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Feb 23, 2023

The National Labor Relations Board (NLRB) has just upended standard practices when it comes to severance agreements — in effect redefining the very nature and value of the agreements themselves.

On Tuesday, the Board ruled that employers can no longer offer severance agreements that force people to “broadly waive” their rights. Significantly, this includes requiring that employees may not disparage the company as a condition of severance. The ruling also states that employers may not stop exiting employees from revealing the terms of their exit agreements.

“This is a big deal for all non-supervisory employees who are subject to termination. It’s a watershed moment and a massive change in how we let people go,” says employment attorney Kate Bischoff.

Notably, in 2020, the Board ruled that employers were permitted to require such clauses in separation agreements, This week’s reversal, however, stems from the Board’s view that companies were infringing on the rights of workers too much.

“The Board observed that the employer’s offer is itself an attempt to deter employees from exercising their statutory rights, at a time when employees may feel they must give up their rights in order to get the benefits provided in the agreement,” the ruling states. According to the Board, non-disparagement clauses risk hindering former employees from participating in labor investigations.

“It’s long been understood by the Board and the courts that employers cannot ask individual employees to choose between receiving benefits and exercising their rights under the National Labor Relations Act,” said NLRB Chairman Lauren McFerran in a statement.

The case that spurred the Board’s clarified new stance entails a Michigan hospital that had laid-off 11 employees almost three years ago. The hospital stipulated in the severance agreements that the laid-off workers had to keep terms confidential and could not publicly say anything that risked disparaging or harming the image of the hospital.

This week’s decision comes at the heels of the recent Federal Trade Commission stated aim to ban noncompete agreements, both of which indicate that the current administration is looking to put more power into the hands of workers.

Despite intentions to support workers, the Board’s announcement may have unintended consequences. Employers may decide that severance agreements aren’t worth the effort, Bischoff explains, adding that “the risk is that employers will let people go without paying them anything.

“I also question whether there will be severance agreements at all in the future if you can’t have confidentiality and non-disparagement clauses,” Bischoff continues. “The only value of such agreements, then, is the release of claims, but employers may find that it’s too much effort to have severance agreements based only on that.”

Nonetheless, companies may still choose to offer severance without accompanying agreements. As Mary Faulkner, ERE’s strategy columnist and principal at the HR consultancy IA, points out, “Not offering any severance can bring a company bad publicity.”

At the same time, Faulkner explains that from a recruiting perspective, not much will change as a result of the NLRB’s decision. “Whether there’s a severance agreement or not, candidates are still unlikely to disparage their former employers.” The difference now, Faulkner adds, is that at least people aren’t being bullied into signing agreements on their way out.

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