Non-compete & non-disparagement clauses are dead. They won't be missed.
The end of non-compete & non-disparagement clauses is a regulatory tailwind in the shifting power balance from employers to employees.
A new ruling from the National Labor Relations Board has just killed the non-disparagement clause.
The Wall Street Journal reports:
The National Labor Relations Board (NLRB) released a decision Tuesday that bans two common components of severance agreements. Employers can no longer require laid-off workers to keep their terms of severance secret, and they can’t compel severance recipients to refrain from publicly criticizing the company. The new restrictions apply to all employers except those in fields the NLRB doesn’t oversee, such as government, railroads and airlines.
The decision concludes a case known as McLaren Macomb, which concerns a Michigan hospital that furloughed 11 outpatient-care workers amid the 2020 Covid lockdown. The employees were offered severance pay in return for their promise not to discuss the payments publicly or disparage the hospital, and all 11 agreed. But their union brought a complaint to the NLRB calling the agreements invalid.
An administrative law judge at the agency heard the case in 2021 and issued a split ruling. His decision said the hospital broke collective-bargaining rules by dealing directly with union members. But it also found that the actual severance agreements were legal. The ruling cited two recent NLRB cases that set boundaries for such agreements. Baylor University Medical Center and IGT, both from 2020, confirmed the right to trade severance for silence except when employers had broken other workplace rules.
The agency tore up those precedents this week and laid down new rules. “Employers cannot ask individual employees to choose between receiving benefits and exercising their rights,” Chairman Lauren McFerran said Tuesday. The case was decided on a 3-1 vote, with three Democratic appointees in favor and a lone Trump-appointee dissenting.
This is a win for employees and proponents of free labor markets. The more people can speak publicly about a former employer, the more free and efficient labor markets will be.
But the Wall Street Journal Editorial board, among others, disagrees:
At a practical level, the decision may lead to fewer severance payments. Consider a cash-strapped company that wants to offer severance to encourage a few employees to pursue other work. That offer might be counterproductive if they think the recipients will spread the word to current staff or to the media. If they can’t require confidentiality, an employer might proceed with the layoffs but forego severance.
When government limits the scope of bargaining, employers and workers often both lose. The NLRB will pat itself on the back for its ruling, while workers may lose their chance to accept cash on their own terms.
This is a horrible argument. Companies offer severance payments primarily to prevent employees that they’ve fired from suing them for discrimination, wrongful termination, or any other reason. Non-disparagement clauses are an extra benefit but almost never the main one. Under no circumstances will this ruling materially affect the number of severance offers.
Furthermore, non-disparagement clauses are often found in standard employment contracts, not just severance agreements. They are also increasingly used to hide abuse inside some of the country’s most influential companies.
This ruling by the NLRB comes on the heels of a January Federal Trade Commission proposal that would ban non-compete clauses.
Companies would also be forced to inform current employees that any previously signed non-competes were no longer binding. The clauses, which typically prevent workers from joining competitors or starting their own company for a certain period of time after their employment, are already banned or largely unenforceable in a small number of states; many others place restrictions on their use, including for certain categories of employee. Still, about one in five American workers have signed them, and the F.T.C. has claimed that the countrywide elimination of these clauses would generate extra job opportunities for as many as thirty million workers, and raise wages by three hundred billion dollars. The U.S. Chamber of Commerce and other business groups have said that the rule exceeds the F.T.C.’s authority; it is likely to face legal challenges.
As I’ve written previously, the simultaneous and universal normalization of remote work brought on by the covid-19 pandemic has dawned an era of unprecedented worker leverage that will not only see explosive growth in remote work but a rethinking of knowledge work from an arrangement from workers trading their time for money to workers trading their output for money.
The end of non-compete & non-disparagement clauses is a regulatory tailwind in that shifting power balance from employers to employees. In each case, employers ask employees to give up some market freedom in return for money. As those market distortions -- most of which benefit employers and the expense of employees -- are fixed, workers win.
The market for labor remains broken in part because employers have done an excellent job of tricking employees into relinquishing what little market power they have. Part of that power is the freedom to speak publicly about a former employer or work for a competitor.
Neither of those market freedoms should be given up, even as part of a negotiation.