NLRB Prohibits General Non-Disparagement and Confidentiality Clauses in Severance Agreements

In a disturbing case applicable to all employers – union and non-union alike – the National Labor Relations Board asserts 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).

Historically, the Board 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. But now, in McLaren Macomb, the Biden Board has overruled those cases.

Background of the case. The employer offered severance agreements to furloughed employees. The agreements provided severance pay in exchange for a release of claims, as well as standard provisions broadly prohibiting disparagement of the employer and requiring confidentiality of the terms of the agreement, as follows:

Confidentiality Agreement. The Employee acknowledges that the terms of this Agreement 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-Disclosure. At all times hereafter, the Employee promises and agrees not to disclose information, knowledge or materials of a confidential, privileged, or proprietary nature of which the Employee has or had knowledge of, or involvement with, by reason of the Employee’s employment. At all times hereafter, the Employee agrees not to make statements to Employer’s employees or to the general public which could disparage or harm the image of Employer, its parent and affiliated entities and their officers, directors, employees, agents and representatives.

The agreement further provided for monetary and injunctive sanctions for violations of these provisions.

The Board’s Decision. The Board admittedly takes a “broad” approach to the protection of Section 7 rights. According to the Board, it now “return[s] 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 Board 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.

Specifically as to the provisions in question, the Board found the rather typical non-disparagement provision “on its face substantially interferes with employees’ Section 7 rights.” The Act protects employees’ right to make public statements about the workplace, including critiques of employer policies or statements that the employer has violated the Act (as long as the communications are not so “disloyal, reckless or maliciously untrue as to lose the Act’s protections”). In the Board’s view, this “comprehensive ban would encompass employee conduct regarding any labor issue, dispute, or term and condition of employment.” The Board also found problematic that the ban applied also to statements about the employer’s parent and affiliated companies, and officers, directors, employees, agents and representatives. Moreover, there was no time limit on the ban. According to the Board, “The end result is a sweepingly broad bar that has a clear chilling tendency on the exercise of Section 7 rights by the subject employee.”

With regard to the also rather typical confidentiality provision, the Board found it broadly prohibited the disclosure of the agreement – and any illegal provision contained therein – to any third person. The Board stated that, “This proscription would reasonably tend to coerce the employee from filing an unfair labor practice charge or assisting a Board investigation into the [employer’s] use of the severance agreement, including the nondisparagement provision.” The Board also stated that it would prevent employees from discussing the terms of the agreement with other co-workers (which may assist employees to decide whether to accept similar agreements) or the union.

Takeaways for Employers. It is clear that very standard provisions, like those in this case, will be deemed unlawful by the Board. This Board decision places significant limitations on employers’ abilities to ensure that departing employees will not disparage the employer or share the terms of any severance agreement – including the amount of severance pay – with others. These matters are often a significant factor in the decision of whether and how much severance pay to offer employees, and some employers may now determine that the utility of severance agreements without such provisions is much diminished. It may be possible to include targeted disclaimers or carefully craft a narrowly tailored provision that respects the protected rights, but employers should consult with counsel.

We note that the Board’s decision here is part of a larger trend, arising out of the #MeToo movement, to prohibit non-disclosure and confidentiality provisions in severance or settlement agreements. A number of states have enacted laws that prohibit such provisions – some only with regard to sexual harassment claims, but others more broadly. At the federal level, President Biden recently signed the Speak Out Act, which prohibits nondisclosure and non-disparagement provisions in pre-dispute employment agreements, as discussed in our November 2022 E-Update. In addition, the federal Tax Cuts and Jobs Act of 2018 contained a provision prohibiting the deduction, as an ordinary and necessary business expense, of any settlements of payments related to sexual harassment or sexual abuse, or associated attorneys’ fees, if the settlement or payment is subject to a nondisclosure agreement, as we discussed in our December 2017 E-Update.

Of additional interest, the Board also found that the employer had violated the Act by failing to notify the union of the furlough decision or of the severance agreement, resulting in the union’s exclusion from the discussions about these significant workplace events. Thus, this case also reminds unionized employers that they should provide notice to the union and an opportunity to bargain over reductions in force and the terms of severance agreements.