The Legal Intelligencer - NLRB Decisions Have Employers Evaluating Future While Simultaneously Needing to Revisit the Past
Each year employers have to brace themselves for the latest onslaught of laws and regulations – both new and amended – that pertain to ensuring compliance with protections for their employees. As an employer, navigating the nuances of the ever-changing legal landscape of employee protections is probably one of the most stressful aspects of running a business, just after the daunting task of generating enough revenue to survive – and thrive. One segment of the law that most employers just may not be paying enough attention to (until now that is) is compliance with the National Labor Relations Act (“NLRA”). With just under 12% of all workers in the United States represented by a union, it is not uncommon for most employers to dissociate themselves from decisions by the National Labor Relations Board (“NLRB”). For those not familiar, the NLRA is designed to address the imbalance of power between employers and individual private sector employees by protecting their rights to organize into unions, engage in collective bargaining, and act collectively, such as striking. But the NLRA also prohibits several actions by employers, employees, or unions that are considered “unfair labor practices” – which, as you will read below, includes virtually all private sector employers regardless of whether they have unionized employees. In the first five months of 2023, the NLRB issued two decisions that had widespread impact relating to employees in the form of regulating terms contained in severance agreements and the enforceability of non-competition provisions. So similar to buyer beware, we now enter the time period of employer beware because these recent NLRB decisions will leave employers evaluating their future actions while simultaneously needing to revisit the terms and provisions of existing agreements.
Strict Confidentiality Provisions Considered Unfair Labor Practice
There is a strong case to make that there are benefits to parties on both sides when it comes to drafting certain provisions in severance and separation agreements. Employment lawyers representing employers or employees in drafting the terms of separation and/or severance agreements most likely have negotiated for the inclusion of or advocated for the exclusion of, certain common terms such as confidentiality, non-disparagement and non-solicitation. Whether you liked it or not, these terms were commonplace when it came to handling agreements relating to an employee’s departure. But now the NLRB has called into question whether it is unlawful for an employer to present these terms in a proposed severance agreement because, according to the NLRB, that alone impairs an employee’s rights under the NLRA and therefore is unlawful.
In McLaren Macomb and Local 40 RN Staff Council, Office and Professional Employees, International Union (“McLaren Macomb”), the NLRB concluded that the confidentiality and non-disclosure provisions in a proffered severance agreement were improper and that the mere proffering of the agreement containing such broad provisions was also unlawful as it was reasonably likely to “interfere with, restrain, or coerce the exercise of employee rights under Section 7” of the NLRA. The NLRB adheres to that position even if it is the employee who sought the confidentiality or other protections of a restrictive covenant. Further, from the NLRB’s perspective, the ruling is not limited to disputes arising under the NLRA. On April 12, 2023, the NLRB filed an application for enforcement with the United States Court of Appeals for the Sixth Circuit that is currently pending. To help assist with the widespread implications and corresponding cadre of looming questions, NLRB General Counsel Jennifer A. Abruzzo issued Memorandum GC 23-05 “Guidance in Response to Inquiries about the McLaren Macomb Decision” (the “Abruzzo Memorandum”) addressing several questions about the NLRB’s action.
A few of the key takeaways to note:
- severance agreements are still permissible if limited to releases of employment claims accrued up to the agreement date but that does not interfere with an employees’ ability to interact with one another or to help improve conditions for other employees in the future;
- narrowly stated confidentiality provisions are acceptable if confined to sharing proprietary or trade secret information for a specified period due to valid business reasons, but confidentiality provisions that inhibit communications assisting other employees or communicating about the employer or employment related activities are forbidden; and
- non-disparagement provisions are extremely limited, in that they may only be lawful if the constraints are confined to defamatory statements because they are “maliciously untrue, such that they are made with knowledge of their falsity or with reckless disregard for their truth or falsity.”
The McLaren Macomb decision, which is retroactive and has the potential to render unlawful existing severance agreements, has broad implications for both employers and employees.
Private sector employers should review existing employee severance agreements for provisions that might be perceived as limiting employee rights to communicate with others, including fellow employees and the public about the terms and conditions of employment. If your agreements affect unionized personnel, evaluate your obligations to the union with respect to communications or addressing any concerns to avoid inadvertently committing an unfair labor practice by mishandling the notice. Unless and until this decision is challenged in court, employers should review their current agreements to ensure that no future agreements violate the McLaren Macomb decision. This will most certainly mean that a narrowing of the scope and focus of confidentiality and nondisclosure provisions must take place. To keep them in future agreements, employers must limit the time and scope so that the protection relates to genuinely proprietary information and trade secrets that are valuable to the business, as well as eliminate provisions that inhibit negative commentary including social media postings. Only time will tell whether or not this will remain the new standard for severance and separation agreements so for now employers must conduct their due diligence in reviewing agreements of the past and the future.
The Complete Ban of Noncompete Agreements
Just three months after the McLaren Macomb decision, the NLRB issued another impactful decision that again has widespread implications for employers and employees alike. On May 30, Abruzzo issued Memorandum GC 23-08 “Noncompete Agreements that Violate the National Labor Relations Act” (the Abruzzo Noncompete Memorandum) opining that with limited exceptions, “the proffering, maintenance, and enforcement of noncompete agreements violate Section 8(a)(1) of the NLRA by “interfer[ing] with employees’ exercise of rights under Section 7” of the NLRA.
The NLRB decision surrounding noncompetes may not feel as shocking as McLaren Macomb because many states already had provisions surrounding the legality and enforceability of noncompete and nonsolicitation clauses. Before this decision, only three states currently had bans on noncompete agreements with a majority of states enforcing them (although many of those courts considered them unfavorably). Abruzzo asserts several grounds for concluding that most noncompete agreements between employers and employees are impermissible because of their chilling effect on the exercise of Section 7 rights and on employee mobility from one job to another for better working conditions. Employers in some states may not feel this belt tightening as much as others considering that the states that did allow for noncompetes already had certain restrictions in place including such things as the terms had to be reasonable, only where necessary and, allowable under narrowly defined conditions in the employment context. For example, the Court of Appeals of New York has held that noncompete clauses are enforceable only to the extent that they satisfy the overriding requirement of reasonableness; in California they were prohibited except under certain limited circumstances involving the sale of a business. The Abruzzo Noncompete Memorandum does call for permissible noncompete agreements only where the provisions “that clearly restrict only individuals’ managerial or ownership interests in competing business, or true independent contractor relationships” as opposed to those where employees are misclassified as independent contractors. The current NLRB position also recognizes that “there may be circumstances in which a narrowly tailored noncompete agreement’s infringement on employee rights is justified in special circumstances.” This does suggest that it may be permissible for the protection of trade secrets or sensitive proprietary information for select employees.
So what does this all mean for employers and employees alike? Well, because of the great significance of these two recent NLRB rulings, I find it unlikely that one or both will not end up in protracted litigation—similar to a 2022 circuit court overturning an NLRB decision surrounding a new standard for determining whether two or more separate employers constitute a joint employer (a battle that lasted almost eight years). There is too much at stake with both sides of aisle making valid points about the need to keep them with restriction, on the one hand, and the reasons to do away with—or drastically narrow—on the other. But until then employers would be remiss at the least, and foolish at best, to not take the time to review past and future severance and separation agreements. Evaluate the terms and conditions of all existing agreements to ensure that they now meet the provisions of McLaren Macomb and the Abruzzo Noncompete Memorandum. For future agreements, employers should consider tailoring them to be as strict as reasonably necessary and be prepared to have pushback from the other side if they do not meet every requirement under the new NLRB decisions. Putting aside the decisions for a moment, it is always good practice to review agreements that impact your business on a consistent basis and not just when decisions such as these come into play. Only time will tell what happens next but in the meantime, try to not let your head spin too much while you are looking back at old agreements while also looking ahead and fixing new ones.
Reprinted with permission from the June 22, 2023 issue of The Legal Intelligencer. © 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.