NLRB Continues Scrutiny of “Stay-or-Pay” Provisions and Clarifies Heightened Remedies for Unlawful Non-Compete Agreements

October 22, 2024

On May 2023, the National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo issued a memo outlining her position that non-compete agreements in employment contracts could violate worker’s rights under the National Labor Relations Act (NLRA).  GC Abruzzo was critical of non-compete agreements as they restrict employee’s mobility, potentially deter union organizing, and suppress wages.  On October 7, 2024, GC Abruzzo released GC Memo 25-01 (the 2024 Memo), which outlined two new concepts relative to how the NLRB would interpret how the NLRA impacts employee’s rights under non-compete agreements. 

Make-whole Remedies

First, the 2024 Memo proposes specific new remedies for non-compete agreements that violate the NLRA.  Traditionally, the remedy awarded to an employee who challenges a non-compete in court is simply a determination from the court that the non-compete is unenforceable.  Under the terms of the 2024 Memo, GC Abruzzo is advocating that the remedies available to employees under the NLRA would require the employer to make the employee whole for any damages incurred as a result of the unlawful non-compete agreement.  The “make-whole” remedies would require the employer to compensate the employee for the difference in pay and benefits between what they would have earned had they not been constrained by the non-compete agreement.  To qualify for the make-whole remedy, the employee must show that (1) there was a specific job vacancy with a better compensation package, (2) they were qualified for the position, and (3) the non-compete agreement that they signed prevented or discouraged them from applying for the job.  If there is uncertainty regarding the likelihood that the employee would have obtained the higher paying job, that uncertainty shall be resolved in favor of the employee.

“Stay-or-pay” Agreements

Non-compete agreements that contain a “stay-or-pay” provisions were viewed with heightened scrutiny as well.  A “stay-or-pay” provision requires employees to repay a certain amount of money in the event they do not work a specified timeframe at the employer.  Examples include educational repayment contracts, sign-on bonuses, or retention bonuses.  To avoid scrutiny by the NLRB, employers must show that the “stay-or-pay” provision meets the following criteria:

  1. Voluntary Entry: The employee must voluntarily choose to receive tuition benefits for education not specifically required for the job. The employee may not suffer an undue financial loss or adverse employment consequence if they decline.  Costs for mandatory training that is required for the job cannot be included in the repayment obligation.
  2. Specific Repayment Amount: The repayment sum should not exceed the actual cost of the benefit by the employer.
  3. Reasonable Stay Period: The period an employee must work in order to avoid a repayment obligation will be a fact-specific determination based on factors such as the cost of the benefit bestowed, the value to the employee, whether the repayment amount decreases over the course of the stay period, and the employee’s income. Where the cost of the benefit is greater, the stay period may be longer.
  4. Termination Without Cause: The stay or pay provision must state that the debt will not come due if the employee is terminated without cause.

Bottom Line

The bottom line is that the General Counsel of the NLRB does not have the authority to make law by issuing a GC Memorandum.  However, the 2024 Memo articulates the GC’s view of the law and intention to initiate claims that, in her view, violate the NLRA.  Ultimately, the 2024 Memo represents another shift toward stronger worker protections under the NLRA.  While the 2024 Memo is not binding law, employers would be well served in understanding the risk of prosecution by the NLRB and reviewing their non-compete agreements and recruitment incentives.

This article, slightly modified to note recent updates, was featured online in the Wisconsin Employment Law Letter and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.