As we have previously covered in EmployNews, in June 2023, the general counsel for the National Labor Relations Board (NLRB) released a memo arguing that most noncompete agreements violate Section 7 of the National Labor Relations Act (NLRA) by interfering with employees’ rights to engage in protected concerted activity.

In the wake of that memo, which left many questions open as to the permissible scope of noncompetes and related restrictive covenants, employers have been closely monitoring the NLRB for insights about how to draft compliant agreements. Two recent developments provide strong insight into the NLRB’s thinking.

First, on December 7, 2023, the NLRB Division of Advice issued a guidance memo evaluating the legality under the NLRA of certain provisions in an employment agreement submitted for its evaluation. The memo covered the following key areas:

• Customer Non-Solicitation: The NLRB division found that the customer non-solicitation provision did not violate the NLRA because it only prevented the employee from “soliciting the Employer’s existing customers in order to provide the same or similar services for a period of one year,” and therefore did not bar the employee from “accessing other employment opportunities.” The NLRB cautioned, however, that where “there [was] a limited pool of customers in the industry” such that the customer non-solicitation provision would, in effect, prevent the employee from securing other employment, this provision may violate the NLRA.
• Confidentiality and Return of Company Property: The NLRB division also found that the confidentiality provision did not violate the NLRA because it barred only the disclosure of trade secrets, marketing plans, customer lists, and other quintessential proprietary information — not information that may be utilized in employee activity under the NLRA such as employee and wage information or other information “related to the terms and conditions of employment.” The return of company property provision similarly covered only the straightforward return of company property at termination and was deemed not to “implicate information known to employees that may be utilized in activity [under the NLRA].”
• Employee Duties: The employee duties provision violated the NLRA. The division found that the provision, which prevented employees from “engag[ing] in any activity competitive with or adverse to the [employer’s] business or welfare” could be reasonably read as preventing employees from engaging in union or other protected activity, as this conduct may be “adverse” to the employer’s “business or welfare.” The division also found that the provision’s mandate that employees “devote [their] full time to the conduct of the business of the employer” could prohibit employees from engaging in other outside employment while employed by the company, which violates the NLRA.

Ultimately, the guidance memo provides employers with some assurance that not every restrictive covenant is unlawful under the NLRA. However, it also highlights that the NLRB takes a very narrow view of which types of restrictions are permissible.

The second recent development came last month. On February 6, NLRB Region 9 in Cincinnati announced that it had approved a settlement agreement with Juvly Aesthetics and three of its former employees. The NLRB filed its consolidated complaint on September 1, 2023 alleging that Juvly, a business operating medical clinics and spas offering outpatient non-surgical aesthetic services, had maintained confidentiality, non-disparagement, noncompetition, non-solicitation, and training repayment provisions which violated employee’s rights under Section 7 of the National Labor Relations Act.

More specifically, among other things, the company allegedly:

• Required employees to sign confidentiality agreements prohibiting discussion of their pay.
• Required aestheticians to agree to a 24-month noncompete that applied to any competing medical practice within 20 miles of a company location.
• For some employees, estimated the costs of its initial training program to be $75,000 in addition to $30,000 in annual continuing training, and required repayment of the full amount if the employee left within the first 12 months, or a prorated amount if the employee left between 13 and 24 months.
• Required all employees to sign a 24-month non-solicitation of other employees which included “minimum damages of employee solicitation” of “$150,000 per employee or contractor plus any business damages[.]”

Facing this treasure trove of potential violations, the company agreed to a settlement under which it paid backpay to certain impacted employees, rescinded its unlawful policies, released employees from unlawful agreements, and posted the requirements of the settlement conspicuously for all employees.

While this was certainly an extreme case, it highlights the NLRB’s active approach to identifying and pursuing alleged violations of the NLRA. In the face of this aggressive enforcement push, employers would be wise to evaluate their use of restrictive covenants.

Are your agreements truly necessary to protect legitimate business interests? Is it necessary for all employees to sign restrictive covenants or perhaps just a subset of employees with access to key information or relationships? Is your restrictive covenant strategy based on threats and intimidation or reasonable protection of the business?

[View source.]