Severance agreements can’t include non-disparagement, confidentiality clauses

The National Labor Relations Board (NLRB) recently ruled that companies can no longer offer severance agreements that include non-disparagement and confidentiality clauses.

“Employers intending to lay off workers should consult with competent employment counsel to review their severance agreements ASAP,” Sarah Sepasi, managing attorney at Los Angeles-based law firm Sepasi Legal, P.C., told HRD.

“Overly broad confidentiality and non-disparagement clauses must be revised to remove any language that could preclude an employee from assisting coworkers with workplace issues concerning their employer. Although the implications of this ruling remain to be seen, there’s certainly a shift in power dynamics at the severance negotiation table. The ‘silence’ employers achieved from entering severance agreements prior to this ruling may quickly become a thing of the past.”

Will severance agreements cease to exist?

The NLRB ruling could go so far as to discourage some companies from offering severance packages altogether, according to Michael Brewer, managing partner of international law firm Baker McKenzie's California offices in San Francisco, Palo Alto and Los Angeles.

“A lot of times, confidentiality is the peace the employer wants to buy,” Brewer, chair of the firm’s global employment and compensation practice, told HRD. “I can picture a CEO telling the HR director that if we’re offering severance, it’s going to be confidential. But now, if it’s at odds with this NLRB ruling, we’re not going to take that chance, so we’re just not going to offer any severance.”

At the same time, Brewer says, non-union employers who really value non-disparagement and confidentiality clauses may take their chances.

“The odds of a non-union employer being hit with an unfair labor practice charge aren’t nearly as high as they would be for a unionized workplace,” Brewer says. “So some employers may take a wait-and-see approach to see if the decision gets challenged, and to see if there’s any clarification on the scope of the ruling.”

For example, the NLRB ruling alluded to the possibility that severance agreements can include disclaimers that allow for non-disparagement and confidentiality provisions. “A disclaimer could say we’ll have these in the agreement, and at the same time, beef up the idea that employees aren’t waiving their Section 7 rights,” Brewer says. “I expect we’ll get more guidance on what an acceptable carve out may look like.”

NLRB returns to ‘longstanding precedent’

Here’s how the ruling came about: McLaren Macomb Hospital in Michigan furloughed unionized workers during the COVID-19 pandemic. Workers filed unfair labor practice charges after their severance agreements included non-disparagement and confidentiality provisions.

In another shift from the Trump administration, the NLRB under the Biden administration has reversed previous decisions in Baylor University Medical Center and IGT d/b/a International Game Technology to return to “longstanding precedent” that employers can’t offer severance agreements that require employees to broadly waive their rights under the National Labor Relations Act (NLRA). Under the NLRA, supervisors and managers are excluded from the ruling.

“Where an agreement unlawfully conditions receipt of severance benefits on the forfeiture of statutory rights, the mere proffer of the agreement itself violates the Act, because it has a reasonable tendency to interfere with or restrain the prospective exercise of Section 7 rights, both by the separating employee and those who remain employed,” the NLRB said in the ruling.

Non-compete clauses are also in the Biden administration’s crosshairs, as the Federal Trade Commission has proposed banning them from severance and employment agreements.

California targets non-disparagement, confidentiality clauses

Meanwhile, in California, non-disparagement clauses have already been under attack and increasingly restricted, Brewer says.

The Silenced No More Act, which went into effect on Jan. 1, 2022, restricts the use of confidentiality and non-disparagement provisions in employment agreements, including settlement and severance agreements, related to all claims of discrimination, harassment and retaliation.

Non-disparagement provisions are still permitted, but only if they contain a disclaimer with the following or substantially similar language: “Nothing in this agreement prevents you from discussing or disclosing information about unlawful acts in the workplace such as harassment or discrimination or any other conduct that you have reason to believe is unlawful.”

Additionally, the law requires employers offering severance agreements to notify the employee that they have a right to consult an attorney regarding the agreement, providing the employee with a period of no less than five business days in which to do so. However, employers are still permitted to include confidentiality clauses regarding the amount of a settlement.