February 23, 2023

NLRB Rules Non-Disparagement Provisions Are Unlawful in Severance Agreements

In recent years, the California Legislature has limited the use of non-disparagement and confidentiality provisions in severance agreements. For example, non-disparagement provisions in California must now include a disclaimer clarifying that employees are still permitted to discuss allegedly unlawful conduct they experienced in the workplace and confidentiality provisions are prohibited in cases where an employee alleges discrimination or harassment based on sex.

While the California legislature has stopped short of declaring an all-out ban of non-disparagement and confidentiality provisions, the National Labor Relations Board’s (NLRB) recent decision in McLaren Macomb, 372 NLRB No. 58 (Feb. 21, 2023), erects yet another barrier to employer’s use of non-disparagement and confidentiality provisions. In McLaren, the Board held that employers violate the National Labor Relations Act (the “Act”) when they include provisions within a severance agreement that (1) prevent employees from making statements that could disparage the employer, and (2) disclose the terms of the agreement. This decision is subject to appeal, so the NLRB’s decision is likely not the last word on this issue.

The NLRB’s Decision

In McLaren, a hospital employer laid off a number of employees for COVID-related reasons. The severance agreements the hospital presented to the laid off employees prohibited them from disparaging the hospital and discussing the terms of the agreement. One laid off employee challenged the enforceability of those provisions before the NLRB.

The NLRB found that the non-disparagement and confidentiality provisions violated Section 7 of the Act and were not enforceable. In addition, it held that the mere “proffer of a severance agreement” containing such provisions – regardless of whether the employee accepts the agreement – is an independent unfair labor practice in violation of Section 7 of the Act. Accordingly, an employee could file a unfair labor practices charge against an employer if the employer simply offered a severance agreement to an employee that contained a non-disparagement or confidentiality provision.

The remedy for this violation is that the unlawful provisions would not be enforced. Notably, the decision would apply to severance agreements offered to most private sector employees regardless of whether they work in a unionized workforce, although it would have no effect on managers, most supervisors, and some agricultural workers.

What Employers Should Do Next

The Board’s decision in McLaren is not all bad news. Much of the Board’s concern with the non-disparagement and confidentiality provisions at issue in McLaren focused on their breadth, with the Board concluding that the provisions placed too broad of a restriction on protected conduct under the Act. This leaves room for careful and creative drafting of provisions that are sensitive to the Board’s concerns. For example, with respect to the non-disparagement provision, the Board took issue with the scope, the lack of any temporal component, and the failure to define “disparagement.” As such, a non-disparagement term could be drafted in a manner that addresses these concerns. It is possible, for example, that the NLRB would reach a different result if “disparagement” was defined as defamatory, slanderous, or otherwise unlawful statements.

Also, it bears noting that this decision is subject to review by a federal Court of Appeals and potentially the U.S. Supreme Court. It would not be at all surprising if this decision was reversed at some stage of the appellate process.

Ultimately, how an employer decides to proceed following McLaren will require an assessment of a number of factors, including the employer’s goals, the facts surrounding the employer’s offer of the severance agreement, and an employer’s risk tolerance. Although somewhat extreme, an employer could opt to remove non-disparagement and confidentiality provisions in their agreements altogether in light of the California’s Legislature’s and the NLRB’s gutting of their relevant strength.

What is clear is that there are no “cookie cutter” answers to how employers should proceed in the wake of McLaren. If you’re considering offering a severance agreement with non-disparagement and confidentiality provisions, we strongly recommend that you carefully consider the reasons why you want them and determine the most optimal way to do so given the legal uncertainty that this decision presents.

For more information, contact Michelle Freeman, mfreeman@hkemploymentlaw.com, (415)-835-9003 or Dan Handman, dhandman@hkemploymentlaw.com, (310)-255-0705.