Employers Beware: NLRB General Counsel Targets Non-Compete Agreements

Non-compete agreements continue to be under attack by federal agencies. The Federal Trade Commission (the FTC) published a proposed rule in January 2023, that would ban all forms of non-compete agreements except in the context of the sale of a business. The FTC is in the process of reviewing thousands of comments as part of its rulemaking process and is expected to finalize a decision in 2024. In the event it chooses to restrict non-compete agreements, the FTC will most certainly face legal challenges in federal court. In the meantime, the General Counsel from the National Labor Relations Board (the NLRB) recently weighed in on the legality of non-compete agreements in the context of the National Labor Relations Act (the NLRA). On May 30, 2023, General Counsel Jennifer Abruzzo issued Memorandum GC 23-08 (the Memo), indicating that overbroad non-compete agreements are unlawful because they “chill” or discourage employees from exercising rights under Section 7 of the NLRA.

State law governs non-compete agreements, and if a court deems the terms of the non-compete agreement overbroad, the remedy is typically that the non-compete agreement is deemed unenforceable. In the Memo, GC Abruzzo contends that non-compete agreements interfere with an employee’s Section 7 rights in the following ways:

• They chill employees from concertedly threatening to resign to demand better working conditions;
• They chill employees from carrying out concerted threats to resign or otherwise concertedly resigning to secure improved working conditions;
• They chill employees from concertedly seeking or accepting employment with a local competitor to obtain better working conditions;
• They chill employees from soliciting co-workers to go work for a local competitor as part of a broader course of protected concerted activity; and
• They chill employees from seeking employment, at least in part, to specifically engage in protected activity, including union organizing, with other co-workers at an employer’s workplace.

GC Abruzzo concluded that “the proffer, maintenance, and enforcement of a non-compete provision that reasonably tends to chill employees from engaging in Section 7 activity violates Section 8(a)(1) unless the provision is narrowly tailored to special circumstances justifying the infringement on employee rights. In this regard, a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.” While limited exceptions may be considered, the Memo is short on specific scenarios where it may find the employer’s interest in maintaining the non-compete to be justified. She also asserted that it is more likely that a non-compete will be deemed to be a violation of labor law where the non-compete provisions are imposed on low wage or middle wage workers.

The risk for employers is that an employee who has signed a non-compete agreement will file an unfair labor practice charge with the NLRB and claim that they have lost out on higher paying work opportunities at a competitor. As the NLRB has expanded its view on “make whole” remedies, there is risk that not only will the NLRB hold that non-competes are invalid, but it may also award damages to compensate the employee for the lost employment opportunity.

Does the Memo Apply to All Employees?

Not necessarily. The NLRA applies to almost all private employers, but does not apply to government workers, independent contractors, managerial or supervisory employees. As such, the Memo would only apply to employees subject to the NLRA. However, the proposed ruling applies to both unionized and non-unionized workplaces.

What Should Employers Do?

There will certainly be increased risks to employers in maintaining non-compete agreements by the NLRB. GC Abruzzo’s Memo signals an intent to investigate and charge employers with unfair labor practice charges before an Administrative Law Judge, and ultimately a review by the NLRB. Ultimately, employers have the right to appeal adverse rulings of the NLRB to the federal court. It is notable that GC Abruzzo’s Memo does not establish the law – the NLRB will need to adopt her position, and these cases will undoubtedly be heavily litigated through the federal courts. However, her Memo does signal to Regional Directors an intent to bring forward cases for litigation. Enforcement of this new initiative will subject employers to time-consuming and costly litigation. Expect employers to vigorously challenge whether such a game-changing approach to non-competes is constitutional when implemented outside of the legislative or rulemaking processes.

Employers should consult with their labor attorneys to discuss their specific circumstances and weigh the risks posed by the increased scrutiny over the NLRB’s change in enforcement policy. Employers should consider a full review of all non-compete agreements to determine whether the initiatives advance by the FTC and/or NLRB will impact their non-compete agreements, and to consider whether there may be alternative methods to protect their business interests moving forward.

Axley Attorneys will continue to monitor the status of non-competes before the FTC and NLRB and are prepared to assist clients navigate these challenging issues. For more information about this topic, please contact Chris Toner at ctoner@axley.com or Troy Thompson at tthompson@axley.com.