Certain states, most notably California, have long sought to restrict or outright ban employee non-competition covenants. The anti-compete crowd gained a strong supporter from the federal administrative state on May 30, 2023, when the General Counsel of the National Labor Relations Board (NLRB) issued Memorandum GC-23-08. That memorandum asserts that the National Labor Relations Act (NLRA) flatly prohibits most non-compete agreements struck between employees and employers, subject to the NLRA—i.e., almost all private sector, non-supervisory employees. This memorandum follows the General Counsel’s March memo taking the position that confidentiality and non-disparagement provisions in employee severance agreements are unlawful.

The NLRB Argues That Non-Competes Violate Employees’ Section 7 Rights

Notably, the NLRA itself—enacted in 1935—does not even mention non-competes within its statutory text. Instead, the NLRB’s memorandum invokes Section 8 of the NLRA, which prohibits employers from limiting covered employees’ Section 7 rights. Under the NLRA, Section 7 protects the “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.” The memo connects non-competes to Section 7 by arguing that such restrictive covenants chill Section 7 rights by denying access to future employment opportunities, unless “narrowly tailored” to a special circumstance justifying the infringement on employee rights.

According to the NLRB, non-compete provisions unlawfully restrain five specific Section 7 rights:

1. Non-competes “chill employees from concertedly threatening to resign to demand better working conditions … because employees would view the threats as futile given their lack of access to other employment opportunities and because employees could reasonably fear retaliatory legal action for threatening to breach their agreements”;
2. Non-competes “chill employees from [actually] carrying out concerted threats to resign or otherwise concertedly resigning to secure improved working conditions”;
3. Non-competes “chill employees from concertedly seeking or accepting employment with a local competitor to obtain better working conditions”;
4. Non-competes “chill employees from soliciting their co-workers to go work for a local competitor as part of a broader course of protected concerted activity”; and
5. Non-competes “chill employees from seeking employment, at least in part, to specifically engage in protected activity with other workers at an employer’s workplace” (such as in union organizing efforts).

The NLRB Concludes that Non-Competes Are Almost Always Unenforceable Absent Narrow “Special Circumstances”

Based on the foregoing, the General Counsel concludes that business’s interests in retaining employees are unlikely to justify overbroad non-compete agreements; indeed, General Counsel specifically notes that “special circumstances” do not include “a desire to avoid competition from a former employee.” A “narrowly tailored” non-compete could be permissible, however, if justified by certain special circumstances, identified by the NLRB here as: (1) provisions that clearly restrict only individuals’ managerial or ownership interests in a competing business; (2) when they apply to true independent contractor relationships; and/or (3) when they are narrowly tailored to protect trade secret information.

Notably, the NLRB General Counsel’s memorandum does not constitute binding or precedential law or authority. Instead, it directs NLRB regional directors to submit cases involving potentially unlawful non-compete agreements to the NLRB’s Division of Advice. Given that this memorandum is the first time in nearly 90 years of existence that the NLRB has declared that non-compete provisions violate the NLRA, it remains to be seen whether the NLRB will actually move forward with prosecuting such claims. In particular, the tenuous connections the memorandum makes between Section 7 rights and non-compete agreements—the latter of which typically do not explicitly restrict the rights enumerated above and are usually not adopted in response to Section 7 activity—could create hurdles for the NLRB in demonstrating that employers possessed the motive to interfere with Section 7 rights by requiring employees to sign non-compete agreements.

Key Employer Takeaways

Notwithstanding the hypothetical obstacles the NLRB may face in challenging non-compete agreements in the future under the memorandum’s roadmap, employers should continue to take measures to ensure that their non-compete agreements are narrowly tailored and compliant with relevant law in states that still permit them (whether limited or otherwise). Employers should also keep in mind that non-compete agreements should be applied only to employees that pose an actual competitive threat. In other words, the legal risk and potential liability arising from asking low-level, low-to-mid-wage, and/or non-exempt employees to sign non-competition agreements will usually outweigh the (likely minimal) benefit to the business by having such an agreement in place.

That many states now automatically void such agreements and may provide mechanisms for employees to recoup attorneys’ fees in a declaratory judgment suit to invalidate restrictive covenants likewise reinforces the idea that employers’ non-compete powder should be kept dry for those high-level employees that really matter. Even better, assuming said employees are in supervisorial or management positions—e.g., they have the authority to hire, fire, transfer, suspend, promote, discipline, etc.—restrictive covenants for those employees who continue to remain outside the purview of the NLRB and any enforcement actions it may take in the future based on the instant memorandum.