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Nonprofit Employers and New Severance Agreement Restrictions

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Thanks to a recent National Labor Relations Board’s ruling, many nonprofit employers may need to eliminate or narrow non-disparagement and confidentiality provisions in employment-related severance agreements, on pain of their legal invalidation. But wait – why would this union-related government agency have authority over nonprofits that don’t have any unionized employees? The answer lies in connection with employees’ union-related communications rights, regardless of whether they belong to a union, with important jurisdictional and religious liberty caveats.

The NLRB’s Holding Regarding Section 7 Employee Rights

On February 21, 2023, the National Labor Relations Board (“NLRB”) issued its McLaren Macomb decision, holding that employers may not offer severance agreements (also known as separation agreements) that require employees to agree to non-disparagement or confidentiality provisions unless such provisions are narrowly tailored.

The NLRB concluded that broadly worded non-disparagement and confidentiality provisions in severance agreements, in effect, require employees to waive their Section 7 rights provided them through the National Labor Relations Act (“NLRA”). More specifically, “a severance agreement is unlawful if its terms have a reasonable tendency to interfere with, restrain, or coerce employees in the exercise of their Section 7 rights, and that employers' proffer of such agreements to employees is unlawful.”[1]

Section 7 of the NLRA provides broad protection to employees with respect to union-related activities: "the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing.” Additionally, and quite importantly for the NLRB’s ruling, Section 7 affords employees with the right “to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Such concerted activities may involve employees’ communications with third parties including disparaging statements or involving confidential information. Consequently, the NLRB’s ruling covers both unionized and non-unionized employees, but subject to the following jurisdictional and religious employer qualifications.

The NLRB’s Jurisdictional Authority

The NLRB is the federal government agency tasked with enforcing the NLRA. The NLRB thus holds authority - in legal jargon, jurisdiction - over private sector employers that participate in interstate commerce more than minimally. Such minimal activity depends on the nature of the employer and its financial activities. For example, non-retail employers are subject to the NLRB’s jurisdiction if they either (a) sell goods or provide services of at least $50,000 out of state or (b) purchase goods or services of at least $50,000 from out of state. The latter threshold could be met through online purchases, retention of contractors from out of state, or employees working remotely.

Practically speaking, and particularly in our current times of extensive interstate operational activities, the NLRB’s jurisdiction extends to many employers including nonprofits. It may be possible for a nonprofit employer, especially one that is relatively small, to be excluded from the NLRB’s reach. But then again, the $50,000 threshold is not hard to reach.

“Religious Institutions” – Educational Only?

A different rationale for exclusion from the NLRB’s jurisdiction, at least for ministry nonprofits, is that they sufficiently qualify as “religious organizations.” The NLRB’s longstanding policy is to decline jurisdiction over employees of “religious organizations” if the employees “effectuate the religious purpose of the organization.”[2] But as a significant distinction (and subject to the above jurisdictional requirements), the NLRB will assert jurisdiction over employees of religious organizations who hold “secular” jobs.

This delineation began with the U.S. Supreme Court’s landmark 1979 ruling NLRB v. Catholic Bishop. In that case, the Court held that a lay teacher’s job at a parochial school fulfilled a church-operated school’s mission and was therefore exempt from the NLRB’s jurisdictional reach. The underlying rationale was essentially to avoid constitutional issues, and therefore with the NLRA plausibly interpreted to exclude religious employers. Unfortunately, however, the Catholic Bishop decision resulted in confusion for courts and the NLRB alike, absent clear delineation of this admittedly amorphous legal standard. Despite such confusion, some clear boundaries have emerged. For example, the courts determined, consistent with Catholic Bishop, the NRLB has jurisdiction over employers that provide so-called secular services, such as childcare centers and hospitals.[3]

Following Catholic Bishop, the NLRB first adopted a two-part test in the 2014 Pacific Lutheran University decision, which involved requiring the school to demonstrate that a religious practice conflicts with NLRA’s requirements.[4] Then in 2020, the NLRB overruled Pacific Lutheran with Bethany College. In Bethany College, the NLRB acknowledged that it cannot exercise jurisdiction over any nonprofit organization holding itself out to students, faculty, and the community as providing a religious educational environment and that is affiliated with, or owned, operated, or controlled directly or indirectly by a recognized religious organization. Bethany College thus makes it harder for the NLRB to assert jurisdiction over religious organizations, but without necessarily clarifying whether “religious organizations” may include non-educational ministries. Notably, the NLRB has signaled its willingness to reconsider its religious exemption standard and to reinstate Pacific Lutheran’s standard in the near future, which would make the NLRB’s jurisdictional reach more extensive over ministry employers.[5]

Notwithstanding the NLRB’s apparent interest in expanding its jurisdiction over ministry organization, keep in mind that the ministerial exception is alive and strong as a critical legal protection for religious employers, as evidenced by court decisions like the U.S. Supreme Court’s 2020 ruling in Our Lady of Guadalupe. In that decision, the Court clarified and broadened this legal protection to forbid courts from intervening in employment-related disputes involving workers engaged in religious activities, thereby strengthening First Amendment religious freedom rights for employers of pastors, other religious leaders, religious teachers, and other personnel involved with religious work.[6] Based on such strengthened legal protection, a ministry employer should consider whether some or all of its employees are covered by the ministerial exception and therefore may not assert adverse employment claims – whether under Section 7 of the NLRA or otherwise.

Applicability to Nonprofit Severance Agreements

What should responsible nonprofit employers do in light of the NRLB’s McLaren Macomb decision?

First, with respect to severance agreements generally, using them still may be quite beneficial and important for a variety of reasons. Such reasons may include recognition of a valued employee’s tenure, a desire to help supplement any unemployment benefits (or to replace them if not available), to garner the departing employee’s cooperation such as with respect to donor relations and transitional matters, and to obtain an employee’s waiver of potential adverse employment claims.[7] The NLRB’s McLaren Macomb decision thus does not ban employees from creating severance agreements, but it does impose significant limits.

Second, and assuming McLaren Macomb’s applicability notwithstanding jurisdictional and “religious organization” caveats, consider the NLRB General Counsel’s recently issued guidance for severance agreements (“GC Memo”). In a nutshell, the GC Memo instructs that employers may not impose severance agreements that in any way limit employees’ engagement with third parties in furtherance of their Section 7 rights. More specifically, per the GC Memo, “overly broad provisions that affect the rights of employees to engage with one another to improve their lot as employees” are prohibited in severance agreements.[8]

To determine whether a severance agreement infringed an employee’s Section 7 rights, the NLRB previously focused on both the agreement’s terms and surrounding circumstances, such as whether an employee was coerced into signing a severance agreement. If not, employees could voluntarily relinquish their Section 7 rights. McLaren Macomb and the GC Memo change the equation, focusing only on the agreement itself. According to the GC Memo, even if an employee does not ultimately enter into a proffered severance agreement containing a broad confidentiality and non-disparagement clause, the mere fact the employer proffered such an agreement is considered unlawful activity. Further, the GC Memo directs that even if an employee expresses a desire to include a confidentiality and/or non-disparagement clause in the severance agreement, the clause may still be considered unlawful if broadly worded.

What is too broad? Or better couched here, what is sufficiently narrow? According to the GC Memo, a confidentiality clause that is “narrowly tailored to restrict the dissemination of proprietary or trade secret information for a period of time based on legitimate business justifications,” may be considered legally enforceable. That is apparently the permissible legal limit. A non-disparagement clause that is legally enforceable if it is “narrowly tailored, . . . [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.” In other words, non-disparagement clauses are unlawful unless they only ban defamation.

What if a nonprofit employer believes that it does not reach the monetary threshold for NLRB jurisdiction or wants to enter into a severance agreement for an employee likely covered by the ministerial exception? In such cases, the employer may decide to include a broadly worded confidentiality clause and/or non-disparagement clause in the severance agreement.

Remember that not all severance agreements are alike, and not all possible severance terms should necessarily be included. For example, a severance agreement may involve an employee with little or no confidential information to be addressed. And as a practical matter, it may be challenging if not impossible to prevent a former employee from making disparaging comments or sharing of confidential information. It may be helpful to condition continued severance payments on compliance with such restrictions, but any other enforcement may prove extremely challenging. Note too that an employer who asks an employee to accept a non-disparagement severance provision may in turn be asked to agree to a mutual non-disparagement provision. Such mutuality may not be acceptable to an employer, especially if the employer may wish to preserve flexibility to share negative information that a former employee may view as disparaging.

Onward with Severance Agreement Usage

An employer confident of McLaren Macomb’s inapplicability may decide to include broad confidentiality and/or non-disparagement provisions in a departing employee’s severance agreement. A more measured approach may be to consider both jurisdictional and ministerial exception aspects, along with the advisability of either or both provisions in the severance agreement. Assuming that McLaren Macomb applies and that such provisions may be desirable, the following severance agreement parameters should be followed: (1) avoid overly broad confidentiality and non-disparagement provisions, even if an employee wants them included; (2) only include a confidentiality clause to protect an employer’s proprietary information or trade secret; and (3) only include a narrow non-disparagement clause banning defamation.

[1] McLaren Macomb and Local 40 RN Staff Council, Case 07-CA-263041, at 4.
[2] Jurisdictional Standards, NLRB; see also St. Edmund’s Roman Catholic Church, 337 N.L.R.B. 1260, 1260 (2002) (“[T]he Board will not assert jurisdiction over nonprofit, religious organizations.”).
[3] See, e.g., Catholic Soc. Servs., 355 N.L.R.B. 929, 929 (2010) (applying Catholic Bishop and determining that Board jurisdiction over residential treatment specialists at religiously affiliated child welfare agency was proper). See also Kathleen A. Brady, Religious Organizations and Mandatory Collective Bargaining Under Federal and State Labor Laws: Freedom from and Freedom for, 49 VILL. L. REV. 77, 78, 84 (2004) (listing contexts in which the Board and the Court have found Catholic Bishop does not preclude NLRB jurisdiction over religiously affiliated employers).
[4] 361 NLRB No. 157, slip op. at 5 (2014).
[5] See Saint Leo University, Inc., 12-CA-275612 (2023), and related article (addressing NLRB General Counsel’s post-hearing brief, which urged the Board to “return to the jurisdictional standard articulated in Pacific Lutheran,” and concluding that such "change would make it even more difficult for religious educational institutions to successfully argue exemption from the Board’s jurisdiction and would tilt the balance towards infringing on the First Amendment rights of religious educational institutions.”).
[6] For more information about the Our Lady court ruling, please see our law firm's blog article.
[7] For more information about severance agreements, please see our law firm's blog article.
[8] Memorandum GC 23-05 on March 22, 2023.

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