On May 30, 2023, the federal government continued its crusade against employee non-compete agreements.1 Jennifer A. Abruzzo, the NLRB’s General Counsel, issued a Memo to all Regional Directors, in which she stated that, absent limited circumstances, the “proffer, maintenance, and enforcement of [employee non-compete] agreements violate Section 8(a)(1) of the [NLRA].” The NLRA protects employees’ “right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” 29 U.S.C. § 157. Employers commit an unfair labor practice if they interfere with employees’ rights under the NLRA. In her Memo, Ms. Abruzzo opines that non-compete agreements are overbroad and “chill” employees’ exercise of their NLRA rights absent exceptional circumstances. Her rational is that the threat of being discharged coupled with the denial of other employment opportunities will hinder employees from engaging in protected activity.2 She outlined five situations in which non-competes could violate employees’ rights under the NLRA:
- Non-competes chill employees from concertedly threatening to resign to demand better working conditions because, absent other employment opportunities, employees would view such threats as futile.
- Non-competes chill employees from actually carrying out the threat to resign to secure improved working conditions.
- Non-competes chill employee from seeking or accepting employment with a local competitor to obtain better working conditions.
- Non-competes chill employees from soliciting co-workers as part of a broader course of protected activity.
- Non-competes chill employees’ ability to engage in protected activity with other workers at an employer’s workplace.
Ms. Abruzzo did state she believed there are circumstances where “narrowly tailored” non-compete agreements justify infringement on employees’ rights. Specifically, non-competes could be lawful if they only restrict employees’ “managerial or ownership interests in a competing business, or true independent-contractor relationships.” This could arguably prevent an employee from receiving equity awards from a competitor. However, Ms. Abruzzo noted that simply avoiding competition from a former employee or protecting investments in training are unlikely to justify overbroad non-compete agreements. Moreover, an employer’s interest in protecting proprietary or trade secret information can be protected by narrowly tailored agreements. She further stated that non-compete agreements with low-wage employees would rarely, if ever, be enforceable.
Typically, restrictive covenants between an employer and employee have been governed by state law.3 However, recently, federal agencies have started to turn their attention towards them. As an example, the FTC announced its proposed rule banning non-competes, which is not yet a final rule, but the agency has already pursued multiple enforcement actions against employers they claim harm competition through restrictive covenant agreements with workers. Ms. Abruzzo’s Memo is not a ruling on the law; that would require the NLRB to issue a decision. Rather, Ms. Abruzzo’s Memo instructs Regional Directors to submit non-compete cases to the Division of Advice, who would determine if these types of cases should be prosecuted. Finally, she instructed Regional Directors to seek “make-whole” remedies for workers who have filed unfair labor charges and who can demonstrate they were harmed by overbroad non-compete agreements. Therefore, it is likely only a matter of time until the NLRB’s Regional Directors take action on Ms. Abruzzo’s directive.
Accordingly, Employers may want to start to examine their employees’ restrictive covenant agreements to make sure they are narrowly tailored; notwithstanding the latest memo, narrowly tailored restrictions is the typical standard states employ when evaluating non-compete agreements. Additionally, employers should consider whether they wish to impose non-competes on non-management employees. Another recommended area of review is the non-solicitation of customer restriction, which is often equated by states to non-competes. Employers would be wise to monitor these issues as they emerge.
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1 On January 5, 2023, the Federal Trade Commission (FTC) proposed a New Rule to ban non-compete clauses, which “hurt workers and harm competition.”
2 It is worth noting that the NLRA does not cover “supervisors”, which is defined as “any individual having authority, in the interest of the employer, to hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward, or discipline other employees, or responsibly to direct them, or to adjust their grievances, or effectively to recommend such action, if in connection with the foregoing the exercise of such authority is not of a merely routine or clerical nature, but requires the use of independent judgment.” 29 U.S.C. §§ 152(11). Typically, these are the employees who have non-compete agreements.
3 Some states, such as California, North Dakota, and Oklahoma have effectively prohibited post-termination non-competes.
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