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NLRB Restricts Certain Terms of Severance Agreements

February 27, 2023

By Noah R. Jordan, Esquire
The NLRB General Counsel has provided further clarification on this decision. Please see our more recent update.

On February 21, 2023 the National Labor Relations Board issued a decision and order that significantly changes the way certain restrictive terms of severance agreements will be analyzed and, by extension, whether severance agreements containing such terms can lawfully be offered to employees.  Specifically, the Board found the employer, an operator of a hospital in Michigan, to have violated the National Labor Relations Act (“the Act”) by presenting furloughed unionized employees with severance agreements which included broadly drafted non-disparagement and non-disclosure provisions, finding that such clauses unlawfully conditioned receipt of severance upon the forfeiture of the employees’ individual rights under the Act.   Specifically, the Board found the terms to restrict the employees’ rights under Section 7 of the Act, which protects the right of all employees, whether or not unionized, and including former employees, to engage in concerted activity.

In so holding, the Board overturned recent, previous decisions which had permitted such clauses to be included in severance agreements, unless the employer offering the agreements did so after, or in connection with, committing other unlawful actions which violated a separating employee’s rights.  This holding restores the state of the law to prohibit such terms if they “have a reasonable tendency to interfere with, restrain, or coerce employees in the exercise of their…rights.” The holding makes clear that the mere offer of such agreements by an employer to a separating employee is illegal.  Thus, the Board held that “an employer violates…the Act when it proffers a severance agreement with provisions that would restrict employees’ exercise of their NLRA rights.”

The case, McLaren Macomb, NLRB Case 07-CA-263041, resulted when eleven employees were furloughed from their employment and presented with a “Severance Agreement, Waiver, and Release,” which included provisions which prohibited them from disparaging their soon-to-be former employer and from disclosing the terms of the Agreement to anyone, other than professional advisors and their spouse.  Such terms are nearly ubiquitous in severance agreements drafted by employers.  The Board majority held that the employer violated the Act by failing first to notify the employees’ union of the furloughs and giving it an opportunity to bargain over its decision and effects on the employees on their behalf, and by engaging in direct dealing with the furloughed employees by communicating with them about the severance agreements directly, as opposed to doing so through their Union.

Additionally, and perhaps most significantly, the Board held that the employer violated the Act merely by presenting the employees with the agreements, given that they contained the non-disparagement and non-disclosure provisions.  The Board explained that the prohibition on disparagement “would encompass employee conduct regarding any labor issue, dispute, or term and condition of employment” of the employer and that the only acceptable such restriction would extend to communications that are so “disloyal, reckless, or maliciously untrue as to lose the Act’s protection.”  Therefore, the Board found the broad non-disparagement clause would have a chilling effect on the exercise of the furloughed employees’ rights, which could extend to their efforts to help their fellow employees in assisting the Board in investigating complaints regarding their working conditions that may arise in the future.  “In sum,” the Board held, “it places a broad restriction on employee protected Section 7 conduct,” and for this reason “violates…the Act.”

Similarly, the Board found that the confidentiality provision would prevent the furloughed employees from being able to disclose the existence of an unlawful provision in the severance agreement, from filing an unfair labor practice charge or assisting the Board with an investigation into a charge filed by another employee, or to discuss the terms of their separation with fellow employees.  This restriction would even prevent the employees from discussing the terms of the severance agreement with their Union – their exclusive bargaining representative which, as stated above, should have been made aware of the offer of the severance agreements before the individual furloughed employees.  The Board concluded all of these restrictions to be violations of the furloughed employees’ Section 7 rights.

How does this affect the terms of existing and future severance agreements?

The Board’s decision in this case does not mean that employers are barred from including non-disparagement and non-disclosure provisions in severance agreements, nor does it mean that all existing agreements including such provisions have necessarily been rendered unenforceable.  However, severance agreements with such restrictive provisions will henceforth be subject to new scrutiny.  If a dispute arises over the enforceability of such language, the question posed will be whether the “terms have a reasonable tendency to interfere with, restrain, or coerce employees in the exercise of their Section 7 rights”?  If the answer to this question is yes, then the mere act of that agreement being offered to an employee will be deemed to be illegal under the Act and the agreement itself will be unenforceable.  As such, employers must be extremely careful when drafting severance agreements and all parties should be properly advised before entering into them, keeping in mind that Section 7 protects the rights of all employees, whether or not unionized. In particular, non-supervisory, non-managerial employees enjoy the full protections of the Act, including high level professional employees.

Employers who wish to include non-disparagement and/or non-disclosure provisions in severance agreements must ensure that they are appropriately and narrowly-drafted such that they do not interfere with or restrain the separating employee’s Section 7 rights.  When seeking to enforce existing agreements, employers first should assess whether the terms were drafted in a manner which would pass muster with the Board’s decision and if not, should reconsider taking formal action seeking injunctive relief to enforce those agreements.

Employees who are presented with a severance agreement containing such terms should be sure to have the agreement reviewed by an attorney with knowledge in both employment and traditional labor law before signing.  Those who are parties to existing agreements similarly should seek a review of their agreement and counsel before determining that any provision is unenforceable and taking action that could be deemed to be a violation.

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