Severance agreements just became more favorable to workers. Here’s what that means for employers

Businessman signing a contract on the table.
A new federal decision pushes back on what employers can require as part of severance agreements.
Getty Images

Severance agreements are suddenly a hot topic as employers lay off workers. Now a new decision from Washington significantly changes the rules of what a severance agreement can and can’t say. On the metaphorical gauge of employee vs. employer power, “the needle just shifted,” says Nicholas Woodfield, principal and general counsel of the Employment Law Group, and “it’s likely going to favor the employees over the employers.” Players on both sides should know the new rules.

Severance agreements exist largely because most employers aren’t required to offer severance payments. When they choose to do so, they want something from employees in return. The agreements frequently prohibit laid-off employees from disclosing contract terms and disparaging the company. Those two standard provisions—a confidentiality clause and a non-disparagement clause—are the focus of a new decision by the National Labor Relations Board. In a case involving 11 employees dismissed by McLaren Macomb Hospital in Mount Clemens, Mich., the board ruled that the hospital wrote the two clauses in its severance agreement so broadly that employees would essentially waive their rights under the National Labor Relations Act if they signed it. As a result, the board declared the entire agreement unlawful.

That outcome sends shivers through employers because the most valuable part of a severance agreement is generally not those two clauses but rather the “release,” in which employees release the employer from legal claims arising from their employment or termination. Losing the release because of overly broad confidentiality and non-disparagement clauses is a bad trade, and corporate lawyers are now advising companies to ensure their severance agreements will pass muster with the NLRB—even if revising them may give employees more leverage in some ways.

For example, the NLRB objected to the hospital’s confidentiality clause because it broadly disallowed dismissed employees from sharing severance agreement details with any third party other than spouses or tax and legal advisers. Laid-off workers thus couldn’t file an unfair labor practice charge, discuss the agreement with their union representative, or assist an NLRB investigation, among other rights guaranteed by federal law.

Kenneth Jenero, an employment lawyer at Holland & Knight, believes employers can still craft acceptable confidentiality clauses. He notes that in cases involving employment dispute settlements (not severance agreements), the NLRB will not approve a settlement with a broad confidentiality provision. But the board allows companies to include a provision that keeps the agreement’s financial and monetary conditions confidential. “I can’t see any reason why that wouldn’t fly in severance agreements even under [the new ruling],” he says.

Similarly, Jenero thinks employers are adequately protected by narrower non-disparagement clauses prohibiting “maliciously false statements and attacks on the employer’s products, services, or customers.” But he’s skeptical of provisions that go further, as the hospital’s clause did. “I’m asking [my clients] to really consider what they’re going to get out of these broad non-disparagement provisions,” he says.

The NLRB’s new decision gives laid-off employees more bargaining power, at least in theory. Woodfield notes that if an employee is offered a severance agreement that might not meet the new requirements, the employee could say, “I’ll take the money, but I’m going to the NLRB with this.” At that point, Woodfield says, “the employer has a real problem. They can’t pull back the agreement because that would be retaliation,” which is illegal. The employee may eventually negotiate a bit more money but must be skillful and comfortable with risk, he adds.

Another potential bright spot for employers: While the new decision is a win for workers, it has yet to be tested in court. Shannon Liss-Riordan, an attorney representing over 1,500 Twitter employees laid off in November, says the social media platform’s severance agreement contained a confidentiality and non-disparagement clause. The NLRB decision raises the question of whether it’s enforceable. “I’m advising my clients, don’t count on these agreements being thrown out because we don’t know what the courts will say. I know there will be a lot of litigation around this.”

For now, the most immediate effect of the NLRB decision may be to shine a light on confidentiality and non-disparagement clauses and incidentally reveal a little secret: Such clauses have rarely, if ever, been much of a danger to employees. “I’ve been practicing for 43 years,” says Jenero. “I’ve not had a client, nor am I aware of any client, who has ever attempted to enforce a non-disparagement provision or confidentiality provision related to the terms of the agreement.”

Liss-Riordan says the same. “I can’t tell you that I’m aware of specific cases where an employer just started a litigation to enforce a non-disparagement clause.”

So why do those clauses exist? Simply put, they have a chilling effect on negative remarks about a company. “Employers love them,” says Jenero. “And they love them, frankly, because of the belief that they will have a deterrent effect on employees saying bad things about the company.”

The bottom line: Like nuclear weapons, these clauses exert their power without being used. They seem unlikely to disappear anytime soon.

Learn how to navigate and strengthen trust in your business with The Trust Factor, a weekly newsletter examining what leaders need to succeed. Sign up here.

Read More

Great ResignationDiversity and InclusionCompensationCEO DailyCFO DailyModern Board