FTC Decision Means Your Severance Agreements Could Be Illegal
In our first post of 2023, we explained the proposed rule by the Federal Trade Commission (FTC) to ban non-compete agreements and related restrictions deemed to be unfair to workers. The new rule has not yet taken effect; its public comment period ends Wednesday, April 19.
Shortly after the FTC proposal, the National Labor Relations Board (NLRB) issued an unrelated but similarly pro-worker decision that severance agreements with overly broad confidentiality, nondisclosure, and non-disparagement clauses are unlawful under Section 7 of the National Labor Relations Act (NLRA). Such provisions typically are intended to keep terms of the agreement private and prevent departing employees from disclosing confidential information or defaming the company. But while the provisions themselves are legal, the specific language and scope of severance agreements are important in determining if they violate employees’ rights under the NLRA. The decision applies to all employers, regardless of whether workers are represented by a union.
On March 22, NLRB General Counsel (GC) Jennifer Abruzzo issued a guidance memo to field offices to assist them in responding to questions about the implications of the decision. The guidance does not carry the weight of law, but is likely to reflect how the Board will operate. Here are some takeaways from the memo.
All severance agreements are not banned. Lawful agreements and provisions can continue to be offered, maintained, and enforced, provided they preserve the rights of employees and the public.
Section 7 violations are unlawful, whether the employee signs the agreement or not. Presenting the severance agreement inherently coerces employees into waiving their rights, according to the GC.
The decision is retroactive. In the GC’s opinion, the six-month statute of limitations may apply to the original offering of the agreement. But maintaining or enforcing a prior agreement with unlawful provisions could be considered an ongoing unfair labor practice not subject to limitations.
Circumstances of the severance agreement do not outweigh the Section 7 rights of employees. The NLRB specified that an employer could not justify an unlawful provision, regardless of situation.
Confidentiality provisions can be lawful, provided they are narrowly tailored to protect proprietary or trade secret information for a time period based on legitimate business interests.
Prohibiting disclosure of financial terms of a settlement can be lawful, provided the language allows discussion with the employee’s attorney, family, and financial advisors.
Well-defined non-disparagement provisions can be lawful. The GC gives this example of appropriately narrow language: “Employee shall not make any maliciously untrue statements about the Company, such that they are made with knowledge of their falsity or with reckless disregard for their truth or falsity.”
Since this decision takes effect immediately and applies to existing agreements, employers must act immediately to ensure compliance with the law. The Board mentioned three specific concerns:
Language that enhances the tendency of the severance agreement to interfere, restrain, and coerce employees' exercise of rights under Act;
Overly broad language related to confidentiality, such as preventing the discussion of terms with a former coworker in a similar predicament; and
Prohibitions of disparaging remarks which could be detrimental to an employer but beneficial to assist former or future coworkers in resolving a complaint of unlawful conduct.
The nature of this ruling is such that every word of your current severance agreements must be reviewed in terms of language and scope. Remember, simply offering an agreement with overly broad provisions can violate the NLRA. Before you take action or make modifications, consult an experienced labor and employment attorney who understands how to craft lawful and enforceable severance agreements. We are ready to help.