NLRB Rules That Employers May Not Offer Severance Agreements with Broad Confidentiality and Non-Disparagement Clauses

Key Points

• On February 21, 2023, the NLRB issued a decision in McLaren Macomb holding that employers may not offer severance agreements with broad confidentiality or non-disparagement clauses to union and non-union employees who are not supervisors, managers, or otherwise exempt from the NLRA.
• The Board’s decision is important because it could render unenforceable many severance agreements, or at least certain key provisions, as well as other employment agreements that contain confidential information and non-disparagement clauses.
• Although the Board’s decision could be altered or reversed on appeal, employers in the meantime should consult counsel to determine whether to substantially revise or suspend the use of confidentiality or non-disparagement clauses in severance and other employment agreements for NLRA-covered employees to comply with the Board’s decision in McLaren.

Background

Many employers routinely include non-disparagement and confidentiality clauses in severance agreements with employees. Non-disparagement provisions typically prohibit communicating anything negative or disparaging about the employer, while confidentiality provisions prohibit disclosure of proprietary, confidential or other information about the employer. These provisions can create tension with provisions of the National Labor Relations Act (NLRA)—section 7 of which protects the right to organize unions and bargain collectively, and to refrain from doing so. Under Supreme Court precedent, employers are generally permitted to ban disloyalty among their workers and preserve the confidentiality of proprietary information as long as those restrictions do not “coerce” employees into waiving their protected rights. What then happens, though, if an employer offers a severance agreement that forbids former employees from disparaging their former employer or disclosing the employer’s confidential information? Does it violate the law to prevent employees from communicating with a union or criticizing their employer after their employment comes to an end?

The National Labor Relations Board (NLRB) didn’t think so in Baylor University Medical Center, 369 NLRB No. 43 (2020) and IGT d/b/a International Game Technology, 370 NLRB No. 50 (2020). In those cases, the Board held that merely offering these agreements to former employees is not “coercive” and so does not violate the NLRA. However, that all changed on February 21, 2023, when a divided Board reversed course in McLaren Macomb, 372 NLRB No. 58 (2023).

The Board held in McLaren that severance agreements are unlawful if they “may chill” former employees from cooperating with Board investigations or discussing the terms of their former employment with current employees. According to the Board majority in McLaren, it is “coercive” to condition severance payments on terms that potentially interfere with section 7 rights. The severance agreements at issue in McLaren included non-disparagement and confidentiality clauses that the Board majority found to be overly broad. In particular, the non-disparagement clause prohibited former employees from making any “statements to [the] Employer’s employees or to the general public which could disparage or harm the image of [the] Employer, its Employer’s parent, affiliated entities, officers, directors, employees, agents, and representatives.” In the majority’s view, this restriction could be construed as forbidding “any statement asserting that the [Employer] had violated the Act” or assisting current employees with complaints to the government or media about the employer, “the Employer’s parent, affiliated entities, officers, directors, employees, agents, and representatives.”

The confidentiality clause prohibited former employees from disclosing the terms of the severance agreement “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.” The Board majority explained that this provision would “coerce” former employees from filing unfair labor practice charges and cooperating with Board investigations into the employer’s use of the severance agreement.

Member Kaplan dissented, arguing that merely offering a severance agreement was not “coercive,” and the challenged provisions did not unreasonably interfere with section 7 rights. In his view, only circumstances external to the offer of a severance agreement could render the agreement unlawful. For example, Member Kaplan agreed with the majority that offering a severance agreement directly to employees without giving their union the opportunity to bargain could be a “direct dealing violation” in violation of section 8(a)(5) of the NLRA. However, he disagreed that merely offering the severance agreement was an independent NLRA violation.

Implications for Employers

Under the Board majority’s new standard, any employer whose employees are covered by the NLRA—even nonunionized employees—could be charged with an unfair labor practice for offering severance agreements with non-disparagement or confidentiality clauses that the Board deems overly broad. Employers may also be charged with an unfair labor practice for attempting to enforce such clauses in severance agreements.

The Board majority’s decision in McLaren may be challenged in court and it remains to be seen whether a court would find that the mere offer of a severance agreement can be unlawfully “coercive” or conclude that an agreement that only restricts post-employment activities can be within the reach of Section 7’s protections.

Pending challenge in court, the McLaren decision presents complex issues for employers that offer their NLRA-covered employees (whether unionized or not) non-disparagement and confidentiality agreements—whether in standalone agreements or as part of an employment or severance agreement. Employers should consult with counsel to determine whether to suspend the use of such agreements or substantially revise them to comply with the McLaren standard pending challenges to the standard in court.