Severance hasn’t always been a given for employees who are terminated. That expectation has often been left to those working in professional positions or in larger companies. But the pandemic changed those expectations for better and for worse.
A new ruling from the National Labor Relations Board (NLRB) in February of 2023 may have employers and benefits professionals paying more attention to severance agreements. The 2023 decision in McLaren Macomb reversed the NLRB’s 2020 decision in Baylor University Medical Center. According to the NLRB, “Today, the Board issued a decision in McLaren Macomb, returning to longstanding precedent holding that employers may not offer employees severance agreements that require employees to broadly waive their rights under the National Labor Relations Act. The decision involved severance agreements offered to furloughed employees that prohibited them from making statements that could disparage the employer and from disclosing the terms of the agreement itself.”[1] Attorneys who have studied this decision have said there are some potential impacts from it. “While the case involved severance agreements, we expect this Board to extend its reach to separation, settlement, and other agreements alleged to include unlawful provisions.”[2] The NLRB decisions apply broadly. As it says “the Board’s jurisdiction is very broad and covers the great majority of non-government employers with a workplace in the United States, including non-profits, employee-owned businesses, labor organizations, non-union businesses, and businesses in states with “Right to Work” laws.”[3]
Severance hasn’t always been a given for employees who are terminated. That expectation has often been left to those working in professional positions or in larger companies. But the pandemic changed those expectations for better and for worse. Severance and benefits are often on the mind of benefits professionals, but the recent changes in the employment market place may have many considering changes.
During the pandemic, many companies changed their severance policies. According to Employee Benefits News who reported on a study from talent company Randstad RiseSmart, between 2019 and 2021, the number of employers offering severance to all of their employees that involuntarily separate increased from less than half to two thirds of all employers. Unfortunately, that extension came with some limits. “However, 28% of employers made changes to their severance policies to decrease costs in the wake of the pandemic.”[4]
Severance packages for employees may cut into an employer’s bottom line. But as SHRM argues, there is a business case for expanding them. That case includes: “Assisting recruiting efforts, especially in fields where the risk of layoff is high; Helping brand the organization as employee-friendly; Giving subpar employees a palatable way to exit employment, thereby allowing the employer to fill a slot with a better employee; Reducing the likelihood of employment litigation; Providing a cost-effective alternative to employment practices liability insurance.”[5]
Some companies are expanding their severance benefits and also implementing upskilling or retraining programs. Upskilling programs can decrease the cost of layoffs, preserve morale and reduce reputational risk that large layoff have.[6]
SHRM emphasizes that however employers and benefits sponsors decide to change severance it is essential that the policy is communicated clearly. They urge employers to make sure that employees “receive clear and accurate information, and spoken or other written information cannot be in direct conflict with the policy.” According to a study released in 2020 by LHH, a talent and leadership development company called Severance & Separation Benefits Benchmark Study, more companies are following this advice. “Additionally, companies are documenting plans better than before, placing an emphasis on clearly communicating their policies to employees. More than 80 percent of 2020 respondents offer well-documented severance plans to employees – a significant increase from the 64 percent of companies who did so in 2018.”[7]
In the wake of the McLaren McComb NLRB decision, the transparency around severance agreements may also be beneficial to employers. This includes being specific about the confidentiality around the severance agreement. “Agreements with carefully drafted provisions prohibiting the disclosure of trade secrets, proprietary, and other confidential business information should be fine.”[8]
[3] https://www.nlrb.gov/about-nlrb/rights-we-protect/the-law/jurisdictional-standards
[4] https://www.benefitnews.com/advisers/news/severance-pay-changes-happening-in-2021post-pandemic
[5] https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/severancepayplans.aspx
[6] https://www.lhh.com/us/en/insights/press-room/severance-and-separation-benefits-2020-benchmark-study
[7] https://www.lhh.com/us/en/insights/press-room/severance-and-separation-benefits-2020-benchmark-study
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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