NLRB Reverses Course on Severance Agreements: Here’s What Employers Need to Know

March 2, 2023

The McLaren Ruling

Just when employers thought the Federal Trade Commission (FTC) proposed rule banning non-competes in employment agreements was confounding, employers are now faced with a new paradigm. In this case, it’s the restriction, if not elimination, of provisions in severance agreements imposing limitations on post-employment conduct such as maintaining confidentiality and prohibiting disparaging statements about the employer.

The National Labor Relations Board (the Board) has recently decided in McLaren Macomb and Local 40 RN Staff Council that the mere proffer of a severance agreement without more, that contains provisions which on their face alone the Board could interpret to interfere with employees’ rights under Section 7 of the National Labor Relations Act, is an unlawful labor practice. Additionally, the Board applied a very broad scrutiny of the provisions to determine they were unlawful as written. This new rule applies to severance agreements even if they are voluntarily entered in to by the employee, either post or pre-separation.

Notably, this decision applies to even those employers whose employees are not represented by a union.

Severance Agreement Provisions Determined to Violate Section 7 of NLRA

In general, Section 7 of the NLRA affords most employees in the private sector the right to engage in concerted activity. Relevant here are their rights to discuss wages and terms and conditions of their employment with co-workers, their union and the public (executives, managers and most supervisors are not covered by the NLRA and would be excluded from the McLaren ruling).

In McLaren, the hospital permanently furloughed 11 employees during the apex of the pandemic, finding them nonessential. In exchange for a release of all claims, the hospital offered them a monetary severance package. All 11 employees voluntarily signed the severance agreement. However, the hospital did not notify the union, much less bargain with them, regarding the layoff or the severance offer.

At issue in this decision were two fairly innocuous provisions in the severance agreement which the Board concluded violated Section 7 of the NLRA. The first provision was a requirement prohibiting the employees from making any statements that would disparage the hospital or harm its reputation. The second was a confidentiality provision whereby the employees agreed not to disclose the terms of the severance agreement to any “third party” other than their spouses or legal or financial advisors or disclose information, knowledge or materials of a confidential, privileged or proprietary nature. Until McLaren, these were generally considered by employers as legitimate severance agreement provisions.

And rightly so, given previous decisions by the NLRB on the appropriate review to be given to severance agreements. In Baylor University Medical Center and International Game Technology (IGT), decided in 2020, the Board reviewed confidentiality and non-disparagement clauses severance agreements that were challenged as unlawful under Section 7. The Board found that because these were effective post-employment, they were not work rules and not subject to the Boeing standard of analysis. Further, because the agreements were (i) entered into voluntarily, (ii) did not impact any pay or benefits that had been established during the employees’ period of employment and (iii) the employees were not unlawfully coerced into signing them, the Board found that the mere proffer of the agreements was not a violation of the NLRA.

NLRB Overrules Prior Precedent

In McLaren, the Board reversed course and found that “upon careful analysis of the terms of the non-disparagement and confidentiality provisions at issue” the provisions were unlawful and the mere proffer of the agreement, even had the employees not accepted them, was also a violation of Section 7. The Board claimed that its decisions in Baylor and ITG ignored or overturned historical precedent. By considering factors such as the voluntariness of the agreement, the absence of coercion and the lack of any detrimental impact on the employees’ position during employment (also all true in McLaren), the Board now held that those cases had formulated a new rule which required a finding of some contemporaneous unlawful act by the employer in order to find the severance agreement unlawful.

The Board overruled Baylor and IGT and returned to a pre-2017 analysis which only:

“Focused on the language of the severance agreement to determine whether proffering the agreement had a reasonable tendency to interfere with, restrain, or coerce employees’ exercise of their Section 7 rights.”

The Board emphasized that prior to Baylor and ITG there was no requirement that there exist additional unlawful conduct by the employer to find that the agreement violated the NLRA. The only consideration was whether the agreement “on its face” restricted the exercise of the employees’ Section 7 rights.

Consideration in the McLaren Decision

Although in McLaren, the Board noted that there were contemporaneous circumstances in that case, such as the hospital’s failure to bargain, which might support a requirement of heightened scrutiny or even a finding of coercion by the employer, the Board found those circumstances are irrelevant. In fact, everything other than the language of the severance agreement itself was irrelevant. The only consideration would be the language itself. There was no need to bother with any interpretation of the surrounding circumstances. The Board reviewed that language and found it to be unlawful. Interestingly, although the Board believed surrounding circumstances may be relevant if they are coercive, the lack of any coercion had no corresponding bearing on the scrutiny of the agreement.

Suggestions for Employers

Going forward, employers must now scrutinize their severance agreements to assure the language does not run afoul of Section 7. At least for confidentiality and non-disparagement clauses, the most conservative approach may be to not include them at all. At a minimum, employers would be wise to consider what the Board revealed in its discussion in McLaren as to the flaws it found in those clauses.

With respect to the confidentiality provision, the Board’s major concern flaw was the prohibition against disclosing the terms of the agreement to any “third person.” According to the Board, that restriction unleashed a plethora of restraints on concerted activity as the employee was prohibited from speaking to the union about any unlawful provisions in the agreement or filing an unfair labor practice. Similarly, the Board concluded that the non-disparagement clause was overbroad as it lacked any temporal limitation or a definition of disparagement.

The Board was concerned that those flaws also created a parade of horribles whereby not only were the employees limited in their own efforts to report the unlawful conduct imposed upon them by the employer, but they were also bridled from assisting fellow workers by cooperating with the Union or the Board investigation and litigation of unfair labor practices. As noted by the Board, its enforcement of Section 7 relies on informants, i.e., former coworkers, who apprize them of unlawful employer conduct. Thus, a more narrowly tailored provision addressing the Board’s concerns, as suggested below, might be an alternative solution.

The Board’s decision will more than likely be appealed to the Appellate Court and could possibly be overturned. However, until then employers are advised to:

  1. Review current templates for severance agreements under the McLaren analysis before proffering them to employees.
  2. Review handbooks and other policies with any eye toward the Board possibly issuing a similar finding as to work rules.
  3. Consider more narrow drafting of confidentiality, non-disparagement and similar restrictive provisions by including (i) a temporal limitation, (ii) definitions of what conduct is precluded and (iii) exceptions for discussions related to wages, terms and conditions of employment and participation in Board investigations and unfair labor practice actions.
  4. Along with the above, include an express disclaimer that nothing in the agreement is intended to interfere with, restrain or coerce employees’ rights to concerted activity under the NLRA including the right to discuss wages, terms and conditions of employee.

For additional information or assistance with a review of your employment policies and severance agreements please contact Maribeth Meluch (MM@kjk.com; 614.427.5747) or any of the partners in KJK’s Labor and Employment practice group.