‘Narrowly Tailor’ Your Severance Provisions

As we wrote about earlier, on February 21, 2023, the National Labor Relations Board (NLRB) dropped a bombshell with the McLaren Macomb decision, which held that employers who offered severance agreements containing broad non-disparagement and confidentiality provisions might be violating the National Labor Relations Act (NLRA). In making its ruling, the Board said that offering employees a severance agreement with such broad provisions in effect requires them to give up their rights under Section 7 of the NLRA and therefore violates Section 8(a)(1) of the NLRA.

Employers, labor organizations, and employees — as well as human resource and legal professionals — had some immediate questions about the possible ramifications of the McLaren case. Are severance agreements now banned? Is the ruling retroactive? Is the entire agreement nullified if only one provision is overly broad? What does “overly broad” mean?

The volume of questions prompted the Board’s General Counsel, Jennifer Abruzzo, to issue a memo (GC Memo 23-05) to Regional Directors on March 22, 2023, to provide some guidance “in response to inquiries about the McLaren Macomb Decision.” While GC Memo 23-05 clarifies a few key questions, it ultimately reasserts what many assumed when the McLaren Macomb decision was first announced. In the opinion of the NLRB’s General Counsel, the broad confidentiality and non-disparagement provisions commonly found in many severance agreements are no longer permissible.

What has been clarified, at least according to the General Counsel?

Severance agreements are not banned. The Memo makes it very clear that severance agreements are not forbidden as long as they don’t contain broad language that limits an employee’s rights to engage with their coworkers or former coworkers “to improve their lot as employees.”

Confidentiality obligation must be defined. The confidentiality provisions in a severance agreement must be “narrowly tailored” to protect only an organization’s proprietary information and trade secrets.

Non-disparagement must be limited. A narrowly-tailored, justified non-disparagement provision is limited to “employee statements about the employer that meet the definition of defamation as being maliciously untrue, such that they are made with knowledge of their falsity may be found lawful.”

The McLaren Macomb decision is retroactive. Ambruzzo says that agreements made before February 2023 may violate the NLRA. While noting that the six-month statute of limitations — Section 10(b) of the NLRA — may apply, she also says that “enforcing a previously entered severance agreement with unlawful provisions” would constitute a new violation.

Savings clauses may not be enough. The Memo says that although “savings clauses and disclaimer language may help resolve ambiguity over vague terms, they would not necessarily cure overbroad provisions.”

The violation exists even if the employer hasn’t enforced it. A severance agreement that is overly broad on its face violates the NLRA. It doesn’t matter if the employer never intends to enforce the overly broad provisions.

All is not lost. Entire agreements are not necessarily void — only those provision(s) found to be unnecessarily broad. Potentially overly broad and therefore problematic language could involve time — such as “at all times hereafter,” or using words without defining them — like “disparage” and “harm,” or describing the employer too broadly — like “our parent company and all its affiliates and all of their officers, directors, employees, agents, and representatives.”

Much remains unclear

The Memorandum has a rather provocative conclusion. In the final paragraphs, Abruzzo lists other standard severance agreement provisions that she believes “might interfere” with employees’ exercise of Section 7 rights. These provisions include non-compete clauses, no solicitation clauses, no-poaching clauses, and other “broad liability releases and covenants not to sue that may go beyond the employer and/or employment claims, and cooperation agreements pertaining to investigations or proceedings that could limit an employee’s Section 7 rights.”

While the Memo asserts that non-disparagement and confidentiality clauses may still be okay if they are “narrowly tailored” enough, there is no guidance about what that means. As is often the case with changes in the law, the answer to what “narrowly tailored” means in this context will be clarified and resolved over time by the NLRB and the courts.

Although managers and supervisors are generally not covered by the NLRA, the Memo points out that an organization may violate the Act by retaliating against a supervisor who refuses to commit an unfair labor practice on behalf of the employer. The Memo describes several other situations where an overly broad severance agreement with a supervisor could violate the NLRA.

What penalties could employers face? The Memo doesn’t say.

We expect to see some significant clarifying activity at the NLRB and in the courts about this issue in the months ahead.

Next steps for employers

Employers should be cautious about drafting any new severance agreement in this environment and can assume that all their severance agreement “templates” must be reviewed and perhaps revised. Reviewing prior agreements is an excellent way to get some perspective on the scope of potential NLRA violations and the possible new restrictions on enforcing existing agreements.

Also, the General Counsel of the NLRB strongly recommends that organizations “notify its former employees that the overbroad provisions in their severance agreements no longer applied.”  Whether complying with this recommendation is advisable and worthwhile for a particular employer probably depends on that employer’s history of using severance agreements, and the employer’s risk tolerance.

If you need assistance evaluating, restructuring, or rewriting your severance agreement policies or templates to address the concerns identified by the NLRB, don’t hesitate to contact Orr & Reno for assistance.

About the Authors: Steven L. Winer and Elizabeth C. Vélez

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