Funk and Preller: Confidentiality, non-disparagement, noncompete restrictions

Can an employer ask an employee to sign a confidentiality, non-disparagement or noncompete agreement? This term, the National Labor Relations Board imposed significant restrictions on how employers can contract with their employees by holding in McLaren Macomb, 372 NLRB No. 58 (Feb. 21), that broad confidentiality clauses and non-disparagement clauses cannot be included in employee severance agreements. This ruling from the five-member “board” caused a flurry of activity among employers looking to comply with the board’s mandate without gutting two of the provisions often considered crucial to the successful implementation of a severance policy, which in turn led NLRB General Counsel Jennifer Abruzzo to issue nonbinding guidance on the issue in March.

When she did so, however, the general counsel also expanded upon the logic of McLaren Macomb in multiple directions, proposing that the board also consider limiting employers’ efforts to use noncompete clauses, no-solicitation clauses, no-poaching clauses, broad liability releases and covenants not to sue. And in May, the general counsel singled out noncompete agreements from this list, arguing that the mere proffer of such an agreement that restricts an employee from future employment violates the National Labor Relations Act.

While the general counsel’s guidance is nonbinding, employers who ignore it can face prosecution from the agency, which may build a case against the employer to use as a vehicle to ask the board to change the law through adjudication. That means that at this moment, employers know the agency will scrutinize their confidentiality and non-disparagement clauses, they expect the agency will scrutinize their noncompete clauses and they suspect the agency will scrutinize their other agreements with employees.

The board and the general counsel’s logic for these restrictions on employer-employee agreements starts with Section 7 of the NLRA, which grants employees the right to engage in union activity and other “protected concerted activity” (like circulating a gripe petition or complaining about wages en masse even when there is no formal union involved). For years the NLRA has ruled that employee handbooks and other rules imposed on current employees can coerce (or “chill”) employees in the exercise of their Section 7 rights. For example, a rule prohibiting employees from discussing wages violates Section 7 because discussing wages is protected concerted activity.

And while the NLRB has long found that an employer can violate the rights of employees even if they are not currently employed by that employer, what is new about the current board and general counsel’s stance is that they see enough of a connection between general contract terms proffered to current employees and those employees’ potential post-employment Section 7 activities to find coercion.

For example, the NLRB noted that a broad non-disparagement provision could prevent an employee from asserting that their former employer had violated the NLRA or from otherwise critiquing its employment policies. Similarly, it saw the potential for a confidentiality provision to coerce a former employee from discussing the terms of the severance agreement with a union or former co-workers who are considering whether to accept similar severance agreements.

Regarding noncompete agreements, the general counsel enumerated five ways they might chill employees’ exercise of Section 7 rights: 1) concertedly threatening to resign to demand better working conditions, 2) carrying out such threats, 3) concertedly seeking employment with a competitor to obtain better working conditions, 4) soliciting co-workers to go work for a competitor as a broader clause of protected concerted activity, and 5) seeking employment to engage in protected activity at a new workplace with its employees (a version of which is commonly called “salting”). The general counsel acknowledges that concerted quitting is not a Section 7 activity, but she asks the board to change the law in this regard.

The dissent in McLaren Macomb sought to defend a view of labor law that recognizes that “employees do not ‘view every employer document through the prism of Section 7’” and thus does not regulate the content of severance agreements absent outside circumstances that render them coercive, like employer actions that give an employee reason to believe the employer would invoke the agreement in response to the employee’s exercise of their future Section 7 rights.

Employers have often sought to prevent broad pronouncements from being viewed as coercing Section 7 rights by including a general “savings” clause in employee handbooks and agreements that clarifies that employees retain their Section 7 rights. But if employers were looking to general counsel Abruzzo’s guidance on this issue for clarity on whether such an approach provides safe harbor, they were disappointed. In her view, the board should presume that a savings clause “cures” an “overbroad” contract term only if it details nine separate line-items of Section 7 rights, ranging from “discussing wages and other working conditions with co-workers or a union” to “wearing union hats, buttons, t-shirts, and pins in the workplace, except under special circumstances.”

Fortunately for employers, McLaren Macomb itself and the general counsel’s guidance acknowledge the key limitation of these holdings: scope. When the NLRA discusses the rights of “employees,” it is referring to rank-and-file workers. Thus, employers remain free to include confidentiality, non-disparagement and noncompete clauses in severance agreements with their supervisors and managers.

Likewise, the general counsel acknowledged in her guidance about noncompetes that if a former employee lands in a nonemployee position (becomes, for example, an entrepreneur, owner, manager, supervisor or independent contractor), they no longer have the protection of the NLRA. Noncompete agreements that are tailored to restrict these kinds of nonemployee post-employment activities do not violate the NLRA, even when proffered to current employees.

Because the NLRB does not exercise jurisdiction over certain sectors, including the public sector and agriculture, many Indiana employers need not study and respond to these changes. But those under the NLRB’s jurisdiction should review their model employment and severance agreements and revise them to maximize enforceability under these new standards.•

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Ryan Funk is a partner and Alexander Preller is an associate in the Indianapolis office of Faegre Drinker Biddle & Reath LLP. Opinions expressed are those of the authors.