NLRB Restricts Use of Severance Agreements with Broad Confidentiality/Non-Disparagement Clauses

The National Labor Relations Board (NLRB or the Board) on Feb. 21, 2023, issued a decision (McLaren Macomb, 372 NLRB No. 58) that significantly restricts an employer's right to present employees with or enforce severance and other agreements that contain confidentiality and non-disparagement provisions that are overly broad under the Board's new test. This decision applies to union and non-union employees alike, applies to all private-sector employees (other than statutory supervisors and managers), applies even if signing the agreement is entirely voluntary and the employee receives a substantial payment or other valuable consideration for doing so, and appears to apply regardless of whether the employee is asked to sign the agreement before or after the employee's separation from employment. This alert discusses the facts and holding of the Board's decision in McLaren, the legal bases for the Board's decision, an employer's potential legal exposure under the decision and suggestions for employers to minimize or eliminate the adverse impact of the decision when using agreements with confidentiality and non-disparagement provisions.

The McLaren Facts

McLaren Macomb operates a hospital in Michigan where it employs approximately 2,300 people. In response to a COVID-19-related reduction in elective and outpatient procedures and government regulations prohibiting nonessential employees from working inside the hospital, McLaren permanently furloughed 11 such employees who were represented by a local branch of the AFL-CIO (Union). McLaren contemporaneously presented each of the furloughed employees with a "Severance Agreement, Waiver and Release" that offered to pay differing severance amounts to each employee if they signed the agreement. The agreement required each employee to release McLaren from any claims arising out of their employment or termination of employment. It also contained the following two provisions requiring confidentiality about the terms of the agreement and broadly prohibiting disparagement of the hospital:

1. 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 spouses, or as necessary to professional advisors for purposes of obtaining legal counsel or tax advice, or unless legally compelled to do so by a court or administrative agency of competent jurisdiction.
2. Non-Disclosure. [***] 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 provided for substantial monetary and injunctive sanctions against employees who breached the confidentiality and non-disparagement proscriptions.

The McLaren Holding and Remedy

The case before the NLRB involved several issues. The Board found, in agreement with the Administrative Law Judge (ALJ), that McLaren violated the National Labor Relations Act (NLRA or the Act) by permanently furloughing the employees without first notifying the Union and giving it the opportunity to bargain about the furlough decisions and their effects. It similarly found that McLaren violated the Act by communicating directly with the employees regarding the severance agreements and entirely bypassing and excluding the Union. But the Board disagreed with the ALJ regarding another important question: Whether McLaren violated a separate provision of the NLRA (Section 8(a)(1)) by merely presenting the agreements with the broad confidentiality and non-disparagement provisions to the employees? The Board held that it did and expressly overruled two prior decisions issued in 2020 by a Republican-controlled Board – Baylor University Medical Center (369 NLRB No. 43) and IGT d/b/a International Game Technology (370 NLRB No. 50) – on which the ALJ had relied in upholding McLaren's actions.

According to the Board majority in McLaren, the overruled decisions had reversed long-settled precedent and replaced it with a test that failed to recognize that unlawful provisions in a severance agreement proffered to employees have a reasonable tendency to interfere with, restrain or coerce the exercise of employee rights under Section 7 of the Act. Proffering such agreements, therefore, is itself unlawful, regardless of the presence or absence of additional unlawful conduct by the employer and/or the circumstances under which the agreement was presented to the employee. The overruled decisions had focused, among other things, on whether the agreement was voluntary; whether it pertained exclusively to post-employment activities and, thus, had no impact on terms and conditions of employment; and whether there were allegations that the employees to whom the agreement was presented had been unlawfully discharged or that the agreement was proffered coercively.

To the McLaren majority, the proper test is simply whether the severance agreement has unlawful terms that have a reasonable tendency to interfere with, restrain or coerce employees in the exercise of their Section 7 rights. If so, the proffer of such agreement to employees is unlawful. In making this determination, the Board "will examine the language of the agreement, including whether any relinquishment of Section 7 rights is narrowly tailored." No showing of animus, other unlawful practices or actual coercion is required.

Applying this test, the Board found that McLaren's broad confidentiality and non-disparagement provisions were unlawful and that presenting the agreement containing those provisions to employees necessarily was also unlawful, regardless of whether the employee accepted the agreement. As the remedy for this violation, the Board ordered McLaren to cease and desist from presenting employees with agreements containing the unlawfully overbroad confidentiality and non-disparagement provisions and to post at the hospital for 60 days and otherwise distribute to employees notice of its unfair labor practices.

Legal Bases for the McLaren Decision

The McLaren decision is grounded in Section 7 of the NLRA. The Board majority in McLaren identified several of the Section 7 rights implicated by the hospital's broad confidentiality and non-disparagement provisions:

1. To engage in protected concerted activity, including discussing terms and conditions of employment with coworkers, and attempting to improve terms and conditions of employment through channels outside the immediate employee-employer relationship, such as administrative, judicial, legislative, and political forums, newspapers, the media, social media, customers and the public;
2. To file unfair labor practice charges with the NLRB;
3. To assist other employees in filing charges; and
4. To assist in the Board's investigative process.

McLaren's confidentiality provision improperly prohibited the subject employee from disclosing the existence and terms of the agreement "to any third person" (emphasis supplied by the Board). According to the McLaren majority, this proscription would reasonably tend to coerce the employee from filing an unfair labor practice charge or assisting a Board investigation into the hospital's use of the severance agreement. It also improperly prohibited the subject employee from discussing the terms of the severance agreement with his union representatives and with his former coworkers who could find themselves in a similar predicament. As such, it also impaired the rights of the employee's former coworkers to call upon him for support in similar circumstances.

The non-disparagement provision in McLaren's severance agreement improperly prohibited the subject employee from making negative or potentially harmful or disparaging statements to his former coworkers and the general public not only about McLaren, but also its parents, its affiliates and their respective officers, directors, employees, agents and representatives. This would include, for example, a statement that McLaren proffered a severance agreement with unlawful provisions and about any other labor issue, dispute or terms or condition of employment with McLaren. According to the McLaren majority, these provisions and the related fear of violating the agreement would have a tendency to chill the employee's efforts to assist their coworkers, including in connection with the Board's investigation and litigation of unfair labor practices with regard to any matter arising under the NLRA at any time in the future.

The McLaren majority also appears to have put to bed any possible defense based on the fact that the individual was no longer employed by the employer at the time the severance agreement with the unlawfully broad confidentiality and non-disparagement provisions was presented to the employee. It specifically noted both that Section 7 rights "do not depend on the existence of an employment relationship between the employee and the employer" and that "the Board has repeatedly affirmed that such rights extend to former employees."

When Are Confidentiality and Non-Disparagement Provisions Sufficiently "Narrowly Tailored" to Pass Muster Under the McLaren Decision?

The McLaren majority held that severance agreements requiring the forfeiture of Section 7 rights – whether accepted or merely proffered – are unlawful "unless narrowly tailored." Unfortunately, the Board declined to define the meaning of a "narrowly tailored" forfeiture, stating that it was not called on to do so in the case before it. It noted, though, that prior decisions had approved severance agreements with releases waiving only the signing employee's right to pursue employment claims and only as to claims arising as of the date of the agreement. Other guidance will need to be provided in future cases applying and interpreting McLaren. But we also can look to other statements in McLaren and other approaches that may find support in other Board decisions addressing the same or similar issues.

For example, the McLaren Board observed that one of the flaws in the hospital's non-disparagement provision was that it was not "cabin[ed] … to its well-established definition [of "disparagement"] under NLRB and Supreme Court precedent pursuant to which "employee critique of employer policy … is subject only to the requirement that employees' communications not be so 'disloyal, reckless or maliciously untrue to lose the Act's protection.'" To lose the Act's protection as an act of disloyalty, an employee's criticism of an employer "must evidence a malicious motive" or be "maliciously untrue, i.e., … made with knowledge of their falsity or with reckless disregard for their truth or falsity." Employee criticism also is disloyal and unprotected under the Act when it relates to an employer's products, services or customers and not to wages, hours, terms of conditions of employment, or labor disputes or issues. In other circumstances, and with varying degrees of success, the Board also has recognized the use of disclaimers that carve out statutorily protected rights from the scope of the alleged unlawful restrictions on Section 7 rights as a way of avoiding liability under the Act.

Suggestions for Employers

At a minimum, employers should analyze their severance, separation, settlement and other agreements containing confidentiality and non-disparagement provisions in light of the new test set forth in McLaren. This decision will remain the law, at least until another change in Administration and appointment of a Republican-controlled Board.

First, agreements with managers and supervisors (as narrowly defined in the Act) generally are not subject to attack under McLaren as they do not have Section 7 rights under the NLRA. But confidentiality and non-disparagement provisions in agreements with managers and supervisors that are so broad as to prohibit them from aiding or assisting in the Board's processes could be unlawful and interfere with the rights of NLRA-covered employees seeking their assistance in unfair labor practice proceedings or investigations. Managers and supervisors also have limited protection under the NLRA in that they cannot be subjected to discrimination or retaliation for giving testimony that is adverse to the employer's interest, either at an NLRB proceeding or during the processing of an employee grievance, or for refusing to commit unfair labor practices.

Second, employers should consider narrowly tailoring any agreements containing confidentiality and non-disparagement provisions to carve-out activities protected by Section 7 of the NLRA, such as discussing terms and conditions of employment with coworkers and third parties, filing unfair labor practices, assisting other employees in filing charges and assisting in the Board's investigative process. As we have learned in other contexts under the NLRA, these carve-outs or disclaimers need to be very specific, comprehensive and prominently displayed in order for the Board to view them as effective. And the current Board likely will try to find holes in any such provisions, which are designed to save agreements with overly broad confidentiality and non-disparagement provisions that have a potential chilling effect on employees' Section 7 rights.

Third, employers should consider restricting non-disparagement provisions to the types of disloyal statement typically recognized by the Board as unprotected. This includes maliciously false statements and attacks on the employer's products, services or customers.

Fourth, there is Board precedent, in the context of NLRB-approved settlement agreements, permitting confidentiality agreements that broadly prohibit the disclosure of the financial or monetary terms of the agreement. Severance agreements with confidentiality provisions limited to such terms should pass muster under McLaren.

Fifth, employers should include severability provisions in their severance and other agreements to help ensure that a finding that certain provisions of the agreement are unlawful (i.e., the confidentiality and non-disparagement provisions) cannot be used as a basis for striking down other provisions, such as the general waiver and release of claims.

Sixth, there is a six-month statute of limitations for filing unfair labor practice charges under the NLRA. Therefore, any agreement with provisions unlawful under McLaren that was entered into more than six months ago likely cannot provide the basis for a timely unfair labor practice charge. Of course, any attempt to enforce an unlawful provision would start the six-month limitation period for that action.

Finally, employers must be sure to provide notice to the union, and satisfy their statutory decision and effects bargaining obligations, when presenting severance agreements to union-represented employees.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.