Is it time to sever severance agreements from the employer’s toolbox? Not entirely. But a recent decision from the National Labor Relations Board (NLRB) and a follow-up memorandum from the NLRB General Counsel have made clear that severance agreements — as we once knew them — no longer pass muster as far as the Board is concerned. This recent development impacts more than just unionized workforces: it applies to union workplaces, non-union workplaces, even to former employees.

Severance agreements (or confidential separation and release agreements as they’re sometimes called) are a useful tool when an employee’s tenure with the company has come to an end. Severance agreements are especially useful where the employer expects a departing employee to file an employment claim, and the severance payment can be used as consideration to resolve any potential dispute. Most, if not all, of these agreements contained confidentiality and non-disparagement provisions that prevented employees from disclosing anything about the agreement (or sometimes anything about their employment in general) to third parties, as well as publicizing unflattering information about their former employer. If an employee was willing to keep matters confidential and not disparage the employer in exchange for a severance payment, then it was generally recognized that the parties had the freedom to contract in that manner. But that is no longer the case.

Section 7 Rights

Section 7 of the National Labor Relations Act (NLRA) guarantees employees “the right to self-organization, to form, join or assist labor organizations, 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,” as well as the right “to refrain from any or all such activities.” This means that nonsupervisory union and nonunion employees have the right to act together to improve wages and other terms and conditions of employment and to communicate among themselves and with others to do so. Section 8(a)(1) of the NLRA makes it an unfair labor practice for an employer “to interfere with, restrain or coerce employees in the exercise of the rights guaranteed in Section 7” of the Act.

The McLaren Macomb decision

On Feb. 21, 2023 the NLRB issued its 4-1 decision in McLaren Macomb, overturning two Trump-era decisions and holding that an employer may violate the NLRA if it conditions an employee’s acceptance of a severance agreement on broadly worded confidentiality, non-disclosure and non-disparagement clauses.¹ The board held that the following provisions, which many employers viewed as “requirements” or “dealbreakers” for any severance agreement, violated the Act:

• That exiting employees may not disclose any confidential, propriety or privileged information.
• That exiting employees may not disclose any terms of the agreement 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.”
• That exiting employees may not “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 NLRB asserted that employees have the almost-unfettered right to communicate with others, including current and former co-workers, other workers and third parties using all “administrative, judicial, legislative and political forums, newspapers, the media, social media and communications to the public” at their disposal.

Because the provisions broadly prohibited employees from, among other things, disclosing any information regarding the terms of the severance agreement, and/or making any statements that disparaged or harmed the employer, the board found that these terms were so overbroad so as to violate Section 7.

For labor and employment lawyers and those working in the human resource community, the McLaren Macomb decision generated question after question. Can we still offer severance agreements? If so, how much must we change our “form” agreements? Is this decision retroactive to agreements proffered before Feb. 21, 2023? Is including a “savings clause” enough to avoid an unfair labor practice charge?

General Counsel Memo 23-05

On March 22, 2023, NLRB General Counsel Jennifer A. Abruzzo issued Memorandum GC 23-05 in an attempt to clarify many of the questions raised by the McLaren Macomb decision.

Violations can occur even without execution. The mere act of proffering an agreement with provisions that violate the new McLaren Macomb standard — even if the agreement it is not ultimately executed — is enough to run afoul of the NLRA. The general counsel opined that execution is “irrelevant” because proffering an overly broad agreement “coerces employees by conditioning severance benefits on the waiver of statutory rights …”

The decision is retroactive. According to the general counsel, the McLaren Macomb decision applies to severance agreements proffered or entered into prior to Feb. 21, 2023. Generally, unfair labor practice charges are subject to a six-month statute of limitations.² This means that any unfair labor practice charge based on a severance agreement that was proffered or entered into before Aug. 21, 2022 would likely be time-barred. However, the general counsel advised that “maintaining and/or enforcing” provisions deemed overly broad under McLaren Macomb would be a separate violation, such that the unfair labor practice would not accrue until the time of attempted enforcement. Employers thus should refrain from enforcing any provision deemed overly broad under McLaren Macomb regardless of when the agreement was executed.

Overly broad provisions won’t negate an entire agreement. The general counsel pointed out that the NLRB prefers to strike those provisions it deems unlawful rather than voiding an entire agreement. Moreover, the general counsel advised employers with overly broad provisions to contact employees subject to severance agreements and advise the employees that the employer will not seek to enforce those specific provisions. This would not, however, cure a technical violation of the NLRA (because the proffer of the overly broad provisions has already occurred).

A “savings clause” won’t save you. Many severance agreements — even before the McLaren Macomb decision — included a “savings clause” with language to the effect that “nothing in this agreement is intended to impede or otherwise interfere with the employee’s Section 7 rights under the NLRA.” But employers who include overly broad provisions cannot avoid an unfair labor practice charge through a “savings clause” alone. Indeed, the general counsel opined that employers may still be liable for “mixed or inconsistent messages” that could impede the exercise of Section 7 rights.

Supervisors aren’t entirely outside the scope. Supervisors generally do not receive the same protection under the NLRA as other employees.³ However, the NLRA does protect supervisors who are retaliated against for opposing unfair labor practices. According to the general counsel, employers can still engage in an unfair labor practice with respect to a supervisor if: (1) the employer retaliates against a supervisor for refusing an agreement with overly broad provisions or (2) if the employer directly offers a supervisor an agreement that would limit or prohibit the supervisor from participating in a board proceeding.

Limited confidentiality provisions are still acceptable. The general counsel approved, by way of example, a confidentiality clause that restricts the dissemination of trade secrets for a period of time based on legitimate business reasons. But any confidentiality clause that precludes employees from coming together on workplace issues or communicating with third parties would be deemed to violate Section 7.

Focus on defamation, rather than disparagement. Employers can still include a provision that prohibits an employee from making defamatory statements about the employer. However, the value of such a provision might be limited, as untrue statements causing harm to the employer are likely covered under a state law tort claim for defamation. Nevertheless, a broad non-disparagement clause (which could encompass unflattering, rather than just untrue, statements) would run afoul of the NLRA.

While the general counsel’s memo provided some much-needed guidance, this is likely not the end of the NLRB’s crusade against contracts between employers and employees. In fact, the general counsel identified other provisions that, in her view, may run afoul of the NLRA, such as cooperation, non-competition, non-solicitation and non-poaching clauses, as well as broad liability releases and covenants not to sue that extend beyond employment-related claims. For now, employers would be wise to revise their severance agreements to comply with the McLaren Macomb decision. |||

EDWARD G. PHILLIPS is a lawyer with Kramer Rayson LLP in Knoxville, where his primary areas of practice are labor and employment law. He graduated with honors from East Tennessee State University and received his law degree from the University of Tennessee College of Law in 1978 with honors, and as a member of The Order of the Coif. He is a former chair of the Tennessee Bar Association’s Labor and Employment Law Section.

BRANDON L. MORROW is a lawyer with Kramer Rayson LLP in Knoxville. He represents businesses, educational institutions and religious institutions in employment and civil rights related matters. He holds a bachelor’s degree from the University of Tennessee and a law degree from the University of Tennessee College of Law.

NOTES

1. 372 NLRB No. 58 (2023).
2. NLRA §10(b).
3. Parker-Robb Chevrolet, 262 NLRB 402 (1982).