On February 21, the National Labor Relations Board (NLRB or Board) reversed course from its own Trump-era precedent when it held that an employer’s offer of employee severance agreements with broad confidentiality and non-disparagement provisions is an unfair labor practice in violation of Section 8(a)(1) of the National Labor Relations Act (Act). In light of this change, all employers, regardless of whether they are unionized, should carefully consider actions including:
- Discontinuing the use of provisions in nonmanager severance agreements and employment agreements, which broadly prohibit disclosure of the terms of the agreement or disparagement of their employer;
- Carving out exceptions to confidentiality provisions of nonmanager severance agreements to allow disclosure for the purpose of engaging in concerted, protected Section 7 activity under the Act;
- Revising existing employment agreements and policies to ensure they align with the new Board precedent;
- Using release provisions in severance agreements that are narrowly tailored with respect to employees’ exercise of their Section 7 rights;
- Weighing the likelihood of unfair labor practice findings resulting from any efforts by employers to enforce such provisions going forward; and
- Choosing whether to proactively amend any offending severance agreements executed within the six-month window for employees to file unfair labor practice charges.
Significantly, because the Act applies only to nonmanagerial employees, the Board’s ruling and the above-recommended actions do not apply to supervisors, independent contractors, and certain other types of statutorily excluded employees.
The Origins of the Board’s Recent Ruling
Prior to Trump-era Board rulings, the Board long held that severance agreements were unlawful if they contained broad prohibitions on an employee’s exercise of rights under Section 7 of the Act. Section 7 of the Act guarantees employees the right to self-organize, to form, join, or assist unions, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection, including the right to speak freely about the terms and conditions of employment with co-workers, representatives, and/or the general public. Thus, for many years, if a severance agreement prohibited an employee from discussing work conditions or participating in Board investigations in exchange for severance pay, such agreement would be in violation of the Act.
During the Trump administration, the Board overturned this precedent and established a two-factor test to determine whether employers violated the Act when offering departing or terminated employees severance in exchange for confidentiality, non-disparagement, and nonparticipation obligations. Under this two-factor test, a severance agreement violated the Act if: (1) it required the employer offering the severance agreement to discharge the employee in violation of the Act, or commit another unfair labor practice discriminating against employees under the Act; and (2) the employer “harbor[ed] animus” against the employee’s exercise of Section 7 rights. In effect, Board’s Trump-era rulings focused on the circumstances under which the severance agreement was offered — particularly considering whether the agreement was entered into voluntarily and not offered coercively — to determine whether the agreement “reasonably” tended to interfere with the free exercise of the Section 7 rights.
The Board’s Decision in McLaren Macomb Reinstates Pre-Trump-Era Precedent
In McLaren McComb, 372 NLRB No. 58 (2023), the Board, now under the control of a majority of Democrat members, reversed the Trump-era decisions. The salient issue in the 2023 decision was whether the employer (a hospital employing union-represented service employees) violated the Act when it presented its 11 furloughed employees with severance agreements that provided payments in exchange for a release of employment claims. The severance agreements contained the following provisions, prohibiting disclosure of the terms of the agreement and also prohibiting disparagement of the employer:
- Confidentiality Agreement: “The [e]mployee acknowledges that the terms of this [a]greement are confidential and agrees not to disclose them 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.”
- Non-Disparagement: “… At all times hereafter, the [e]mployee agrees not to make statements to [e]mployer’s employees or to the general public which could disparage or harm the image of [e]mployer, its parent and affiliated entities and their officers, directors, employees, agents and representatives.”
In its decision, the Board criticized the two-factor test used in the Trump-era Board decisions as failing to consider whether the actual language in the severance agreements broadly required the employees to waive their Section 7 rights. The Board majority found the above confidentiality provision violated the Act because it broadly prohibited employees from disclosing the terms of the agreement to any third party, including other employees, union representatives, and NLRB agents, which may reasonably coerce the employee against filing an unfair labor practice charge or assisting a Board investigation into the employer’s use of the severance agreement.
Similarly, the majority found that the non-disparagement provision interfered with Section 7 rights because it broadly prohibited employees from publicizing a labor dispute, assisting other employees, and cooperating with Board investigations and litigation. The Board majority emphasized that a variety of factors rendered the non-disparagement provision overbroad, including its lack of a temporal limitation, not limiting the scope to matters regarding past employment with the employer, and extending to the employer’s “parents and affiliated entities and their officers, directors, employees, agents and representatives.” Importantly, however, the Board stopped short of indicating what specific language would render a non-disparagement provision lawful. And, while the majority noted that the provision did not define “disparagement” in a lawful manner — e.g., communications that are so “disloyal, reckless or maliciously untrue” that they are not protected under the Act — the majority once again did not cite any prior precedent that included a lawful definition or limitation of “disparagement.”
Finally, the Board majority explained that whether the offending agreements were executed made no difference to its conclusion. Rather, the Board held the employer violated the Act merely by offering severance agreements to employees that conditioned severance pay upon the employees’ agreement to the unlawful provisions.
Given the Board’s recent decision restoring prior precedent by focusing on the language of the severance agreements with respect to two common provisions, here is what we know:
- Effective Date. The McLaren McComb decision became effective and binding as of February 21, and as was the case for the 11 furloughed employees, the Board’s decision applies to severance agreements offered to both departing and terminated employees.
- Language Matters. The Board will scrutinize provisions in severance agreements to determine whether they broadly restrict employees’ Section 7 rights. Therefore, when reviewing old or drafting new severance agreements, employers should remove any confidentiality and non-disparagement provisions that are likely to be broadly interpreted as restricting Section 7 rights.
- Application to Other Agreements and Policies. Employers should also review and revise existing employment agreements or policies for compliance to ensure they do not contain similar provisions that the Board may interpret as restricting Section 7 rights.
- “Narrowly Tailored” Disclaimer. The Board suggested that conditioning benefits under a severance agreement on the forfeiture of Section 7 rights may violate the Act unless such agreement “is narrowly tailored to respect the range of those rights.” While the Board declined to define what constitutes a “narrowly tailored” provision, it noted that its prior decisions have approved severance agreements where releases waived only the signing employee’s right to pursue employment claims and only as to claims arising as of the date of the agreement. Thus, while still subject to further review by the Board, employers should consider including disclaimer language in any release provisions of severance agreements preserving the employees’ Section 7 rights.
- Unfair Labor Practice (ULP) Charges. Going forward, employers that present agreements containing confidentiality or non-disparagement provisions similar to those in McLaren McComb to departing or terminated employees will be subject to a ULP finding by the Board. Attempts to enforce such provisions will likely also render employers subject to ULP findings.
- Six-Month Statute of Limitations. If, over six months ago, an employer presented a severance agreement containing similar confidentiality or non-disparagement provisions to a terminated employee, then the applicable six-month statute of limitations bars the employee from bringing a ULP charge based on that offering of the severance agreement.
- Limited Application to Nonmanagerial “Employees.” The McLaren McComb decision only applies to severance agreements presented to nonmanagerial employees under the Act. Thus, agreements with independent contractors or supervisors (g., managers and high-level executives with authority to hire, fire, discipline, or responsibly direct the work of employees) are not affected by this decision. We recommend consulting with labor and employment counsel to determine whether an individual is subject to the Act for purposes of enforcing severance agreements.
There are also some unanswered questions following the decision:
- Future Appeal. The decision likely provides employees with a defense against enforcement of similarly broad confidentiality and non-disparagement provisions in many jurisdictions. However, it remains to be seen whether the decision will be appealed before a federal appellate court or otherwise reversed or clarified by a subsequent Board decision. Any appeal of the decision to a federal appellate court must overcome the general deference of federal appellate courts to the NLRB’s interpretation and enforcement of the Act.
- Retroactive Application to Existing Agreements. The McLaren McComb decision also does not explicitly address whether it would apply retroactively to severance agreements previously offered or executed. As discussed, the applicable statute of limitations bars any ULP charge regarding severance agreements offered more than six months ago. However, the Board did not indicate whether an agreement offered within the past six months is valid under prior precedent. As best practice, employers should carefully consider whether to pursue amendment of severance agreements offered or executed within the past six months in an effort to mitigate against any ULP finding. As a practical matter, many employers may view the risk of former employees pursuing ULP charges for including such provisions as too low to justify the effort of pursuing amendment of prior severance agreements offered or executed within the past six months. In addition, employers may argue against retroactive application by claiming that they drafted and proffered severance agreements at a time when similar confidentiality and non-disparagement provisions were considered lawful by the Board under the Act.
- Available Remedy for Violation. The scope of remedy available to an employee as a result of such unlawful severance agreements is also unclear. In McLaren McComb, the Board majority entered a cease-and-desist order, prohibiting the employer from presenting the furloughed employees with a severance agreement containing unlawful provisions and from engaging in any similar or related manner that interferes with the employees’ Section 7 rights. The decision does not address whether the releases of claims or other provisions, such as noncompete obligations, in the agreements continue to be binding. In this regard, if a nonmanagerial employee failed to challenge a confidentiality provision by filing a ULP charge with the Board within the Act’s six-month statute of limitations, but then challenges enforceability of the settlement agreement generally, or the confidentiality provisions specifically, in a state court or federal district court, neither of which has jurisdiction to hear ULP charges, it is unclear what impact, if any, McClaren McComb would have on the state or federal court’s consideration of that challenge. This lack of guidance highlights the importance of including a strong severability clause in severance agreements to ensure that its important provisions, such as the release of the employer or restrictive covenants, remain binding and enforceable in the event that other provisions are found to be invalid.
The Troutman Pepper Labor + Employment team will continue to monitor further developments regarding this important Board decision and is ready to assist in answering any questions or reviewing and crafting agreements related to severance that involve Section 7 rights.