New Limits for Employee Severance Agreements

April 24, 2023

New Limits for Employee Severance Agreements

Rembolt Ludtke Employment & Labor Law Practice Group
Sam Colwell, Tara Paulson, Mark Fahleson, Julie Ward

Severance agreements benefit employers and employees in reducing the prevalence and cost of litigation arising out of an employee’s separation. These agreements have traditionally limited an employer’s risk when terminating an employee by providing some legal consideration (like extra money) to the former employee in exchange for avoiding legal disputes arising out of their employment, including the termination. Severance agreements also routinely include “confidentiality” and “non-disparagement” provisions—clauses that prohibit an employee from publicly disparaging the employer and sharing the terms of the agreement. Naturally, employers do not want to pay money they don’t have to only for the former employee to bad-mouth them and tell remaining employees what they received.

On February 21, 2023, the National Labor Relations Board (“NLRB”) determined that almost all “confidentiality” and “non-disparagement” clauses contained in a severance agreement violate the National Labor Relations Act (“NLRA”). In essence, the NLRB held that the inclusion of these clauses within severance agreements require employees to forfeit their Section 7 rights under the NLRA to engage in concerted activity with fellow employees. Concerted activity includes “employee efforts to improve terms and conditions of employment…through channels outside the immediate employee-employer relationship.” [1] These channels include “administrative, judicial, legislative, and political forums, newspapers, the media, social media, and communications to the public that are part of and related to an ongoing labor dispute.” [2] Based in large part on the NLRB’s belief that “[p]ublic statements by employees about the workplace are central to the exercise of employee rights under the [NLRA], ”the NLRB held that severance agreements containing “confidentiality” and “non-disparagement” provisions violate the NLRA unless the provisions are “narrowly tailored.”

On March 22, 2023, the General Counsel for the NLRB published a memorandum addressing the relationship between severance agreements and the NLRA. In particular, the General Counsel addressed the following relevant questions:

Are severance agreements now banned?

No, but their utility for employers has been greatly reduced. The General Counsel noted: “[L]awful severance agreements may continue to be proffered, maintained, and enforced if they do not have overly broad provisions that affect the rights of employees to engage with one another to improve their lot as employees.” The General Counsel indicated severance agreements that release only the signing employee’s right to pursue employment claims would be enforceable. An enforceable severance agreement cannot release any claims the employee might have after signing the agreement.

Do severance agreements entered into before February 21, 2023 violate the NLRA if the agreements include “confidentiality” or “non-disparagement” clauses?

Yes. NLRB cases are presumed to apply retroactively. However, only severance agreements entered into within the last six months may be subject to the NLRA due to the statute of limitations set forth within the Act. Still, the General Counsel opined that “maintaining and/or enforcing a previously-entered severance agreement with unlawful provisions . . . continues to be a violation and a charge alleging such beyond the [statute of limitations] would not be time-barred.”

When can a “confidentiality” clause be included in a severance agreement?

In limited circumstances. The General Counsel stated that an employer can only include a “confidentiality” clause if it is narrowly tailored “to restrict the dissemination of proprietary or trade secret information for a period of time based on legitimate business justifications.”

When can a “non-disparagement” clause be included in a severance agreement?

In limited circumstances. “[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.”

What if an employee signs a severance agreement that includes “confidentiality” and “non-disparagement” clauses?

It is irrelevant whether an employee signed the severance agreement. If the employee signed, it does not make the employer’s conduct in entering into a prohibited severance agreement lawful.

Can an employer still include “confidentiality” and “non-disparagement” provisions in a severance agreement with a supervisor?

Supervisors are generally not protected by the NLRA. However, if an employer retaliates against a supervisor for refusing to proffer an unlawfully overbroad severance agreement, the employer may violate the NLRA. 

Is the entire severance agreement null and void if there is just one overbroad provision?

Probably not. As the General Counsel noted, most decisions are “based solely on the unlawful provisions and [those provisions would be] voided out as opposed to the entire agreement, regardless of whether there is a severability clause or not.”

Will the NLRB soon be addressing other common provisions in severance agreements?

Most likely. The General Counsel signaled the following provisions as potentially interfering with employees’ exercise of rights under the NLRA: “non-compete clauses; no solicitation clauses; no poaching clauses; broad liability releases and covenants not to sue.”

The General Counsel’s entire memorandum can be found here as GC-23-05.

[1]  McLaren Macomb, 372 NLRB No. 58, p. 6 (February, 2023).

[2]  Id.

This article is provided for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney.