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 Mt. Clemens, Michigan, 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.
