a balancing scale showing a variety of terms affecting severance agreements based on the new regulation on severance agreements

New Regulation on Severance Agreements

The NLRB recently altered what can and cannot be included in severance agreements. Below we explain these new regulations so that you can determine whether your severance agreement may be violating the law.

At Gardner Employment Law, we have decades of experience dealing with severance agreements. If you need help understanding your severance agreement or negotiating a better exit package, reach out to us today. 

What is a Severance Agreement? 

A severance agreement is a contract offered to departing employees granting them severance pay and other potential benefits in exchange for releasing all claims and all potential claims that the departing employee may have against the employer. Severance agreements are not required to be offered to departing employees, unless provided by contract or an ERISA plan. Each severance agreement is negotiated individually.

Employers usually add other sections to a severance agreement, such as confidentiality clauses, non-disparagement provisions, non-disclosure agreements, and a variety of other promises by the employee. The departing employee should consult with an experienced attorney before signing any severance agreement because of promises that the employer may insert in the contract. We covered severance agreements in-depth in our blog articles entitled “Severance Agreements: Read Before You Sign” and “Is There a Right to Pay Severance”.

What Happened in the McLaren Macomb Case?

The NLRB (National Labor Relations Board) decision in the case McLaren Macomb, Case 07–CA– 263041 (Feb. 21, 2023), returned to a longstanding precedent holding that employers may not offer employees severance agreements that require the employees who sign such an agreement to broadly waive their rights under the National Labor Relations Act. In McLaren Macomb, the severance agreement at issue prohibited the employees from making statements that could disparage their employer and from disclosing the terms of the severance agreement itself. 

The case involved 11 Michigan Hospital employees who were furloughed due to the COVID-19 pandemic. When the hospital decided to permanently furlough and lay off these 11 employees, the hospital offered each of them severance pay in exchange for signing a severance agreement which contained not only a release of claims but other promises waiving legal rights. All 11 employees signed this agreement in order to receive the severance pay. However, the severance agreements contained a confidentiality clause and a non-disparagement provision. It was these two clauses where the NLRB focused its analysis.

The confidentiality clause was found to impermissibly violate the workers’ rights because it broadly restricted them from talking to third parties about the severance agreement. The NLRB explained that this clause could prevent the employees from filing unfair labor practice charges or assist the Board with investigations into rights protected by Section 7. Further, the confidentiality clause could be read to prohibit the employees from discussing the terms and conditions of their employment, which is a protected right for union as well as non-union workers under Section 7 of the Act. The NLRB held that the confidentiality clause violated the Act because of its overall chilling effect on employees who would be reluctant to assert their legal rights. 

The NLRB interpreted the non-disparagement provision with similar harsh scrutiny. The broad language of the provision meant that the 11 employees could not make any negative comments about their former employer even if true. The Board held that employees have a right under Section 7 to speak negatively about their employer. Since the provision barred the exercise of this right, the provision was struck down by the Board. Once again, the NLRB saw a general chilling effect that the provision would place on employees’ rights to discuss the terms and conditions that might be negative.

Also, the NLRB rejected the employer’s claimed defense that it did not seek to enforce these provisions in the severance agreement. The Board ruled that by simply “proffering” the overbroad language within the severance agreements was enough to find an unlawful labor practice. While these two provisions were singled out, the new standard is much broader. The NLRB made it clear that if any terms in a severance agreement tend to interfere with a workers organizational rights, the agreement would be unlawful.  

Since the McLaren Macomb decision was issued, many scholars now are wondering just how far the ruling will extend. Will all severance agreements be affected? What can employers legally include in their severance agreements? The NLRB’s general counsel released a memorandum after the decision which answer some of these questions. It will require future rulings to clarify the nuances of the NLRB’s monumental decision.

What Is the NLRB?

The NLRB is the board of a federal agency responsible for protecting the rights of both union and non-union employees in the workplace. A worker does not have to be a union member to be protected by the National Labor Relations Act, which was passed in 1936. The NLRB is responsible for ensuring compliance by employers with many laws and regulations that affect their employees.

What Happens to Severance Agreements Now?

Generally, this decision is seen as a victory for employees, although one attorney interviewed by CNN believes that this decision may actually result in a reduction of severance payments for employees. Despite what many click-bait titles may say about the NLRB’s decision in McLaren Macomb, severance agreements are not banned nor are they illegal. Some severance agreements may be unenforceable if they violate the new regulations. Employer must revise those agreements to comport with the NLRB’s pronouncements. More importantly, severance agreements going forward must be drafted differently.

Below is a table answering some common questions regarding these changes brought about by the NLRB’s McLaren Macomb decision.

Question Answer
Is this decision retroactive? Yes. These changes apply to all severance agreements, even those signed before this decision was rendered. 
What happens to the rest of my severance agreement if one part is in violation?  Standard board practice is to void unlawful provisions, but keep the remainder. 
What happens to confidentiality clauses? Clauses must be narrowly tailored to only restrict the dissemination of proprietary or trade secret information. 
What about non-disparagement provisions? These must be limited and can only cover statements which would be considered defamation. 
What if I include a general savings clause or a disclaimer?  These will not necessarily cure overbroad provisions. 
Does this decision affect statutory supervisors? It was suggested that in certain cases of retaliation, this decision may extend to statutory supervisors. 
Does this decision only impact severance agreements?  No. All employer communications are subject to scrutiny if they interfere with or coerce employees in the exercise of their rights. 

When to Consult an Attorney

Given how drastic and wide ranging these changes are, employers and employees must be on alert. If you are an employee, the severance agreement you signed may no longer be enforceable. If you are an employer, you need to carefully examine past agreements you offered and make sure they are still valid. If not, you should revise the wording if the workers are still employed. Going forward, employers must make sure that any employment agreements you offer are in line with these new regulations.

If you would like to know more about the new regulations on severance agreements or would like to discuss your severance agreement specifically, get in touch with us today.

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