Time to Revise Your Severance Agreements: Recent Changes to Noncompete, Nondisparagement, and Nondisclosure Clauses that Impact Your Agreements
You may have heard chatter about the potential end of two common clauses that impact employees, and more significantly, employers: noncompete clauses and nondisclosure (or confidentiality) clauses in severance agreements. What has received a little less attention, but may be more important, is also changes to nondisparagement and general confidentiality clauses. What are these changes, and as an employer, do you need to take immediate action?
The short answer? It’s time to review your employment and severance agreements to ensure that nondisparagement and confidentiality clauses don’t threaten their enforceability if challenged. There is no official change to noncompete clauses, but for nondisclosure clauses, it’s a good idea to check the language in your severance agreements. Read below to learn more about these proposed changes.
Nondisparagement and Confidentiality Clauses
In late February, the National Labor Relations Board held that clauses broadly prohibiting disparagement of the employer and requiring confidentiality as a requirement of severance violated Section 7 of the National Labor Relations Act. This overturned a pair of Trump-era rulings that said severance agreements only violate federal labor law when employers engage in other unlawful conduct when asking workers to sign them. Even if you do not have a union or your employees are not organizing, Section 7 applies broadly and requires employers to allow employees to freely discuss wages, hours, and other terms and conditions of employment. In the recent decision, the Board held that the two clauses that are commonly used in severance and settlement agreements, prohibiting disparagement of the employer and prohibiting the employees from discussing the terms of the agreement, violated Section 7.
In January, the Federal Trade Commission proposed a new rule that would ban employers from imposing noncompete clauses on their workers. A Noncompete clause is a clause under which one party agrees to not enter into or start a similar profession or trade in competition against another party. According to the FTC, this is a “widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses”—impacting hairstylists, doctors, and corporate executives alike. By stopping this practice, the agency estimates significant wage increases and the expansion of career opportunities for approximately 30 million Americans.
The FTC is seeking public comment on the proposed rule, which is based on a preliminary finding that noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. The public is able to provide comment until March 20, 2023.
The FTC’s proposed rule would generally prohibit employers from using noncompete clauses—and further, would require them to rescind existing noncompetes and inform employees that they are no longer in effect. The rule would apply to independent contractors and anyone who works for an employer. It would make it illegal for an employer to enter into and/or maintain a noncompete with a worker.
Once public comments are closed on March 20, the FTC will review the comments that were received and the results of a recent public forum held on February 16, and will adopt either the rule as proposed or a modified version of the rule such as a presumption that the non-compete is unlawful or applying to certain classes of workers, as described in the notice of proposed rulemaking.
“Speak Out Act” and Nondisclosure Clauses
In December 2022, President Biden signed into law the Speak Out Act, which prohibits enforcement of clauses in severance agreements or pre-dispute agreements that prohibit disclosure of disparaging comments or descriptions of circumstances relating to claims of sexual harassment or assault. Clauses included in such agreements will be deemed non-enforceable. Although the term “dispute” is not defined, employers should ensure that severance or separation agreements are reviewed by legal counsel to ensure their clauses are enforceable.
This federal law is similar to many state-law requirements that broadly prohibit disclosure of allegations or factual information that form the basis of claims for employment discrimination, sexual harassment, or similar information without following very specific requirements in Maine and New York, for example.
With these recent changes, and the current economic climate, employers should review—and, if necessary, revise—their severance agreements to ensure they don’t include overly broad language that would impair the enforceability of those agreements. For guidance on these updates and reviewing severance agreements, contact Labor and Employment Attorneys Tara Walker or Talesha Saint-Marc for support.