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Severance Agreements

NLRB Deems Many Severance Agreements Unlawful

A February 21, 2023, decision by the National Labor Relations Board found it unlawful for employers to include some routine provisions in severance agreements. NLRB General Counsel Jennifer Abruzzo issued a memorandum dated March 22, 2023, elaborating on her broad interpretation of the ruling. Consequently, employers may now face federal labor law claims if they even offer a severance agreement to an employee that includes previously common restrictions.

McClaren Macomb Decision

In McClaren Macomb, 372 NLRB No. 58, the NLRB found that a hospital committed an unfair labor practice in violation of the National Labor Relations Act merely by offering a severance agreement to 11 permanently furloughed employees. The NLRB deemed the proposed agreements unlawful because they contained these non-disclosure and non-disparagement provisions:

  • “Confidentiality Agreement. The Employee acknowledges that the terms of this Agreement are confidential and agrees not to disclose them to any third person, other than spouse, or as necessary to professional advisors for the purposes of obtaining legal counsel or tax advice, or unless legally compelled to do so by a court or administrative agency of competent jurisdiction.”
  • “Non-Disclosure. At all times hereafter, the Employee promises and agrees not to disclose information, knowledge or materials of a confidential, privileged, or proprietary nature of which the Employee has or had knowledge of, or involvement with, by reason of the Employee’s employment. At all times, hereafter, the Employee agrees not to make statements to Employer’s employees or to the general public which could disparage or harm the image of Employer, its parent and affiliated entities and their officers, directors, employees, agents and representatives.

The severance agreement also identified penalties if the employee violated those provisions, including paying the employer’s attorneys fees.

The Board held that these provisions unlawfully interfere with employees’ exercise of rights protected by Section 7 of the NLRA. Section 7 rights include protection for employees engaging in concerted activity for their mutual aid and protection. The NLRB emphasized that just offering the agreement was unlawful even though the employees didn’t sign it and thus didn’t become bound by its terms.

General Counsel Memorandum 23-05

General Counsel Abruzzo has already established through earlier actions and memorandums that she has extremely pro-labor views of the NLRA. She demonstrated these sentiments again through this memorandum elaborating on the Board’s McClaren Macomb decision. Though not formally binding, the GC’s memo establishes her prosecutorial viewpoint and puts employers on notice that she will challenge a broad array of severance agreement provisions.

Here are summarized versions GC Abruzzo’s answers to the following questions:

Are severance agreements now banned?

No, as long as they’re limited to a release of the signing employee’s employment claims arising before the date of the agreement. But once seemingly any of the various other common components of severance agreements are added, her view shifts.

Do the circumstances surrounding the severance offer matter?

Probably not, as “an employer can have no legitimate interest in maintaining a facially unlawful provision in a severance agreement.”

What if the employee doesn’t sign the agreement?

As the Board held, it doesn’t matter. “[T]he proffer itself inherently coerces employees by conditioning severance benefits on the waiver of statutory rights such as the right to engage in future protected concerted activities and the right to file or assist in the investigation and prosecution of charges with the Board.”

What about severance agreements offered to supervisors?

Even these may be unlawful. Typically, the NLRA doesn’t protect “supervisors,” as defined by the law. However, the GC still has a (highly dubious) theory of how offering a severance agreement with prohibited language to a supervisor nonetheless constitutes an unfair labor practice.

How does this affect severance agreements before the February 2023 McClaren Macomb decision?

They could also be challenged. The GC even suggests she could prosecute back beyond the standard 6-month NLRA statute of limitations where the severance agreement provisions have ongoing effect. She notes that the NLRB has “settled cases involving severance agreements which had unlawfully broad terms that chilled the exercise of Section 7 rights by requiring the employer to notify its former employees that the overbroad provisions in their severance agreements no longer applied.” But she does not guarantee that would be the extent of the potential penalties.

Would the entire severance agreement be null and void due to just one overbroad provision?

It depends. The GC suggests the NLRB “generally make[s] decisions based solely on the unlawful provisions and would seek to have those voided out as opposed to the entire agreement, regardless of whether there is a severability clause or not”. She further offers that “while it may not cure a technical violation of an unlawful proffer, employers should consider remedying such violations now by contacting employees subject to severance agreements with overly broad provisions and advising them that the provisions are null and void and that they will not seek to enforce the agreements or pursue any penalties, monetary or otherwise, for breaches of those unlawful provisions.”

Why does the NLRA protect former employees in this situation?

Good question. Because the Board said so. But the GC adds, “In addition, former employees can play an important role in providing evidence to the NLRB and otherwise sharing information about the working conditions they experienced, in a way that constitutes both mutual aid and protection.”

Can the NLRB come between private contracting parties?

Yes, though the General Counsel doesn’t really answer that. Instead, she shifts the focus to the Board’s role “to address the inequality of bargaining power between employees, who do not possess full freedom of association or actual liberty of contract, and their employers . . . .”

What if employees request broad confidentiality or non-disparagement clauses?

They can ask, but the employer can’t provide it. Per the GC, “In that unlikely scenario, I would reiterate that the Board protects public rights that cannot be waived in a manner that prevents future exercise of those rights regardless of who initially raised the issue.” She also notes that unions could not waive these rights on behalf of employees.

What about other forms of employer-employee communications?

Pre-employment agreements or offer letters could be unlawful on the same theories as severance agreements.

Could any confidentiality provision in a severance agreement be lawful?

Yes, but not really. “Confidentiality clauses that are narrowly-tailored to restrict the dissemination of proprietary or trade secret information for a period of time based on legitimate business justifications may be considered lawful.” Such restrictions were likely already in place before the severance agreement, which may only be restating them for clarification/reiteration. The typical purpose of a confidentiality agreement in a severance agreement, especially if used to settle a pending claim, is to prevent public dissemination of information related to the employee’s potential claims against the employer. Any such restrictions would now likely violate McClaren Macomb.

Could any non-disparagement provision in a severance agreement be lawful?

Yes, but not really. “[A] narrowly-tailored, justified, non-disparagement provision that 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 or with reckless disregard for their truth or falsity, may be found lawful.” That is a non-defamation provision, not a non-disparagement provision. And state laws already protect against defamation, so there’s probably not much to be gained by putting such a clause in a severance agreement–especially at risk that the GC will somehow still find it’s overbroad.

Would a savings clause or disclaimer save overbroad provisions in a severance agreement?

Probably not. The General Counsel might be somewhat persuaded by a very extensive recitation of all possible rights protected by the NLRA and clear language that no such rights are being limited. However, there’s no guarantee that will help, and it’s unlikely many employers would be interested in taking that approach.

Does the GC view any other common severance agreement provisions as problematic?

Yes, of course. In particular, she points to non-compete clauses; no solicitation clauses; no-poaching clauses; broad liability releases and covenants not to sue; and cooperation requirements. There’s hope some of these might be acceptable in some situations, but employers proceed at their own risk.

Employer Response

What does all of this mean? Private companies in the U.S. have reason to fear that the NLRB will object to the severance agreements they’ve regularly used in the past. The same legal issues likely apply to settlement agreements used to resolve pending lawsuits and administrative proceedings.

If you use severance agreements with your separating employees, you should review them and reconsider your approach given these new pronouncements. However, that doesn’t necessarily mean every employer should adopt new agreements that don’t include confidentiality, non-disparagement, and other potentially challengeable provisions. NLRB rulings are not final, and there may be court challenges to the theories applied in McClaren Macomb and by the General Counsel. But it is critical to carefully weigh the risks and rewards of various approaches with the assistance of experienced labor counsel.

 

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Cuomo Proposal on Workplace Sexual Harassment

First Look: Governor Cuomo’s Proposal to Combat Workplace Sexual Harassment

On January 2, 2018, New York Governor Andrew Cuomo announced his plan to “Combat Sexual Harassment in the Workplace”. Cuomo’s agenda includes a multi-faceted approach that would affect both governmental and private employers. It includes at least five measures to address workplace sexual harassment in New York.

Introducing these initiatives, Governor Cuomo stated:

“2017 brought a long overdue reckoning where the secret and pervasive poison of workplace sexual harassment was exposed by brave women and men who said this ends now. Our challenge in government is to turn society’s revulsion into reform, and we in New York must seize the moment and lead the way. There must be zero tolerance for sexual harassment in any workplace, and we can and will end the secrecy and coercive practices that have enabled harassment for far too long.”

Though there are already pending bills that pursue similar objectives, the Governor has only laid out his specific agenda relatively generically. So let’s just take a preliminary look at how he seeks to change New York employment law.

Note: In this post I raise questions and suggest some downsides to these proposals. That certainly does not mean that I’m opposed to combating workplace sexual harassment. The employers I work with would welcome more effective means of preventing sexual harassment. But this is a very difficult area to legislate, with the potential for many undesirable consequences. So, I think it’s valuable to give them some thought and critical analysis.

Prevents Use of Taxpayer Dollars to Fund Individual Sexual Harassment Settlements

It’s not yet clear how far this proposal intends to go. Would it be limited to harassment claims against elected State officials? Or would it extend to all claims based on the actions of governmental employees at every level of government in New York?

The latter approach could be particularly game-changing. Employees claiming employment discrimination in the form of sexual harassment usually name their employer directly. In fact, under Title VII (the federal law that prohibits workplace sexual harassment), individual employees can’t be held liable. Even though the New York Human Rights Law permits individual liability in some situations, employees almost always include the employing entity itself in lawsuits.

What happens if an individual doesn’t have enough money to settle a sexual harassment claim? Does the governmental employer still have to defend the claim, perhaps without the ability to settle? Can a governmental entity still be liable and responsible for paying damages to an aggrieved employee?

There are many complicated aspects to what seems like a straightforward policy matter. Is it feasible to implement this approach? We’ll see.

Proposes Uniform Code of Sexual Harassment for All Branches of State and Local Government

Presumably, this would essentially write a new sexual harassment policy, with consistent complaint procedures, for all governmental employers in New York.

Notably, this proposal includes an “anonymous whistleblower process to help individuals communicate complaints across state and local government without fear of retribution or consequence.”

One can reasonably question how effectively employers can respond to anonymous sexual harassment reports. Even assuming the report names the alleged perpetrator, a good investigation usually begins with speaking with the victim of harassment. If the employer doesn’t know who that is, then they may have little to go on other than asking the named employee whether they have sexually harassed anyone. That may not yield tremendous results.

Hopefully any such initiative would recognize the value of victim involvement in the investigation of sexual harassment. Emphasizing existing anti-retaliation laws, for example, should be a valuable component.

Prohibits Confidentiality Agreements Relating to Sexual Assault or Harassment for All Branches of Government — State and Local — Unless Express Preference of the Victim

This addresses the concern that employees often agree not to discuss their claims in exchange for a financial settlement. Reasonably, the risk is that the perpetrator may commit further harassment because the previous victim could not warn everyone else.

From my experience, in most employment discrimination cases the employer is less concerned about the employee telling others what actually happened to them. They are more concerned about the employee telling others that they received money to go away. This is a valid fear where the employer credibly doesn’t think it did anything wrong, but doesn’t want to spend years litigating the employee’s claim. . . . And also doesn’t want every other unhappy employee, or more often former employee, to come seeking the same payout.

So, one potential downside to this rule would be a greater reluctance to settle cases. Without the confidentiality agreement, the defendants may perceive even greater value in litigating cases out to a decision by judge or jury. If everyone will know about the allegations (and assuming the defendant reasonably believes they did nothing wrong), then the defendant may be better off proving their innocence.

The proposal does purport to permit confidentiality agreements upon the “express preference of the victim”. One might question how to make that a workable standard. What’s the difference between an employee agreeing to confidentiality (as they must usually do now) and demonstrating an “express preference” for it? Will this just mean that the defendant can agree to observe confidentiality, but not the complaining employee?

Mandates Private Companies That Do Business with the State Report Sexual Assault and Harassment Statistics to Prevent Secrecy

We don’t yet know the scope of which companies would be covered or what exactly they must report.

Happily, the majority of companies that do business with the State probably won’t have any incidents to report. But some will. How many will depend on how those terms are defined, etc.

How will the State use this data? Will it cancel the contracts? Pursue litigation? Issue press releases?

Again, the details will matter.

Voids Forced Arbitration Policies or Clauses in Employee Contracts that Prevent Sexual Harassment Cases from Consideration in Law Enforcement Investigation and Trials

Frankly, it’s already unlikely that any arbitration policy or clause in employee contracts would prevent “law enforcement investigation” of sexual harassment cases . . . . Even to the extent that includes investigation by the New York State Division of Human Rights or the federal Equal Employment Opportunity Commission. The National Employment Law Project, a prominent employee-rights group, through its Senior Counsel Patricia Smith (former New York Commissioner of Labor under Governors Eliot Spitzer and David Paterson and U.S. Solicitor of Labor under President Obama), has also acknowledged this, along with expressing some doubts about other aspects of the proposal.

Thus, the primary effect of this piece of the legislation (if enforceable despite potential federal preemption arguments) would be to preserve employees’ default rights to go to court with a claim of workplace sexual harassment. It at least seems fairly straightforward, with few unintended consequences to victims of sexual harassment. Most likely, employees could still readily agree to arbitrate sexual harassment cases if they want to and employers are interested.

What New York Employers Should Already Be Doing to Combat Workplace Sexual Harassment

Again, my scrutiny of the Governor’s announced agenda only means to acknowledge the difficulty of addressing this serious issue. With or without new State legislation, all New York employers should be proactive in avoiding sexual harassment.

Keep in mind: the New York State Human Rights Law prohibits workplace sexual harassment for all New York employees. Other aspects of the State employment discrimination law only apply to employers with at least 4 employees. But the sexual harassment provisions apply to every employer.

For now, here are some basic elements every employer should implement to combat workplace sexual harassment:

 

I will continue to monitor these proposals and the related legislation. To make sure you don’t miss any important updates, sign up for my email newsletter!