Dorsey Work Watch

Abruzzo has been busy. Within the last few months, she has issued two notable memorandums that could have significant impacts on how employers must comply with the National Labor Relations Act (“NLRA”). It is important to note that certain provisions of the NLRA apply to all employers, not only those that currently have unions or are facing union election petitions. What was the first memorandum? Abruzzo issued a memorandum on March 22, 2023 in response to the NLRB’s decision in McLaren Macomb, 372 NLRB No. 58 (N.L.R.B. February 21, 2023). (We analyzed that decision in detail in another Quirky Questions blog post, linked here; in sum, the NLRB held in McLaren that an employer offering a separation agreement with non-disparagement and confidentiality provisions was inherently coercive, and therefore was facially a violation of the NLRA.).  One important thing to note: the logic and reasoning of McLaren likely apply equally to settlement agreements that resolve litigation brought by a former employee, in addition to separation or severance agreements entered at the time an employee’s employment ends. The General Counsel’s memorandum in response to McLaren went beyond explaining the ruling.  Instead, Abruzzo took the position that the decision not only applied to future separation agreements, but also applied retroactively – meaning that, in her view, employers who tried to enforce non-disparagement and confidentiality provisions in agreements with previously departed employees faced the risk of an unfair labor practice (“ULP”) charge under the NLRA. The memorandum also asserted that employers may maintain non-defamation clauses in separation agreements, but those clauses must be “narrowly-tailored, justified,” and “limited to employee statements about the employer that meet the definition of defamation as being maliciously untrue, such that they are made with knowledge of their falsity or with reckless disregard for their truth or falsity.” Finally, the memorandum outlined Abruzzo’s position that other provisions in separation agreements that might interfere with an employee’s Section 7 rights under the NLRA include non-compete clauses – a point on which she expanded earlier this week. What was the second memorandum? The second memorandum was issued on May 30, 2023, and expanded upon Abruzzo’s view that non-compete clauses violate the NLRA. In this memorandum, Abruzzo asserted that employers that require and enforce non-compete agreements with employees run afoul of the NLRA. Abruzzo believes that non-competition agreements chill an employee’s exercise of their Section 7 rights under the NLRA, because “employees know that they will have greater difficulty replacing their lost income if they are discharged for exercising their statutory rights to organize and act together to improve working conditions; employees’ bargaining power is undermined in the context of lockouts, strikes, and other labor disputes; and, an employer’s former employees are unlikely to reunite at a local competitor’s workplace, and, thus be unable to leverage their prior relationships—and the communication and solidarity engendered thereby—to encourage each other to exercise their rights to improve working conditions in their new workplace.” Abruzzo also argued in the memorandum that non-competition agreements discourage employees from exercising Section 7 rights because (1) any employees’ threats to resign in connection with demanding better working conditions will be seen as “futile” by the employer, since the employer knows the employee lacks access to other employment opportunities; (2) employees will refrain from actually resigning following a threat to do so in demanding for better working conditions; (3) employees are unable to seek or accept employment with competitors to obtain better working conditions; (4) employees are unable to solicit their co-workers to work for a competitor to obtain better working conditions; and (5) employees are unable to see employment with the goal of engaging in protected activity, such as union organizing, with other employees at their employer. While Abruzzo indicated there may be “special circumstances” in which a non-competition agreement is reasonable, such as protecting proprietary or trade secret information, or narrowly-tailored provisions “that clearly restrict only individuals’ managerial or ownership interests in a competing business, or true independent-contractor relationships,” she maintained that for the most part non-competition agreements are unenforceable. Abruzzo also categorically believes that an employer’s justification for a non-competition agreement will likely never be reasonable when the agreement is with “low-wage or middle-wage workers who lack access to trade secrets or other protectible interests, or in states where non-compete provisions are unenforceable,” and that “a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.” Do Abruzzo’s memoranda carry the force of the law? No. In fact, the press release for the memorandum regarding McLaren includes a disclaimer stating that the McLaren memorandum represents Abruzzo’s views, not those of the NLRB. With that said, it is important to understand that Abruzzo’s memoranda are directives to NLRB prosecutors across the country, who now will be expected to view confidentiality provisions, non-disparagement provisions, and non-competition agreements as potential ULPs under the NLRA which, in turn, subject employers accused of the ULP to a range of sanctions that have been expanded by Abruzzo during her term in office. Finally, employers should also remember that non-competition agreements are under increasing scrutiny and greater legal restrictions across the country. In January 2023, the Federal Trade Commission proposed a rule banning almost all non-competes (on that proposed rule, our previous commentary is linked, here).  The FTC received a substantial number of comments on that proposed rule.  In addition, many states have passed recent legislation banning or limiting non-compete agreements, including a law that will take effect in the state of Minnesota on July 1, 2023.

Employee reductions and terminations are an unfortunate result of economic downturns. Even during good economic times, many companies face the need to reduce their workforce or terminate the employment of individual employees. In such circumstances, employers may seek to offer severance pay in exchange for certain releases and promises by the departing employee requiring a severance agreement. The drafting of severance agreements can be complex, given that there are various federal and state laws that prohibit or narrow the provisions that can be included in the severance agreement. The use of confidentiality and non-disparagement provisions has recently come under scrutiny again.  This article summarizes the legal issues that an employer must consider when deciding whether to include such provisions in a severance agreement. What is the impact of the National Labor Relations Board’s decision in McLaren On February 21, 2023, the National Labor Relations Board (“NLRB”) issued a decision, McLaren Macomb, 372 N.L.R.B. No. 58 (2023), finding that an employer violated Section 7 of the National Labor Relations Act (“NLRA”) by offering employees a severance agreement containing provisions stating that the terms of the agreement were confidential and prohibiting the employee from making any disparaging statements about the employer.  Even if the employee ultimately did not sign the agreement, the NLRB found that the mere proffer of these terms to the employees as part of a severance package could be a violation of the NLRA.  Communications by covered employees are protected by Section 7 even if they contain comments that would be considered “disparaging” towards the employer. Does McLaren apply to non-union workplaces? Yes.  Section 7 of the NLRA protects employees’ right to engage in concerted activity for “mutual aid and protection,” which includes discussing the terms and conditions of their employment.  Section 7 applies in union and non-union workplaces. Does McLaren apply to all severance or separation agreements?? No. Only individuals who meet the statutory definition of “employees” – which does not include executives, supervisors, and most managers – have rights under Section 7 of the NLRA. Does the NLRB’s decision mean confidentiality and non-disparagement provisions can no longer be included in severance agreements? Not necessarily.  Employers will now, however, have to engage in a risk assessment in determining whether to include such provisions. For example, in reductions in force (“RIFs”) where the severance is formula-based, the need to include a confidentiality provision is diminished by the fact that there will be many departing employees. Therefore, prohibiting the departing employees from discussing their severance agreements with fellow co-workers who were selected for the RIF adds very little value to the employer. In contrast, where a severance agreement is presented to an individual employee as a compromise, employers may include a confidentiality provision with a definition of “Confidential Information” that is tailored to avoid implicating the terms and conditions of employment that are the core protections of Section 7 of the NLRA. Similarly, following the McLaren decision, employers that want to continue to include non-disparagement provisions in severance agreements could  do so only with specific language. Non-disparagement provisions should, for example, be narrowly tailored to prohibit defamatory statements in accordance with the defamation laws in the applicable jurisdiction to be permissible under McLaren. Is this the first time a federal agency has taken action with regard to provisions in these types of agreements?   No.  The Equal Employment Opportunity Commission (“EEOC”) is another federal agency keeping an eye on confidentiality and non-disparagement provisions in severance agreements.  The EEOC has taken the position that no agreement between a departing employee and an employer can limit the departing employee’s right to testify, assist, or participate in an investigation, hearing, or proceeding conducted by the EEOC.  In addition, the EEOC has stated that limiting an individual’s ability to file a charge or participate in an investigation constitutes retaliation in violation of federal employment law.  Any confidentiality or non-disparagement provision in a severance agreement that attempts to waive these rights is subject to challenge by the EEOC. Similarly, the Securities and Exchange Commission (“SEC”) prohibits employers from taking any action that impinges upon an employee’s ability to bring complaints to the SEC.  SEC Rule 21F-17, enacted under the Dodd-Frank Act, prohibits any action that would “impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement. . .with respect to such communications.” Indeed, the SEC has fined employers for using language that prohibits employees from speaking with the SEC without prior approval from the employer. Thus, employers may not use severance agreements with departing employees that prohibit or discourage departing employees from reporting alleged violations to the SEC. It is important to include language in each severance agreement, even for employers that are not publically traded, that states that the departing employee may speak freely with federal agencies such as the SEC without first seeking approval from the employer. Aren’t there also restrictions related to settlements of claims involving sexual harassment? Yes.  In response to #metoo, various states introduced or enacted legislation restricting the use of confidentiality provisions in agreements settling sexual harassment-related claims.  Each piece of legislation has its own nuances regarding the types of language which are prohibited and the consequences of violating the restrictions. These are just a few of the key issues to consider when drafting a severance or settlement agreement. It is always best practice to speak with an employment attorney when drafting severance agreements to ensure compliance with federal, state, and local laws.

Today’s workforce is more mobile than in past generations. Long gone are the days when an employee started and ended a career at the same company. Knowing how to protect your company’s confidential information when a trusted employee leaves can have a lasting impact on your ability to compete. So, what can you do when a former employee goes to work for a competitor? Is having an irreparable injury provision in your non-compete agreement enough to obtain a court order prohibiting that individual from working at his/her new job? In Minnesota, courts want to see more than just words in a contract before they will grant injunctive relief against a former employee. This week, the Supreme Court of Minnesota issued a decision in St. Jude Medical, Inc. v. Carter. The case arose after Heath Carter left his employer to work for a competitor. The employer filed suit against Mr. Carter and the competitor, alleging violations of Mr. Carter’s non-compete agreement. The employer did not seek money damages but asked the court for injunctive relief; specifically, an order enforcing the terms of the non-compete agreement and prohibiting Mr. Carter from working for a competitor in his then-current position. The case went to a jury, which ultimately found that Mr. Carter had breached his non-compete agreement. But the court refused to enter an injunction, finding that the employer failed to establish that it had been harmed. The case made its way to the Supreme Court, where the question became what to do about specific language in the non-compete agreement that addressed the issue of whether and how the former employer was harmed. The language at issue is commonly included in many non-compete agreements: In the event Employee breaches the covenants contained in this Agreement, Employee recognizes that irreparable injury will result . . . that [the Employer’s] remedy at law for damages will be inadequate, and that [the Employer] shall be entitled to an injunction to restrain the continuing breach by Employee. At first glance, the provision appeared to resolve the issue of whether the employer suffered irreparable harm—Mr. Carter agreed that it had. But the Supreme Court disagreed. The court noted that “[a] private agreement is just that: private,” and concluded that such contractual language does not, by itself, entitle an employer to an injunction after proving the breach of a non-compete. The court emphasized that regardless of what the parties agree to, the burden will always fall on the employer to show that: (1) legal remedies (i.e., money damages) are inadequate; and (2) “great and irreparable injury” will result without an injunction. Because the employer did not offer proof of an irreparable injury, the court held that the employer was not entitled to an injunction. So what now? Are provisions like those quoted above meaningless? Should employers scramble to re-write their non-compete agreements? The short answer is “probably not.” Minnesota aligns with a number of states in which mere contractual language about irreparable harm is not enough to win injunctive relief. Nevertheless, these provisions are still worth including in non-compete agreements because courts can consider them as one of many factors that bear on whether an employer has suffered irreparable harm. Other factors will usually be more persuasive, often including evidence of some or all of the following: The departing employee took confidential information when he or she left (e.g., client lists, marketing plans, and pricing information). The departing employee disclosed confidential information to the competitor or put confidential information to use in the new job. The departing employee solicited business from former clients or customers and used confidential information to solicit such business. The former employer lost client or customer goodwill because of the departing employee’s breach of the non-compete agreement. Ultimately, Carter serves as a useful reminder to employers on both sides of an employee’s job change. Former employers should carefully consider how they have been harmed by an employee’s departure (and what evidence they anticipate being able to present as proof of that harm). Hiring employers should understand and reinforce to their new employees the importance of complying with prior non-compete agreements. And for employers on both sides, consulting with experienced employment attorneys even before these types of cases go to litigation can be the key to a successful outcome.