality and non-disparagement provisions.
The non-disparagement provision at issue was standard and used by hundreds of thousands of U.S. employers. The NLRB held the provision, “on its face substantially interfere[d] with employees’ Section 7 rights.” The provision was so broad as to chill the exercise of rights, including future efforts to assist other employees or assist the Board in an investigation. Other criticisms of the provision included: no limit on subject matter (such as only the employee’s past employment); coverage included all affiliated entities of the employer and their officers, directors, employees, etc.; no temporal limitation; no definition of disparagement; and it would prevent the employee from discussing any potential violation of the Act. Thus, the Board ruled that such non-disparagement provisions violate federal law.
The confidentiality provision at issue prohibited disclosure of the terms of the severance agreement, which again is typically found in most severance agreements. The Board held that this clause would also hamper an employee’s Section 7 rights, as it would prevent the employee from disclosing an unlawful provision in the agreement, working with the Board, or discussing severance with other employees. The Board ruled that confidentiality provisions would chill the exercise of Section 7 rights, and therefore ruled that such confidentiality provisions are unlawful.
The Board’s ruling is not a complete ban of these provisions, but it makes them unlawful in many circumstances. First, the ruling applies only to “nonmanagerial employees,” as defined by the Act. Thus, these types of provisions may still be used for certain types of workers, such as managers and independent contractors. Second, the Board left open the enforceability of such agreements if they are “narrowly tailored.” However, the Board does not define “narrowly tailored,” and employers are forced to divine the Board’s intent through the words of McLaren and past precedent. It is important that employers review their existing agreements with their counsel and ensure compliance with this new ruling.
Earlier this year, we reported that the Federal Trade Commission (FTC) is nearing the end of public comment period to issue a national ban on employee non-competition agreements. These agreements, along with the confidentiality and non-disparagement provisions discussed above, have long been used by businesses to protect their intellectual property, their goodwill, and their legitimate competitive business interests. The decision by the NLRB, coupled with the expected FTC ban on non-competition agreements, represent a seismic shift in labor and employment law, and could frustrate employers’ legitimate interests in protecting their goodwill, intellectual property and avoiding unfair competition by departing employees.
Given these recent developments, we encourage you to contact Young Basile’s Labor and Employment Department to discuss how your business may be impacted. The employment attorneys and counselors at Young Basile will continue to monitor these and other developments. As strategic advisors to the world’s most innovative companies, Young Basile has deep experience drafting, negotiating, and litigating non-disparagement and confidentiality agreements relative to mission-critical employees, knowledge, and technologies. If you have any questions about this ruling, the expected FTC rule, or how they will affect your existing employment documentation, please contact the employment attorneys and counselors at Young Basile.