Many employers have employees sign confidentiality agreements aimed at prohibiting disclosure of confidential business information to third parties, and it has been widely assumed that such clauses were lawful. That assumption may no longer be accurate, however, as a recent First Circuit decision has held that confidentiality clauses in employment contracts can constitute a per se violation of employees’ protected employee rights under the National Labor Relations Act (NLRA) if the clauses can be read as prohibiting all discussions of wages, hours, and working conditions.

The NLRA became federal law during the height of the Great Depression as a way to help protect workers’ rights in forming labor unions and protecting workers from reprisals from management. The law has evolved through the years and is particularly susceptible to changing political winds as the National Labor Relations Board (“NLRB” or “Board”) is appointed by the President (with the advice and consent of the Senate) with Board members serving five-year, staggered terms. It is well established under Section 7 of the NRLA that employers cannot prohibit non-supervising employees from discussing with each other and/or union representatives the terms and conditions of their employment.  As a result, management must avoid making statements or engaging in conduct that unlawfully infringes upon workers’ rights to engage in concerted activity, including discussing their wages and other conditions of employment among themselves. But, now all employers must take note of how the NLRA’s application is being expanded to apply outside the traditional labor union context.

Recently, the Board has been stretching the limits of Section 7, and the First Circuit case of NLRB v. Northeastern Land Services, (1st Cir. June 22, 2011) provides a good example of that trend. In that case, a non-union temporary employment agency required its employees to sign a contract that stated, in relevant part, “that the terms of this employment, including compensation, are confidential to Employee and the NLS Group. Disclosure of these terms to other parties may constitute grounds for dismissal.” The confidentiality clause was standard in the employer’s employment agreements, and the employer believed the clause was necessary and appropriate to prevent employees from complaining to clients of the temp agency about wage issues. The employer neither believed nor contemplated that the phrase “[d]isclosure of these terms to other parties” could be interpreted to chill an employee’s exercise of NLRA rights.

The Northeastern case arose after the employer fired an employee for allegedly violating the confidentiality provision of his employment contract, by complaining about alleged untimely payment of wages and expense reimbursements to a third party (not a fellow employee or union representative). The employee then filed an unfair labor practice charge with the NLRB, alleging that the employer violated the NLRA by (1) maintaining and enforcing an unlawful confidentiality clause in its employment contract (because an employee could reasonably construe the clause to prohibit protected activities under the Act, such as discussing wages with a union representative), and (2) discharging the employee for violating the unlawful confidentiality clause.

An NLRB Administrative Law Judge (“ALJ”) initially held that the employer’s enforcement of the confidentiality clause did not violate the NLRA. Following core precedent, the ALJ held that if an employer had a valid reason for implementing a confidentiality clause, then employees could not construe it to prohibit their ability to talk with union organizers and therefore such a clause would not violate the NLRA. Accordingly, the ALJ held that the employee’s termination did not violate the NLRA.

On appeal, the Board reversed the ALJ’s decision, holding that the confidentiality clause was “overbroad” and the employer did not have a sufficiently valid reason for implementing it. The Board reasoned that employees could have reasonably construed the confidentiality clause as prohibiting “protected” discussions, because it forbade disclosure to “other parties”–a broad characterization that could include co-workers and union representatives. The First Circuit enforced the Board’s holding, under the rationale that federal appellate courts should show deference to the Board, in light of the agency’s specialized knowledge of the NLRA.

This case is notable because it is a departure from the traditional labor law context, in that no union was involved and the employee was complaining to an outside third party (the employer’s customer). The case is also notable because the ruling did not turn on whether the employee actually felt (or was) restricted in their NLRA rights. Rather, the confidentiality clause was found per se unlawful under the NLRA. The NLRB found that an employee could reasonably construe the clause to restrict protected activities under the NLRA, and that possibility is sufficient to be an unfair labor practice.

The Northeastern case highlights the current Board’s and First Circuit’s trend towards a broad interpretation and application of the NLRA. The application of traditional labor law principles to an expanding universe of contexts and fact patterns is a concern for both unionized and non-unionized employers, given the NLRB’s recent inquiries into various union and non-union workplaces: ranging from the language of employee contracts to the handling of employee social media posts.

Action Items for Employers

Employers should review their employee handbooks, personnel policies, and employment agreements—specifically their policies on communication—to make sure that they do not infringe on their non-supervising employees’ rights to discuss wages, hours, and working conditions.

If using a confidentiality clause, employers should define confidential information as narrowly as possible. Employers should specifically define those individuals to whom confidential information may not be disclosed. Employers should also consider adding a disclaimer which makes clear that the confidentiality clause is not meant to restrict employees’ rights under the NLRA (a more robust disclaimer may be advisable depending on items such as the breadth of the policy, whether the employer is already unionized, and the degree to which the employer, or the employer’s industry, is the focus of organizing activity).