Opinion: Prepare for changes in severance agreements

Paul Satterwhite

In what is likely to be seen as a landmark decision, the National Labor Relations Board recently issued a decision that immediately changes the legal landscape for severance agreements for certain employees.

The NLRB overturned two former President Donald Trump-era cases collectively known as McLaren Macomb and held that severance agreements offered to nonsupervisory employees are unlawful if they contain broad nondisparagement or confidentiality provisions that restrict a worker’s (or former worker’s) Section 7 rights to discuss the terms and conditions of their employment or to speak negatively regarding their former employer. Under McLaren, the mere offer of a severance agreement including a broad confidentiality or nondisparagement provision can now be found to be a violation of the National Labor Relations Act.

The McLaren decision will significantly impact most employers’ standard practice of including broad confidentiality and nondisparagement provisions in severance agreements. Employers should familiarize themselves with the NLRB’s new standard and work with legal counsel to determine necessary modifications to their severance agreements and when the McLaren standard will apply.

How did we get here?
McLaren involved a unionized hospital in Michigan that offered a severance agreement to 11 bargaining unit employees. The severance agreement in question contained a relatively standard confidentiality provision that prohibited the employees from disclosing the terms of the severance agreement to third parties and a nondisparagement provision prohibiting statements that “could disparage or harm the image of” the employer and its related entities/employees.

The employees filed unfair labor practice charges against the hospital, asserting the prohibitions in the severance agreement were too broad and, as a result, unreasonably restricted their exercise of Section 7 rights to engage in concerted protected activity by discussing the terms and conditions of their employment with others. In finding for the employees, the NLRB reversed its recent decisions in a 2020 matter involving Baylor University Medical Center.

In the ruling, the NLRB said, “[B]road proscriptions on employee exercise of Section 7 rights have long been held unlawful because they purport to create an enforceable legal obligation to forfeit those rights. Proffers of such agreements to employee have also been held to be unlawfully coercive.”

In addition to making confidentiality and nondisparagement provisions essentially obsolete in agreements offered to workers covered by the labor relations act, McLaren also expands and extends Section 7 protections to employees’ discussions of their terms and conditions of employment with third parties not affiliated with the employer.

Who does McLaren impact?
This decision applies to both unionized and nonunionized private employers who are subject to the jurisdiction of the federal act. That means most U.S. private employers. However, the decision does not apply to many employees who are traditionally offered severance agreements, such as management-level employees, most supervisors, independent contractors and any other employees who are not covered by the act. These classes of employees do not have Section 7 rights.

Employers should have expected the NLRB to take this position or a similar position on the issue of employee speech and Section 7 rights. NLRB General Counsel Jennifer Abruzzo has been clear about her intention and goal for the NLRB to be much more aggressive in protecting Section 7 rights, including overturning multiple NLRB decisions that she believes eroded those rights. 

What’s next and takeaways
All eyes should be on the Stericycle (Nasdaq: SRCL) case that is pending before the NRLB. In January 2022, the NLRB took the unusual step in Stericycle of issuing a notice inviting parties and amici to submit briefs addressing whether the board should adopt a new legal standard to determine whether employer work rules violate Section 8(a)(1) of the act. If McLaren is any indication, the NLRB will likely issue a much more stringent standard for evaluating employers’ policies.

There are two key takeaways to the McLaren case:

1. Severance agreements should typically be handled on a case-by-case basis. This quick-change situation presented by McLaren gives employers the opportunity to revisit their severance agreements in coordination with experienced labor and employment counsel.
2. This is likely a precursor for bigger changes that are coming from the NLRB. Given recent trends, the standard the NLRB will apply to employers’ policies will change substantially in the near future.

Paul Satterwhite is a partner at Spencer Fane LLP and co-chair of the firm’s labor and employment practice group. He can be reached at psatterwhite@spencerfane.com.