Federal Appellate Court Upholds NLRB’s Decision Prohibiting Non-Disparagement and Confidentiality Clauses in Severance Agreements

In 2023, the National Labor Relations Board issued a disturbing case applicable to all employers – union and non-union alike – asserting that severance agreements may not contain general non-disparagement or confidentiality clauses. According to the Board, such clauses violate the rights of employees under Section 7 of the National Labor Relations Act to engage in concerted activity for their mutual aid or protection (i.e. “protected concerted activity). The case was appealed to the U.S. Court of Appeals for the Sixth Circuit and, unfortunately for employers, the Sixth Circuit upheld the NLRB’s ruling – albeit on procedural grounds, without reaching the substantive question of whether the NLRB’s ban on the aforementioned clauses was permissible.

Background of the Case: Historically, the NLRB has disfavored such provisions in severance agreements. However, in several 2020 cases, Baylor University Medical Center and IGT d/b/a International Game Technology, the Trump Board found such provisions to be permissible. According to the Trump Board, the agreements containing such provisions were not mandatory, pertained exclusively to post-employment activities and therefore had no impact on terms and conditions of employment, and were not proffered coercively. However, in McLaren Macomb, the Biden Board overruled those cases, as discussed in our February 2023 E-Update.

Specifically, the NLRB asserted that it was “return[ing] to the prior, well-established principle that a severance agreement is unlawful if its terms have a reasonable tendency to interfere with, restrain, or coerce employees in the exercise of their Section 7 rights, and that employers’ proffer of such agreements to employees is unlawful.” The acceptance or nonacceptance of the agreement by the employee is “immaterial,” as the “mere proffer of the [unlawful] agreement itself violates the Act.” The NLRB will look to the language of the provisions themselves, and will consider such language unlawful if, read broadly, it could potentially impact employees’ Section 7 rights.

With regard to typical non-disparagement language, the NLRB found that it substantially interfered with employees’ ability to make statements about the workplace, including critiques of employer policies and assertions that the employer has violated the Act. As for typical confidentiality provisions, the NLRB held that such a provision illegally prohibited employees from disclosing the agreement to the NLRB, filing unfair labor practice charges with the NLRB, or discussing the terms and conditions of the agreement with other co-workers for their mutual benefit.

Following this decision, the NLRB’s General Counsel issued a memo clarifying and confirming the broad impact of the ruling, as discussed in our March 22, 2023 E-lert. The case was then appealed to the Sixth Circuit.

The Sixth Circuit’s Ruling: In NLRB v. McLaren Macomb, the Sixth Circuit upheld the NLRB’s decision – but did not decide whether the NLRB was correct that the non-disparagement and confidentiality provisions violated the Act, finding that it was not necessary to resolve the case. Rather, the Sixth Circuit addressed only whether the employer had the obligation to bargain with the union over the furlough of 11 employees and whether it engaged in unlawful direct dealing by offering the severance agreement directly to the employees.

The Sixth Circuit agreed with the NLRB that layoffs or furloughs are terms and conditions of employment that are subject to mandatory bargaining for unionized employers. Although the employer raised certain arguments about whether the union had been formally recognized as the employees’ bargaining representative and whether the furloughs were permissible as a past practice, among other things, the Sixth Circuit noted that the employer had failed to raise these arguments before the NLRB, and therefore had failed to preserve them for review on appeal.

There is an exception to the statutory obligation to bargain where there is a compelling business justification that would justify the failure to bargain. The employer argued that the COVID-19 constituted exigent circumstances that excused its conduct. This required a showing that it was required to take immediate action and was unable to bargain. Here, the Sixth Circuit noted that the employer had bargained with the union over other matters during the same timeframe, undermining the claim that it could not do so.

The Sixth Circuit also found that the employer violated the Act when it dealt directly with the employees over the severance agreements, rather than going through the union as the employees’ exclusive representative. This constituted unlawful direct dealing.

Lessons for Employers: Unfortunately, the employer community lost this first effort to overturn the NLRB’s McLaren Macomb decision, meaning that the Board’s current prohibitions on general non-disparagement and confidentiality provisions in severance agreements remains in effect. We may need to wait until there is a change to a Republican administration before receiving any relief from this ruling.

But this case also highlights the need for employers (and their counsel) to ensure that all relevant arguments are raised before the Board. In addition, if asserting a compelling business justification defense to a failure to bargain charge, it is important to ensure that the Company’s actions are consistent with such a defense with regard to other interactions with the union.