U.S. Employers Need to Reconsider Use of Confidentiality and Nondisparagement Provisions in Light of New NLRB Decision
Employers frequently seek to include confidentiality and nondisparagement provisions in severance agreements provided to departing employees. Last week, the U.S. National Labor Relations Board (NLRB or Board) significantly altered the legal landscape governing such provisions, making it much more difficult for unionized and nonunionized employers alike to use them for nonsupervisory employees without running afoul of the National Labor Relations Act (NLRA). The decision is likely to be appealed, and we will issue updates as they become appropriate. In the interim, however, it is critically important for employers to understand the implications of the decision (see below) and to adjust their use of these provisions to limit their risk.
The case arose when a Michigan hospital permanently furloughed a group of employees and presented them with severance agreements containing, as relevant here, a confidentiality provision and a nondisparagement provision. These provisions read:
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.
NLRB’s Decision in McLaren Macomb, 372 NLRB No. 58 (Feb. 21, 2023)
Under prior precedent, to determine whether a severance agreement was lawful, the NLRB focused narrowly on whether the circumstances in which it was proffered were coercive. In McLaren Macomb, however, the Board changed the law and held that the Board must also consider whether the language of a severance agreement has a “reasonable tendency to interfere with, restrain, or coerce employees in the exercise of their Section 7 rights” or restrict “filing unfair labor practice charges with the Board, assisting other employees in doing so, or assisting the Board’s investigative process.” Section 7 of the NLRA protects employees’ right to engage in concerted activity for purposes of collective bargaining or other mutual aid or protection. This has long been held to include the right to discuss terms and conditions of employment with one another.
With those principles in mind, the Board deemed unlawful both the nondisparagement and confidentiality provisions of the hospital’s severance agreement. In the Board’s view, these provisions impermissibly restricted the employees from engaging in activities protected by the NLRA, such as filing unfair labor practice charges, cooperating with Board investigations, and raising complaints about working conditions. The Board also deemed their scope to be overbroad in other respects, such as the nondisparagement provision’s lack of a temporal limit and application beyond just the employer.
Scope of the Board’s Decision
Covered agreements. Though the McLaren Macomb decision addressed a severance agreement, its decision will likely apply to other types of agreements with departing employees, such as settlement agreements and separation agreements. It is also likely that the decision will apply to employment, restrictive covenant, and confidentiality agreements more generally.
Covered employees. Note that the NLRA’s protections — and the decision in McLaren Macomb — apply to both unionized and nonunionized employees. At the same time, the NLRA does not apply to managers, supervisors, or independent contractors; the decision, in other words, will affect agreements only with nonsupervisory employees.
Retroactivity. Though the decision does not explicitly state whether it will apply retroactively, it is best to assume that it will. As a note, the NLRA includes a short limitations period — six months — to file an unfair labor practice charge, so agreements executed more than six months ago will be difficult to challenge. However, as soon as an employer seeks to enforce an agreement with a problematic confidentiality or nondisparagement provision (even one executed years ago), the statute-of-limitations bar may fall away.
Implications for Employers
In the wake of the McLaren Macomb decision, employers across the country should think twice before including a broad confidentiality or nondisparagement provision in their agreements with nonsupervisory employees. Under this decision, the mere act of proffering an overbroad agreement may be held unlawful, even if the employer has never attempted to enforce a confidentiality or nondisparagement provision against a former employee. To the extent that an employer does not have significant worries that a departing employee will divulge confidential information or disparage the employer, it may be wise to consider omitting confidentiality and nondisparagement provisions from the severance agreement.
If such provisions must be included, it is important to consult with legal counsel and ensure that they are appropriately tailored to adhere to the Board’s ruling. For both confidentiality and nondisparagement provisions, disclaimers should be included indicating that the employee is not prohibited from participating in activities protected by Section 7 of the NLRA, such as filing unfair labor practice charges, assisting others who are filing such charges, and cooperating with the investigative process of the NLRB and other government agencies.
For nondisparagement clauses in particular, the Board in McLaren Macomb suggested including temporal restrictions as well as limiting the restriction to the actual employer only (and not affiliated entities or persons) and to statements that the Supreme Court has already found to be unprotected. Employers may also consider limiting the restriction to matters unrelated to the employee’s employment.
For confidentiality provisions, employers may also wish to consider narrow restrictions such as trade secrets and other proprietary information. Under McLaren Macomb, there will likely not be much room to protect the nature and terms of a settlement for employees subject to the Board’s jurisdiction.
To be sure, carveouts along these lines may take some of the teeth out of confidentiality and nondisparagement provisions. But the alternative is that a court may find a severance agreement violative of the NLRA if the carveouts are not included. When that occurs, a court may determine that the entire severance agreement — including any release of claims — is unenforceable. To mitigate this risk, it is advisable to include a strong severability clause that permits a court to delete any unlawful provision while leaving the rest of the agreement, including the release, in place. But there is never a guarantee that a court (or the Board) will be willing to follow a severability clause.
In the near future, the NLRB’s General Counsel is likely to provide some guidance delineating what lawful confidentiality and nondisparagement clauses look like. In the meantime, the Michigan hospital may choose to appeal the NLRB’s decision to the United States Court of Appeals for the Sixth Circuit. It is also possible that other parties will challenge the Board’s reasoning in future cases, and litigation on this issue before the Board is likely to continue.