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NLRB Limits Non-Competition, Non-Disparagement and Confidentiality Agreements

By June 6, 2023No Comments

The National Labor Relations Board (NLRB) is taking steps to severely restrict employers’ tendering of non-competition, non-disparagement and confidentiality agreements to employees. In particular, the NLRB has deemed it unlawful for employers to tender provisions in severance agreements and other employment agreements that broadly seek to interfere with or otherwise limit protected rights of employees. In a memo dated May 30, 2023, the NLRB’s General Counsel takes the position that such agreements violate the National Labor Relations Act (NLRA), except under narrow circumstances. Likewise, in McLaren Macomb, decided earlier this year, the NLRB ruled that the employer there could not tender a severance agreement to furloughed employees that included non-disparagement language and a provision restricting them from disclosing the terms of the agreement itself.

According to the NRLB, these restrictions on an employee violate the NLRA, which without limitation permits and protects the rights of employees, unionized or not, to participate in certain activities to advance or improve their interests as employees. Practical examples of rights protected by Section 7 of the NLRA include a range of activities from speaking with co-workers (and former co-workers) about working conditions; to the right to form, join or assist a union; and to seek or accept other employment to improve their working conditions.

So how does all this impact severance agreements? First, neither McLaren Macomb nor the General Counsel’s memo would make severance agreements illegal outright. However, they do invalidate, or at least call into question, restrictive covenants that are commonly used in severance agreements, across industries. According to the NLRB’s general counsel, Jennifer Abruzzo, “the proffer, maintenance and enforcement” of such agreements will violate the NRLA “unless . . . narrowly tailored to special circumstances justifying the infringement on employee rights.” According to Attorney Abruzzo, an employer’s desire to “avoid competition from a former employee” would not be a legitimate interest supporting such a defense. Conversely, protecting trade secrets or proprietary information may suffice when the agreement is narrowly tailored.

To clarify, a severance agreement that contains one of these provisions does not mean the entire agreement is void. Instead, according to the NLRB, only the specific problematic provision would be void, leaving the remainder of the agreement legally enforceable.  Furthermore, according to the NLRB, employers can still include such provisions in severance agreements (assuming they are otherwise lawful), but should take precautionary measures to ensure they are narrowly tailored to avoid a violation of the NLRA. Of note, the mere proffer of an overbroad agreement can violate the statute. Likewise, employers who insist on the application of non-disparagement, confidentiality and non-competition restrictions should take note of the considerable risks of doing so, as to employees covered by the NLRA.

While the full range of implications resulting from the McLaren Macomb decision are expansive, there are a few critical details that bear mentioning:

  • McLaren Macomb does apply retroactively to severance agreements entered into before the decision on February 21, 2023. This means that provisions in severance agreements that are now unlawful may be void, even if the severance agreement was entered into before February 21, 2023.
  • The decision does not apply just to severance agreements, but also applies to other provisions in any employer communication to employees that is overbroad and could interfere with or restrain employees’ exercise of Section 7 rights, such as a pre-employment offer letter, or other communications or instructions from an employer to an employee.
  • Supervisors are generally not protected by the NLRA, and therefore the McLaren Macomb decision generally would not apply to severance agreements provided to supervisors. However, supervisors that have been discriminated against for refusing to violate the NLRA may be covered. Further, other laws or regulations may limit or prohibit such agreements.

The McLaren Macomb decision and the NRLB General Counsel’s memo represent a significant change in how severance agreements may be structured—and even whether they can be proffered or maintained at all. And the NLRB is not alone in taking such steps, as a number of recent changes have limited the scope of lawful agreements between employees and employers. For example, the Federal Trade Commission recently proposed a rule that would ban many non-compete clauses. Likewise, a Massachusetts law enacted in 2018 limits the application and enforcement of severance agreements, and in some instances invalidates them altogether.

Given the complex and ever-changing landscape surrounding these employment agreements, parties should seek the assistance of legal counsel before entering into or offering any such agreements.