NLRB BANS CONFIDENTIALITY & NONDISPARAGMENT PROVISIONS IN SEVERANCE AGREEMENTS

NLRB BANS CONFIDENTIALITY & NONDISPARAGMENT PROVISIONS IN SEVERANCE AGREEMENTS

In Peak v. United States, Justice William O. Douglas, in resurrecting the claim of a mother for the proceeds of her son’s National Service insurance policy (the son had disappeared from his army unit during World War II), wrote that, “common sense often makes good law.”  I suppose the corollary to the Justice’s maxim might be that nonsense makes bad law.  Well, nonsense is on parade in the February 24, 2023, opinion of the National Labor Relations Board (“NLRB” or the “Board”) in McLaren Macomb, 372 NLRB No. 58.  In two recent decisions, Baylor University Medical Center, 369 NLRB No. 43 (2020) and IGT d/b/a International Game Technology, 370 NLRB No. 50 (2020), the NLRB broadly approved the nearly universal practice of using confidentiality and nondisparagement provisions in severance agreements to shield the terms and conditions of separation and protect employers’ legitimate proprietary and economic interests.  No more.  In a paroxysm of silliness, the NLRB threw common sense to the wind, overturning the Board’s Baylor University Medical Center and International Game Technology decisions and, in the process, making illegal accepted business, risk-management practices that have been relied on by employers for decades.

McLaren involved a unionized teaching hospital in Michigan permanently furloughing 11 union employees and presenting each with a severance agreement and general release.  The agreement included the following provisions:

                   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.

(Emphasis added.)  Note that neither of these clauses contained a disclaimer preserving an employee’s rights to engage in concerted activities for the purpose of mutual aid or protection, including the right to form, join, or assist labor organizations.  Section 7 of the National Labor Relations Act (“NLRA”) provides employees with the right to communicate with each other about their terms and conditions of employment.  Consequently, in McLaren the NLRB did not address whether including such disclaimers might save severance agreements from illegality.  Employers have long incorporated such disclaimers to notify employees of their Section 7 rights, making clear that such rights are intact, while preserving other essential contractual provisions, like confidentiality and nondisparagement.  These disclaimers are not foolproof (especially after McLaren).  However, they are still a widely used risk-mitigation tactic which we expect to continue.  

Even though similar contractual provisions have often been used by employers and discussed with favor in prior NLRB cases, the Board found them unlawful as infringing on Section 7 rights.  Sounding like Captain Louis Renault from Casablanca, the NLRB was “shocked, shocked!” in suddenly discovering 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.”  Thus, the Board ordered the hospial in McLaren to “cease and desist” from presenting employees with severance agreements including the emphasized passages.  Still more devastatingly, the NLRB also held that merely offering employees severance agreements containing the above provisions violated the NLRA.  This is so regardless of whether the employees signed the agreements, or the employer tried to enforce the confidentiality and nondisparagment provisions.

Although McLaren only directly adjudicated the rights and obligations of 11 employees and single employer, the decision may have implications reaching far beyond its facts.  McLaren calls into question the legality of employers’ efforts at keeping confidential the terms of their severance agreements and prohibiting former staff from disclosing information, knowledge, or materials of a confidential, privileged, or proprietary nature which they learned during their tenures.

THE SKINNY:  The McLaren decision is broad.  It applies to both unionized and non-union employees.  It seems to prohibit virtually all confidentiality provisions preventing employees from disclosing the nature and terms of severance and other agreements (even in settlements of disputed claims).

Employers should be reviewing nondisparagement and confidentiality terms included in any documents they are proffering to employees or job applicants, regardless of whether the document is a severance agreement.  This includes other contracts that may be incorporated by reference into such agreements, like proprietary information, intellectual property, work-for-hire and invention agreements.

Despite the overall tenor of McLaren, a few graces notes can be heard (to the ears of employers, at least).  First, the decision only covers staff who are defined as “employees” under the NLRA.  As such, it doesn’t apply to executives, managers, supervisors, or independent contractors.  Also, agreements containing carefully drafted provisions prohibiting the disclosure of trade secrets, proprietary, and other confidential business information learned or discovered during the course of employment should pass muster.  Further, the defensibility of confidentiality and nondisparagement clauses likely will be increased by incorporating a disclaimer stating that these provisos will not affect an employee’s Section 7 rights under the NLRA.  These disclaimers should be located within the provision(s) at issue themselves and explain in detail the employee’s Section 7 rights.  Finally, including a sunset provision will increase the odds of these terms being upheld.

But then again, these are all commonsense suggestions.  Only the ghost of Justice Douglas and his cohorts know whether they’ll be acceptable to the folks sitting atop their perches at the NLRB.

This article is intended to be used for informational purposes only.  Legal advice is neither implied by the author nor should be inferred by the reader.  If you have specific legal questions, you should consult with your attorney.

Jeffrey Sculley, who may be reached at jsculley@cmrlaw.com, is an attorney and counselor at law focusing his practice on representing commercial and residential landlords; providing backroom human resource and employment support to businesses and not-for-profits; appealing adverse trial-court and administrative decisions; counseling clients on logo and brand development and trademark protection; and representing clients in all types of administrative, regulatory and compliance matters, before governmental agencies and administrative hearing officers and law judges.