The NLRB Joins the Assault on Confidentiality and Non-disparagement Provisions in Severance Agreements

The National Labor Relations Board (NLRB), in a recent precedent-reversing decision, effectively prohibited employers’ use of non-disparagement and confidentiality provisions in severance agreements with employees covered by Section 7 of the NLRA. Although the NLRB reached this conclusion in a case involving a unionized workplace, its decision applies equally to non-unionized workplaces. Thus, the severance agreement templates many employers have been using are currently unenforceable as to confidentiality and non-disparagement terms, and may subject an employer to liability under the NLRA.

In McLaren Macomb, 372 NLRB No.58, 2023 WL 2158775 (Feb. 21, 2023), the employer offered severance agreements to a group of terminated workers that provided payments in exchange for a release, and included standard confidentiality and non-disparagement provisions. All the employees signed the agreements, but one thereafter filed an unfair labor practice charge challenging, among other items, the confidentiality and non-disparagement terms.

In reversing two Trump-era Board decisions that authorized such provisions, the NLRB held that an employer violates Section 7 of the NLRA when the employer includes terms in a severance agreement that (a) prohibit an employee from disclosing the terms of the agreement to any third party (except spouse, attorney, or tax preparer/accountant); or (b) prohibit employees from making statements to other employees or the public that could disparage “or harm the image of” the employer. Furthermore, the NLRB held that the mere act of proffering a severance agreement containing such terms – regardless of whether the employee accepts the agreement – is itself an independent unfair labor practice that violates Section 7.

The NLRB focused on the unlawful restraint of the employees in the exercise of their Section 7 rights engendered by these provisions. The NLRB found the non-disparagement prohibition overbroad because it would prohibit any employee communication that critiqued employer policy or publicized labor disputes. These communications are protected as long as they are not “so disloyal, reckless or maliciously untrue as to lose the Act’s protection.” McLaren, 2023 WL 2158775 at *9. Similarly, the confidentiality provision would have impermissibly prohibited the subject employee from discussing the terms of the severance agreement “with his former coworkers who could find themselves in a similar predicament facing the decision whether to accept a severance agreement.” Id. at *10. The confidentiality provision as drafted would also prohibit the employee from providing information to the NLRB itself concerning the employer’s alleged unlawful interference with employees’ Section 7 rights.

The McLaren decision likely will be appealed to the U.S. Court of Appeals for the Sixth Circuit, so its continued validity may be short-lived. For the time being, however, employers should proceed with caution when entering into employee severance agreements and consider the following:

• The NLRA applies only to non-supervisory employees. Managers and supervisors, independent contractors, public sector employees, and certain agricultural workers are not covered by Section 7, and therefore, no legal impediment exists to use of these provisions in those contexts.

• The McLaren decision does not mention the use of disclaimers (e.g., “Nothing herein will be interpreted or applied to prevent you from exercising or enforcing your Section 7 rights”), or whether a disclaimer could have salvaged these provisions. Yet in cataloguing the various shortcomings of the provisions at issue, the NLRB arguably implied that any disclaimer at a bare minimum would have to expressly allow employees to participate in Section 7 activity, file ULP charges and assist co-workers in doing so, and cooperate with NLRB investigations and proceedings. In other words, an employer considering whether to attempt to draft an effective disclaimer (if there can be such a thing) will need to determine whether the disclaimer needs to be so broad that it would be rendered useless as a practical matter. Moreover, proffering a severance agreement with a disclaimer that is later deemed ineffective is itself an unfair labor practice under McLaren.

• The McLaren decision comes less than three months after the Federal Speak Out Act, 42 U.S.C. §19401 et seq. Effective December 7, 2022, the Federal Speak Out Act prohibits courts from enforcing certain confidentiality and non-disparagement agreements related to claims of sexual assault or harassment that have been entered into before a dispute actually arises. Consequently, when providing a severance agreement to a worker who is not covered by the NLRA, non-disparagement and confidentiality terms may need to be revised to include an exemption for sexual harassment and sexual assault claims that have not previously been raised - even if those claims are released by the terms of the severance agreement.

• While neither McLaren nor the Federal Speak Out Act would apply to settlement agreements of disputes already raised or in litigation, employers are reminded that since 2017, an amendment to Internal Revenue Code §162(q) eliminates the ability of employers to treat the costs of settlement payments and related attorney’s fees as a tax deductible business expense for claims alleging sexual harassment or sexual abuse if the settlement or payment is subject to a confidentiality / non-disclosure agreement. The amendment applies only to for-profit businesses, and does not impact settlements for tax exempt enterprises or government agencies.

Drafting effective employee severance agreements just became trickier, and in some instances, a potential unfair labor practice for the unwary employer. Employers should work closely with experienced labor and employment counsel when considering severance agreements with confidentiality and non-disparagement terms. If you have questions, Nyemaster’s Labor & Employment attorneys can help you navigate the changing dynamics of these developments.