NLRB Prohibits Broad Confidentiality Clauses in Severance Agreements

On Tuesday, the National Labor Relations Board held that a hospital employer violated the NLRA in 2020 by offering laid off non-supervisory employees a separation agreement which, among other things, prohibited them from disparaging or making statements that harm the reputation of the employer.  McLaren Macomb, Case 07–CA– 263041 (2-21-23).  The Board is returning to a legal standard where “unlawful provisions in a severance agreement proffered to employees have a reasonable tendency to interfere with, restrain, or coerce the exercise of employee rights under Section 7 of the Act.”  More broadly, “an employer violates Section 8(a)(1) of the Act when it proffers a severance agreement with provisions that would restrict employees’ exercise of their NLRA rights.”  The Board expanded its analysis by including within this prohibition clauses which require employees to keep confidential the terms of the separation agreement where the only exceptions were for tax advisors, attorneys, spouses and when compelled by law.  “A severance agreement is unlawful if it precludes an employee from assisting coworkers with workplace issues concerning their employer, and from communicating with others, including a union, and the Board, about his employment.”  This is not a case where the confidentiality clause also carved out statutory rights, such as reporting to or cooperating with government agencies. 

According to the Board’s opinion, the employer temporarily laid off 11 non-supervisory/management  employees when the government restricted medical services during the COVID pandemic.  Without first informing or negotiating with the union, the employer later made those layoffs permanent and offered severance agreements which provided severance pay in return for a release of claims, etc. and promises to not disparage the hospital and to keep confidential the terms of the agreements:

6.  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.

7. 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 Agreements also made the employees liable for injunctive relief, attorneys’ fees and damages if they violated the provisions.  The Board had no difficulty finding the employer violated the NLRA by failing to first inform or negotiate with the union about the layoffs and severance agreements.  However, the Board also found that the agreements themselves violated the NLRA.

Relying almost exclusively on prior Board precedent that employees may not waive their Section 7 rights and cases which addressed whether employers could interfere with employees’ rights to report allegations to the Board or to assist other employees in asserting their Section 7 rights, then Board then asserts that the confidentiality provision would prevent employees from reporting the employer’s alleged misconduct to the NLRB:

The provision broadly prohibits the subject employee from disclosing the terms of the agreement “to any third person.” . . . The employee is thus precluded from disclosing even the existence of an unlawful provision contained in the agreement. This proscription would reasonably tend to coerce the employee from filing an unfair labor practice charge or assisting a Board investigation into the Respondent’s use of the severance agreement, including the nondisparagement provision. Such a broad surrender of Section 7 rights contravenes established public policy that all persons with knowledge of unfair labor practices should be free from coercion in cooperating with the Board.  The confidentiality provision has an impermissible chilling tendency on the Section 7 rights of all employees because it bars the subject employee from providing information to the Board concerning the Respondent’s unlawful interference with other employees’ statutory rights.

                . . .

The confidentiality provision would also prohibit the subject employee from discussing the terms of the severance agreement with his former coworkers who could find themselves in a similar predicament facing the decision whether to accept a severance agreement. In this manner, the confidentiality provision impairs the rights of the subject employee’s former coworkers to call upon him for support in comparable circumstances. Additionally encompassed by the confidentiality provision is discussion with the Union concerning the terms of the agreement, or such discussion with a union representing employees where the subject employee may gain subsequent employment, or alternatively seek to participate in organizing, or discussion with future co-workers.  A severance agreement is unlawful if it precludes an employee from assisting coworkers with workplace issues concerning their employer, and from communicating with others, including a union, and the Board, about his employment. Id. Conditioning the benefits under a severance agreement on the forfeiture of statutory rights plainly has a reasonable tendency to interfere with, restrain, or coerce the exercise of those rights. unless it is narrowly tailored to respect the range of those rights. (bolding added for emphasis).

There is no discussion in the case whether the agreements also provided that the confidentiality provision would not apply to prevent the employee from reporting or cooperating with any law enforcement or government agency, including, for instance, the NLRA or EEOC or SEC, etc.  Rather, the Board notes that: “The only exceptions are disclosure to spouse, for obtaining legal counsel or tax advice, or if compelled to do so by a court or administrative agency.”

Section 7 rights are not limited to discussions with coworkers, as they do not depend on the existence of an employment relationship between the employee and the employer, and the Board has repeatedly affirmed that such rights extend to former employees. It is further long-established that Section 7 protections extend to employee efforts to improve terms and conditions of employment or otherwise improve their lot as employees through channels outside the immediate employee - employer relationship . . . 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. Accordingly, Section 7 affords protection for employees who engage in communications with a wide range of third parties in circumstances where the communication is related to an ongoing labor dispute and when the communication is not so disloyal, reckless, or maliciously untrue to lose the Act's protection.

                 . . .

             . . . Where an agreement unlawfully conditions receipt of severance benefits on the forfeiture of statutory rights, the mere proffer of the agreement itself violates the Act, because it has a reasonable tendency to interfere with or restrain the prospective exercise of Section 7 rights, both by the separating employee and those who remain employed. Whether the employee accepts the agreement is immaterial. . . .

The nondisparagement provision on its face substantially interferes with employees’ Section 7 rights. Public statements by employees about the workplace are central to the exercise of employee rights under the Act. Yet the broad provision at issue here prohibits the employee from making any “statements to [the] Employer’s employees or to the general public which could disparage or harm the image of [the] Employer”—including, it would seem, any statement asserting that the Respondent had violated the Act (as by, for example, proffering a settlement agreement with unlawful provisions). This far-reaching proscription—which is not even limited to matters regarding past employment with the Respondent . . .

The Board also ordered the employer to “compensate the employees for any other direct or foreseeable pecuniary harms incurred as a result of the unlawful furloughs, including reasonable search-for-work and interim employment expenses, if any, regard[1]less of whether these expenses exceed interim earnings. Compensation for these harms shall be calculated separately from taxable net backpay . . .”

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

SEC Invalidates Severance Agreement Waivers Which Preclude Whistleblowers From Recovering Financial Bounties

In August, the Securities and Exchange Commission issued a Cease and Desist Order that employers cannot require an employee in a severance agreement to waive their right to collect a financial award from a government agency because such a provision removes the financial incentive for the employee to report illegal conduct by the employer.  Such provisions are common in severance agreements because the employer is paying an employee money to which the employee is not otherwise entitled in order to buy future peace and does not wish to have to pay the employee twice if the employee later pursues a claim with a government agency.  While the SEC decision and position are based on an unusual SEC regulation that only applies to publicly traded companies, employers should remain alert to other government agencies attempting to adopt a similar position. 

Following the Great Recession, Congress enacted stronger SEC whistleblower laws in the Dodd-Frank Wall Street Reform and Consumer Protection Act, including provisions providing for financial bounties to be paid to individuals who report corporate wrongdoing to the SEC.  The SEC then enacted regulations, including the following provision at 17 C.F.R. § 240.21F-17:

 Staff communications with individuals reporting possible securities law violations.

(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement (other than agreements dealing with information covered by § 240.21F-4(b)(4)(i) and § 240.21F-4(b)(4)(ii) of this chapter related to the legal representation of a client) with respect to such communications.

In 2015, the SEC announced that it violated this regulation to require employees to first report to the Company any disclosure of confidential information before exercising their right to engage in whistleblowing to the SEC.  In August, it found that an Atlanta employer had a similar confidentiality provision in its severance agreements which stated, in part,  

Employee has not and in the future will not use or disclose to any third party Confidential Information, unless compelled by law and after notice to BlueLinx. * * * If the Employee has any question regarding what data or information would be considered by BlueLinx to be information subject to this provision, the Employee agrees to contact BlueLinx’s Legal Department in writing for written clarification.

and/or

[The Employee shall not] disclose to any person or entity not expressly authorized by the Company any Confidential Information or Trade Secrets….Anything herein to the contrary notwithstanding, you shall not be restricted from disclosing or using Confidential Information or Trade Secrets that are required to be disclosed by law, court or other legal process; provided, however, that in the event disclosure is required by law, you shall provide the Company’s Legal Department with prompt written notice of such requirement in time to permit the Company to seek an appropriate protective order or other similar protection prior to any such disclosure by you.

 . . . .

Employee further acknowledges and agrees that nothing in this Agreement prevents Employee from filing a charge with…the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other administrative agency if applicable law requires that Employee be permitted to do so; (however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency. (Emphasis added.)

The SEC determined that:

by requiring its departing employees to forgo any monetary recovery in connection with providing information to the Commission, BlueLinx removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.

Restrictions on the ability of employees to share confidential corporate information regarding possible securities law violations with the Commission and to accept financial awards for providing information to the Commission, such as those contained in the Severance Agreements, undermine the purpose of Section 21F, which is to “encourage individuals to report to the Commission,” and violate Rule 21F-17(a) by impeding individuals from communicating directly with the Commission staff about possible securities law violations.

The employer resolved the dispute with the EEOC, paid a $265,000 penalty to the SEC and agreed to replace the offending paragraph with the following, which permitted departed employees to not only collect financial bounties awarded by the SEC, but to also accept financial compensation from the EEOC, NLRB, and OSHA:

“Protected Rights.  Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”).  Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company.  This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.”

One could argue that the SEC position only applies to waivers of bounties paid by the SEC, as opposed waivers of any right to receive any future or additional monies from the employer.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Franklin County Appeals Court: Doesn’t Pay to Be Too Clever By Half

Last week, the Franklin County Court of Appeals ruled in favor of the defendant employer and ordered the rescission of a severance agreement where a typographical error in the agreement provided the employee with twelve extra months of severance pay which the employer had not intended to provide. Faivre v. DEX Corp. Northeast, 2009-Ohio-2660 (6/9/09). The employee admittedly had been told that the employer was only offering him three months of severance and he indicated that he would need to have at least twelve months. When he reviewed the agreement in detail after returning home, he realized that the offered severance agreement (which had been drafted by the employer and had already been signed by the employer’s Senior Vice President of Human Resources) promised to pay him severance through 2007 instead of three months later in 2006. Rather than clarifying the issue with the employer, he instead signed and returned the agreement. Quickly realizing its error, the employer immediately asked him to sign a revised page and said that if he did not agree to reform the agreement, it would consider the agreement to be rescinded due to mistake.

Instead, the employee filed suit against the employer for breach of contract. The trial court ruled in favor of the employer, but ordered a reformation of the contract to provide for the three months of severance pay initially offered by the employer. Both sides appealed. On appeal the court of appeals agreed that the parole evidence rule – which typically would bar extrinsic or outside evidence to contradict the clear terms of a contract – did not bar evidence of mistake. In this case, the employer made a mistake and the employee was admittedly aware of the mistake.

The court also agreed that the trial court had authority to reform the contract. However, the court found that was not a proper remedy because there had never been a mutual agreement on the amount of severance. The employer offered three months and the employee wanted twelve. Because there had never been a “meeting of the minds,” there could be no contract to resurrect by reformation.

The court agreed to rescind the contract altogether (meaning the employee would receive no severance). This was pursuant to a Restatement provision:

Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable
by him if he does not bear the risk of the mistake . . .

Thus, unless the mistaken party bears the risk of a mistake, a court may rescind a contract if: (1) one party made a mistake at the time the parties executed the contract, (2) the mistake had a material effect on the agreed exchange of performances that was adverse to the mistaken party, and (3) the other party had reason to know of the mistake.

The court rejected the employee’s argument that the employer had assumed the risk of mistake when it unilaterally prepared and presented the agreement. First, the employee knew about the mistake because the agreement’s terms did not match what he had been told in his exit interview. Finally, the court refused to put the risk on the employer even though it negligently drafted the agreement: “Pursuant to Section 154 of the Second Restatement of Contracts:

A party bears the risk of a mistake when

(a) the risk is allocated to him by agreement of the
parties, or
(b) he is aware, at the time the contract is made, that
he has only limited knowledge with respect to the facts to
which the mistake relates but treats his limited knowledge as
sufficient, or
(c) the risk is allocated to him by the court on the
ground that it is reasonable in the circumstances to do so.

. . .

Subsection (c) is a "catchall provision" that permits a court to allocate the
risk of a mistake to the mistaken party if, under the totality of the circumstances, it would be more equitable or reasonable to do so. . . . " '[A] party's negligence is immaterial where the mistake is in the expression of the contract and the other party knew of the mistake and took advantage of it.' "

. . .

As we concluded above, [the employee] had reason to know that the severance agreement contained a typographical error. Instead of seeking clarification regarding the length of the severance period, [the employee] attempted to take advantage of [the employer’s] error. Therefore, equity and reasonableness do not require us to place the risk of the mistake on [the employer] due to its negligence.

Insomniacs can read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/10/2009/2009-ohio-2660.pdf

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.