Back to the Future: NLRB Reinstates Significant Restrictions on Severance Agreements
The Legal Intelligencer
The National Labor Relations Board (NLRB) recently announced the return of a wide-sweeping ban on severance agreements that contain provisions that effectively silence certain employees. On February 21, 2023, the NLRB issued its decision in McLaren Macomb, 372 NLRB No. 58, reinstituting its pre-2020 precedent that severance agreements cannot contain: (1) confidentiality agreements precluding the employee from discussing the terms of the severance; and (2) non-disparagement clauses.
In McLaren, a Michigan hospital laid off eleven employees early in the COVID-19 pandemic after federal regulations prohibited the hospital from performing outpatient procedures or allowing nonessential employees to work in the building. The hospital offered these eleven employees a severance agreement that included a non-disparagement clause and a provision not to disclose the terms of the severance agreement. However, the NLRB determined that the severance agreement violated the National Labor Relations Act (NLRA) due to the inclusion of these provisions.
The Board reasoned that offering severance agreements containing broad confidentiality or non-disparagement clauses has a reasonable tendency to interfere with, restrain, or coerce employees’ exercise of their Section 7 rights under the NLRA to engage in protected concerted activity, which constitutes an unfair labor practice in violation of Section 8(a)(1). Under the NLRA, employers are prohibited from interfering with, restraining, or coercing employees who exercise their rights to engage in protected concerted activities, such as discussing the terms and conditions of their employment for the purpose of mutual aid and protection. According to the Board, the confidentiality and non-disparagement clauses in McLaren had a potential chilling effect on the employees’ exercise of their rights, because employees must waive certain Section 7 rights in order to receive the benefits of the severance agreement.
This decision marks a return to long-standing Board precedent that was overturned in 2020. In Baylor University Medical Center, 369 NLRB No. 43 (2020), the Board shifted its focus from analyzing the text of a severance agreement to the circumstances under which an employer offered the agreement. The Baylor Board reversed years of precedent to hold that severance agreements containing broad confidentiality requirements did not violate the NLRA, as long as they were not mandatory or coercive, applied only to post-employment activities, and were free of allegations that the employer committed a separate unfair labor practice discriminating against the employee. Several months later, in IGT d/b/a International Gaming Technology, 370 NLRB No. 50 (2020), the Board applied the same reasoning to severance agreements containing non-disparagement clauses. The McLaren Board criticized the rulings in both Baylor and IGT for failing to articulate any policy considerations that would justify their “severely constricted view” of employees’ Section 7 rights, and squarely overruled them in favor of reinstating broader protections for employees.
The McLaren ruling applies to all private employers—with or without unionized workforces—covered by the NLRA, as it is based on both Sections 7 and 8 of the Act. It does not, however, apply to all employees. The NLRA only applies to “employees” as defined by the Act, which specifically excludes independent contractors and supervisors. Whether an employee is a “supervisor” involves a fact-specific analysis beyond review of the job title in question. The NLRA states that a “supervisor” is:
Any individual having authority, in the interest of the employer, to hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward, or discipline other employees, or responsibly to direct them, or to adjust their grievances, or effectively to recommend such action, if in connection with the foregoing the exercise of such authority is not of a merely routine or clerical nature, but requires the use of independent judgment.
NLRA, Section 2(11). Some of these terms have been subject to additional definitional analysis through Board decisions. The Supreme Court has further determined that employees who are even higher in the management structure but who may not meet the NLRA definition of “supervisor” are also excluded from coverage of the Act. These workers are considered “managerial employees”—executives who formulate and effectuate management policies by expressing and making operative decisions of the employer. See NLRB v. Bell Aerospace Co. Div. of Textron Inc., 416 U.S. 267 (1974). So, McLaren‘s limitations likely will not apply to severance agreements offered to any supervisory or managerial employee.
The McLaren ruling is effective immediately, but there was no discussion as to whether the decision retroactively invalidates existing severance agreements containing these confidentiality and non-disparagement clauses. This is unlikely, as such retroactive application could be challenged as a violation of the U.S. Constitution’s Article I provision protecting the freedom to contract. Further, the six-month statute of limitations for unfair labor practice charges should render any severance agreement executed more than six months before McLaren (i.e., severance agreements effective prior to August 21, 2022) presumptively valid.
So, what are the implications of the McLaren decision on employers?
- As many employers are more likely to offer severance agreements to employees whom they would consider supervisory or managerial, employers are encouraged to consult legal counsel prior to including non-disparagement or broad confidentiality provisions in severance agreements for these employees to analyze whether they would fit the definitional NLRA exemption.
- Risk-averse employers should cease offering severance agreements containing non-disclosure and non-disparagement clauses to nonsupervisory employees, at least for the time being. Per McLaren, the very act of offering severance agreements with these broadly worded prohibitions, even if the employer has no intention of legally enforcing them, is itself now a violation of the NLRA. The safest practice is to take this approach until further clarification and advisory memoranda from the Board’s General Counsel is made available.
- A more robust approach would be for an employer to augment the offending provisions of its standard severance agreement with a broad disclaimer stating that nothing in the agreement should be interpreted as waiving the employee’s Section 7 rights under the NLRA or prohibiting the employee from participating in protected concerted activity, participating in the Board’s investigative process, or filing an unfair labor practice. There is no guarantee that the Board would uphold a confidentiality or non-disparagement clause containing such a proviso, but this is a viable middle ground approach that arguably demonstrates recognition of and attempted compliance with the NLRA’s prohibition on interference with employees’ Section 7 rights.
- Along with providing a disclaimer, an employer could tailor their standard confidentiality and non-disparagement provisions to address the specific issues the Board identified in the agreement in McLaren. The Board took issue with the fact that the non-disparagement clause (1) was not limited to matters regarding past employment, (2) extended to statements made concerning the employer’s parents, affiliated entities, officers, directors, employees, agents, and representatives, and (3) had no temporal limitation. The Board criticized the confidentiality clause because it applied to disclosure of the terms of the agreement to any third person other than a spouse, legal counsel, tax advisor, or court/administrative agency when compelled, which prohibits discussion with former coworkers who could be faced with deciding whether to accept a similar severance agreement and with union representatives. Creating caveats in severance agreements that address the Board’s concerns of overbreadth could result in provisions that may pass scrutiny under McLaren.
- When determining risk tolerance and how to proceed, consider these factors: (1) the deterrent value of your existing confidentiality and non-disclosure provisions; (2) whether your industry or company is at particular risk of scrutiny from the NLRB; (3) the likelihood of whether McLaren will be upheld; and (4) the likelihood that your former employees would challenge their severance agreements by filing an unfair labor practice.
- Finally, employers should review their employee handbooks (preferably annually) to ensure that their policies do not violate the NLRA.
The McLaren decision is a return to the employee-friendly pre-Baylor days. While the effects are immediate, it remains for the courts to enforce. This decision may be appealed, but in the meantime, employers should consider changing their severance agreement practices if they wish to avoid an unfair labor practice charge. Contact a Babst Calland employment and labor attorney to assist in evaluating the legal risk inherent in your existing severance agreements and in carefully crafting disclaimers that address the McClaren reasoning.
Alexandra Farone is an associate in the Litigation and Employment and Labor groups of Babst Calland. Ms. Farone’s employment and labor practice involves representing corporate clients, municipalities, and individuals on all facets of employment law, including restrictive covenants, discrimination claims, human resources counseling, grievances, and labor contract negotiations. Please contact her at 412-394-6521 or firstname.lastname@example.org.
Janet Meub is senior counsel in the Litigation and Employment and Labor groups of Babst Calland. Ms. Meub has significant experience in the areas of employment and labor law, professional liability defense, insurance coverage and bad faith litigation, toxic tort litigation, nursing home negligence, and medical malpractice defense. She has a diversified practice that includes defending employers, healthcare providers, law enforcement and other professionals, and non-profits, at all levels of civil litigation through trial. Contact her at 412-394-6506 or email@example.com.
Steve Silverman is a shareholder in the Litigation and Employment and Labor groups of Babst Calland. Mr. Silverman devotes a significant amount of his practice to the defense and prosecution of theft of trade secret and non-compete suits. Contact him at 412-253-8818 or firstname.lastname@example.org.
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Reprinted with permission from the March 30, 2023 edition of The Legal Intelligencer© 2023 ALM Media Properties, LLC. All rights reserved.