On May 30, 2023, Jennifer Abruzzo, General Counsel of the National Labor Relations Board (NLRB), published a controversial enforcement memorandum asserting that most post-employment non-competition agreements for non-management and non-supervisory employees violate Section 7 of the National Labor Relations Act (NLRA).
The memo’s analysis, if adopted and broadly applied by the NLRB, would upend established legal precedent in the 46 states that permit post-employment non-competition covenants that are appropriately tailored to protect the legitimate business interests of employers. The memo, available here, is the latest in a trend at the state and federal level seeking to limit the use of post-employment non-competition covenants.
Non-Competition Covenants and the National Labor Relations Act
The General Counsel’s memo states that the “proffer, maintenance, and enforcement” of non-competition agreements “reasonably tend to chill” employees exercising their Section 7 rights by making it harder for employees to seek different employment and thus, according to the General Counsel’s theory, discouraging them from engaging in conduct that might put their current employment at risk. These Section 7 rights, according to the memo, include:
- The right to threaten to resign to demand better working conditions;
- The right to resign to demand better working conditions;
- The right to seek or accept employment with a local competitor to obtain better working conditions;
- The right to solicit co-workers to work for a local competitor as part of a broader course of protected activity; and
- The right to seek employment in order to engage in protected activity with other workers, such as union organizing, at different workplaces.
Based on this analysis, the memo opines that non-competition agreements will violate these rights unless they are “narrowly tailored to special circumstances justifying the infringement on employee rights.” Such “special circumstances” include agreements which “clearly restrict only individuals’ managerial or ownership interests in a competing business, or true independent-contractor relationships.” However, special circumstances which do not in the General Counsel’s view justify a non-competition agreement include an employer’s interest in “retraining employees or protecting special investments in training employees.” The memo also casts doubt on whether the protection of trade secrets could justify a non-competition agreement, particularly for “low-wage or middle-wage workers.”
Furthermore, the memo recommends that NLRB regions should seek relief for employees who demonstrate that they lost employment opportunities because of a post-termination non-competes, even if the employer does not actually enforce the non-compete.
Important Limitations on the Memo
While the memo appears to sharply curtail the ability of employers to enforce non-competition agreements, it has limits. First, the memo is not the official legal position of the NLRB. While the NLRB’s General Counsel can instruct Regional Directors to pursue complaints advocating for her position, it remains to be seen whether the NLRB will adopt the memo’s legal analysis, and, if so, whether that analysis would be upheld by the courts.
Second, Section 7 rights do not apply to supervisory and management employees, so employers who require non-competition agreements for those employees would not be subject to NLRB enforcement jurisdiction regardless of whether the NLRB adopts the positions taken in the memo.
Third, the General Counsel’s memo is not a blanket ban — it allows the use of narrowly-tailored restrictive covenants in “special circumstances.” It is not yet clear how the “special circumstances” differ from current law, which already generally requires post-termination non-competition agreements be narrowly tailored, in subject matter and geographic and temporal scope, to protect employers’ legitimate business interests.
Growing Trend to Restrict Post-Employment Covenants
The memo is the latest salvo in the fight to restrict post-employment covenants. The Memo comes on the heels of the NLRB decision in McLaren Macomb, 372 NLRB No. 58 (2023), which held that severance agreements containing overly broad confidentiality, non-disclosure, and non-disparagement provisions also violate Section 7 of the Act. The Federal Trade Commission (FTC) recently issued a Notice of Proposed Rulemaking, which proposed an even broader, nationwide ban on employee non-competition agreements. The US Department of Justice, NLRB, and FTC have created a task force to cooperate on the enforcement of labor and antitrust law issues. Restrictions also arise at the state level — most recently in Minnesota, Colorado, and Washington, DC — where new laws limit the use of non-competition agreements, particularly for low-wage employees.
Implications for Employers
In light of the General Counsel’s memo, and comparable legislative actions and initiatives by the FTC and others, employers should continue to evaluate their use of non-competition agreements with caution, adopting a state-by-state and position-by-position or even employee-by-employee analysis. Employers should be prepared to present a strong justification for the use of non-competition agreements and avoid overly broad agreements which may be interpreted as chilling the legitimate rights of departing employees. Additionally, employers should be prepared for former employees to raise the memo as a defense against the enforceability of non-competition agreements. Finally, employers should consider additional or alternative means to protect their legitimate business interests, including through other restrictive covenants, other contractual provisions, and ensuring reasonable steps are taken to protect confidential information and trade secrets.
ArentFox Schiff LLP will continue monitoring developments in this area.