Time to Revamp Your Employee Severance and Release Agreements!

On February 21, 2023, the National Labor Relations Board (“NLRB”) issued a decision that greatly alters the landscape relating to settlement agreements between Employers and Employees. In McLaren Macomb and Local 40 RN Staff Council, Office and Professional Employees, International Union (OPEIU), AFL-CIO, Case 07-CA-26304, the NLRB ruled that two common terms of virtually all private settlement agreements between employers and employees violate the National Labor Relations Act (the “Act”). Specifically, the NLRB ruled that confidentiality and non-disparagement terms of a settlement agreement between McLaren Macomb Hospital and 11 of its former employees violated Section 8(a)(1) of the Act which makes it an unfair labor practice for an employer “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in Section 7” of the Act. Section 7 of the Act guarantees employees “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection,” as well as the right “to refrain from any or all such activities.”

The settlement agreement at issue contained very standard settlement terms that prohibited the settling employees from disclosing the terms of the settlement to any third person, other than their spouse, or as necessary to professional advisors for the purposes of obtaining legal counsel or tax advice and also prohibited the settling employees from making statements to the Employer’s employees or to the general public which could disparage or harm the image of the Employer, its parent and affiliated entities and their officers, directors, employees, agents and representatives. Also, as is standard practice, the agreement provided for actual damages and attorney fees for violation of the non-disparagement and confidentiality terms. The Board ruled that the mere inclusion of the non-disparagement and confidentiality terms in a settlement agreement has a “reasonable tendency to interfere with, restrain, or coerce employees in the exercise of the Section 7 rights” and is therefore unlawful even though given in exchange for the money payable by virtue of the settlement. While not directly involved in the settlement agreement at issue, the NLRB also made it clear that typical non-cooperation clauses under which the settling employee agrees to refrain from assisting others in pursuit of claims against the employer are likewise off limits as a violation of Section 7 rights.

In reaching its decision the NLRB looked at not only the impact on the individual employee’s rights but the impact on others, including the NLRB, which would find unfair labor practice charge investigations hampered by the non-disparagement and confidentiality terms. As a remedy for the inclusion of the unlawful terms, the NLRB ordered the reinstatement of the 11 employees and awarded damages for lost wages and benefits.

An Exception to the Ruling

While the NLRB ruled that a standard non-disparagement clause violates Section 7 of the Act it did reaffirm that a settling employee does not have the right to make statements that are “so disloyal, reckless or maliciously untrue as to lose the Act’s protection.” In that regard, the NLRB quoted earlier rulings noting “to lose the Act’s protection as an act of disloyalty, an employee’s public criticism of an employer must evidence a malicious motive or be maliciously untrue, i.e., if they are made with knowledge of their falsity or with reckless disregard for their truth or falsity.”

How Your Settlement Agreements Must Change

Since the ruling was just issued it is unknown whether it will be appealed and, if so, whether it will be affirmed. For the time being it represents the current state of the law. Since the Act applies to virtually all employers and employees in the private sector, regardless of whether the employee is represented by a union, many employers are going to confront the issue of whether settlement makes sense if the confidentiality and non-disparagement terms cannot be included in settlement agreements. After all, a significant reason many cases settle is to avoid the time and expense of litigation while at the same time not having to be concerned that the settlement will be used as a springboard for other employees to make claims. Furthermore, the confidentiality of settlements is key to many employers who wish to avoid any public inference of guilt associated with the payment. A modest payment to avoid significant litigation costs to defend a questionable claim may simply not be worth it if the settlement is publicized as an acknowledgment that the employer violated the law in some fashion. So, some cases that would have settled with these terms included may now instead proceed to trial. Whether that is a few or a lot will sort itself out over time.

Unless the ruling in McLaren is reversed, Employers that still want to settle claims with their employees need to review their standard settlement agreements and remove the confidentiality, non-disparagement and non-cooperation terms or face the prospect of settling a claim of questionable value only to then be hit with an unfair labor practice charge and a potential order to reinstate the employee and pay damages.

Employers that want to limit disparagement and publication of the settlement may still be able to achieve their goals, albeit in a limited fashion. With respect to non-disparagement, as noted above, a provision can be included that prohibits an employee from making any statement regarding the company, its principals, management, etc. with knowledge of its falsity or with reckless disregard for its truth or falsity.

Attempting to preserve confidentiality will be more difficult. Employers that want to try it are certainly running the risk of an unfair labor practice charge and the potential of having to reinstate the employee and pay damages. That said, given the NLRB’s emphasis in its McLaren opinion on the need for disclosure to allow it to do its job and to allow other employees to be aware of and to exercise their own rights including informing their union and other employees of the alleged unlawful acts of the employer and the settlement of claims relating to those acts,  it may be that some limitations on disclosure can be implemented that contains broad carve-outs for such disclosures. So, instead of agreeing not to disclose the agreement to anyone other than a spouse or professionals the agreement could provide there shall be no disclosure to any disinterested third party other than a spouse, professionals, other similarly situated employees who ask for assistance or information, any labor union or any governmental agency or Board. Those that want to take the risk of using such language should certainly not couple it with any form of penalty for a violation as the NLRB will likely take the position that putting the employee at risk for getting the disclosure wrong has the coercive effect of limiting the exercise of the employee’s Section 7 rights. Given the NLRB’s strong condemnation of confidentiality agreements great care must be taken in drafting such an agreement and even then it may be a fool’s errand.

Many employers have a “heritage” settlement agreement that they use over and over again. This new ruling by the NLRB makes it clear that these agreements need immediate modification to eliminate terms that are no longer legal. Employers that wish to modify existing language to still seek protection against disparagement or disclosure of the agreement must use extreme caution in doing so but may still find themselves in legal peril. The Employment Team at Rhoades McKee is ready to assist employers who need to revamp their old agreements to meet current legal standards.

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