Confidentiality and Non-disparagement Clauses Prohibited in Severance Agreements for Certain Categories of Employees

When an employer and employee part ways, the employer may offer the departing employee a severance payment, and perhaps the extension of certain other benefits. In exchange, the employee must agree not to do certain things, including sue the employer for matters related to the termination of the employment, disclose confidential information of the employer, or make disparaging statements about the employer.

In February the National Labor Relations Board (NLRB), a federal agency that protects the right of private sector employees to form and join unions, issued a decision in a case that declares confidentiality and non-disparagement provisions in severance agreements to be unlawful. This article will explain the reasons for the NLRB’s decision, who it applies to, and what employers should do to comply.

Why did the NLRB decide these provisions are unlawful?

As noted above, the NLRB protects the right of private sector employees to form and join a union. Among other things, the NLRB supervises elections to form a union, investigates charges of unfair labor practices under the National Labor Relations Act, and enforce its orders, rulings, and regulations in the courts.

This decision, called McLaren Macomb (which you can find at 372 NLRB No. 58 if you want to read it), involved a unionized hospital in Michigan that permanently furloughed 11 union employees. The hospital presented each employee with a severance agreement that included among other things a general release of claims, a confidentiality provision, and a non-disparagement agreement. The confidentiality provision prohibited the former employee from disclosing the terms of the severance agreement to anyone other than a spouse, attorney or tax advisor, or if required by a court order. The non-disparagement clause prohibited the former employee from making any statement “which could disparage or harm the image of Employer” or any of its personnel.

These two provisions are quite common in severance agreements, but the NLRB decided they are unlawful, ruling that a severance agreement is unlawful if its terms have a “reasonable tendency to interfere with, restrain, or coerce employees” in exercising their legal rights under the National Labor Relations Act. In particular, the NLRB stated:

• By stating that the employee could not disclose anything about the agreement “to any person”, the confidentiality provision restricted the right of employees to engage in protected discussions about the agreement, for example with union representatives or at a future employer where unionizing activities might occur.
• If the agreement contained unlawful provisions that could be the basis for filing an unfair labor practice charge, the confidentiality provision even prevented the employee from disclosing this to the union or to the NLRB.
• The non-disparagement clause, in theory, could violate the employee’s right (even as a former employee) to publicize a labor dispute or violation, discuss the conditions of employment with other employees, or even cooperate with an NLRB investigation of the employer.

To what categories of employees does this decision apply?

The NLRB’s decision does not apply to all private sector employees. It excludes supervisors, managers, executives, independent contractors, and agricultural laborers. Note that i applies to all other employees regardless of whether they are members of a union.

What should employers do?

In its decision, the NLRB rules that merely presenting a severance agreement containing these provisions to a departing employee will be a violation of the National Labor Relations Act and open the employer up to a charge of engaging in an unfair labor practice. Among other things, this means an entire severance agreement could be invalidated, or only the permitted portions be enforceable, although the ruling was unclear on this point.

There are other aspects of the  ruling that are unclear, such as whether it applies to severance agreements already in effect prior to its decision or whether narrower non-disparagement and confidentiality language might still be permitted. Still, there are some steps that employers should consider taking right now. These include:

• Review all current severance agreements as well as employee handbooks and other written policies for the prohibited language, as the NLRB indicated it may rule that its decision will apply as well to those other documents.
• Add language to severance agreements (if they don’t already contain it) that nothing in the agreement is intended to prevent an employee from exercising the exercise of rights that cannot be waived under Section 7 of the NLRA, which relate to protected union-related activities.
• Add a “severability” clause to severance agreements (again, if they don’t already contain one) stating that if any particular provision of the agreement is judged to be unenforceable, the remaining provisions will be enforceable. This is a very common contractual provision.
• In a unionized environment, comply with all rules related to the termination, layoff, or furloughing of employees, as the hospital in McLaren failed to do this.
• Language prohibiting the disclosure of trade secrets, proprietary business information (such as customer lists) and other confidential information should still be permitted; the NLRB focused in its ruling on the language prohibiting any disclosure of the terms of the severance agreement itself.

If you have additional questions about your company’s severance agreements, what language they can include, and who they apply to, please contact me at mark@spitzlegalcounsel.com, or 720-575-0440.