Making sense of the NLRB’s effort to limit non-compete agreements.

In late May, Jennifer Abruzzo, the General Counsel for the National Labor Relations Board (NLRB), issued Memorandum GC 23-08, in which she expressed her position that the majority of non-compete clauses violate the National Labor Relations Act (NLRA). The Memorandum came about a month after the public comment period closed on the Federal Trade Commission’s (FTC) proposed rule to ban non-compete agreements altogether,[1] leaving many employers confused about the current state of federal regulation of non-compete agreements. This article covers some of the key questions troubling employers.

What does the Memorandum do? 

In short, the General Counsel opined that it is generally unlawful for employers to (1) offer, (2) maintain,or (3) enforce non-compete agreements with or against employees who are covered by the NLRA. 

Why did the General Counsel take this step?

Ms. Abruzzo believes that overbroad non-compete clauses violate the NLRA by chilling employees from exercising their rights under Section 7 of the NLRA, which allows both union and non-union employees to take collective action to improve their working conditions. For example, the memo contends that non-compete clauses dissuade employees from working together to:

• Threaten to resign to improve working conditions.
• Seek and accept work with a local competitor for better working conditions.
• Solicit coworkers to work for local competitors to improve working conditions.

How does this relate to or impact the FTC’s proposal? 

It doesn’t. The General Counsel’s position is a completely separate matter from the FTC’s proposed rule banning non-compete agreements and has no legal bearing on the fate of the FTC’s rule. 

The General Counsel’s position also differs from the FTC’s proposed rule in a few key respects.

First, the Memorandum is not a mere proposal like the FTC’s rule. While the Memorandum doesn’t itself carry the force of law, it is a very public expression of the General Counsel’s plans for the NLRB to begin processing and prosecuting unfair labor practice charges relating to non-compete agreements right now.

Indeed, Ms. Abruzzo closed her Memorandum by instructing the NLRB’s regional directors to begin analyzing “cases involving noncompete provisions that are arguably unlawful,” and to, in appropriate circumstances, “seek make-whole relief for employees who, because of their employer’s unlawful maintenance of an overbroad non-compete provision, can demonstrate that they lost opportunities for other employment, even absent additional conduct by the employer to enforce the provision.” (My emphasis.)  

Second, and importantly, the Memorandum does not apply to all workers like the FTC’s proposal, nor does it purport to ban all non-compete provisions as the FTC wishes to do.

What workers are covered by the General Counsel’s Memorandum? 

Only those employees protected by the NLRA are covered, which generally applies to lower and mid-level employees. That law does not apply to “supervisors,” as defined[2] by the law—which is a significant carveout, as this is the class of employees most commonly bound by non-competition obligations. 

Those workers properly classified as independent contractors are also outside the scope of the Memorandum.

What sort of non-compete provisions are targeted by the General Counsel?

The Memorandum indicated that provisions that clearly restrict only an individual’s managerial or ownership interest in a competing business may pass muster. 

Beyond that limited exception, however, the General Counsel intends to attack what she contends are “overbroad” non-competition restrictions, which generally means those that are not “narrowly tailored to special circumstances justifying the infringement on employee rights.” While the Memorandum is somewhat mum on what sorts of “special circumstances” might justify the imposition of a non-compete agreement on covered employees, the General Counsel was clear that the following do not qualify:

• A company’s interest in avoiding competition from a former employee.
• A company’s interest in retaining its workforce.
• A company’s desire to protect the investments made to train its employees.

Given the tenor of the Memorandum, employers should expect any “special circumstances” exceptions to be limited in scope.

So, what happens next? 

While the NLRB itself has not yet ruled on the legality of the position espoused by the General Counsel, given the very public announcement in the Memorandum, employers should expect unfair labor practice charges to be filed in the near future challenging the maintenance and enforcement of non-compete clauses against lower-level employees. 

As the General Counsel ramps up enforcement efforts under the NLRA, the FTC’s proposed rule will continue unaffected on its current path. The FTC is expected to vote in April 2024 on the final version of its proposal. From there, legal and legislative challenges are expected depending on the contents of the final rule ultimately adopted by the FTC.

Given the onslaught of governmental regulation-more states are passing laws restricting non-compete agreements, with New York likely to be next in line–employers are wise to consider whether the objectives of those agreements can be met through other types of contracts, policies, and business practices, and take appropriate steps to minimize potential risk. 

[1] A link to our summary of the FTC’s proposal can be found here.

[2] The NLRA defines the term “supervisor” 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.”