Non-compete agreements continue to face intense scrutiny from government authorities.

On May 30, the General Counsel for the National Labor Relations Board (“NLRB” or “Board”) issued a guidance memorandum opining that many non-compete agreements violate federal labor law protections. In addition, a proposed amendment to the N.Y. Labor Law has gained traction in the state Legislature — and if signed into law, would largely prohibit the use of non-compete agreements in New York State. And both developments come against the backdrop of the still-pending proposed rule from the Federal Trade Commission (“FTC”).

NLRB Guidance Memorandum

NLRB General Counsel Jennifer Abruzzo’s non-compete memorandum comes on the heels of her earlier guidance memorandum on the NLRB’s McLaren decision – in which the Board held most confidentiality and non-disparagement provisions in separation agreements are unlawful.

In the non-compete memorandum, GC Memo 23-08, the General Counsel argues non-compete agreements are generally overbroad and limit employees’ abilities to exercise their rights under Section 7 of the National Labor Relations Act (“NLRA”). “Section 7 rights” typically include employees’ rights to self-organization, to join labor organizations, and to engage in “other concerted activities” to improve the workplace.

The NLRA chiefly governs relations between employers and employee unions. Employers with a unionized workforce are therefore well-versed in the ins-and-outs of Section 7 rights — but Section 7 also covers workforces not represented by a union. Accordingly, businesses without a unionized workforce should take care to understand the implications of the non-compete memorandum.

As a whole, GC Memo 23-08 argues that non-compete agreements improperly deny an employee’s ability to quit or change jobs, thereby limiting future employment opportunities. The memo argues further that an employer’s desire to avoid competition from a former employee is unlikely to ever justify an overbroad non-compete agreement. The memorandum notes five employee activities that are limited by overbroad non-compete agreements, including:

• concertedly threatening to resign in an effort to demand better working conditions;
• resigning or otherwise concertedly resigning in an effort to secure better working conditions;
• concertedly seeking or accepting employment with a local competitor in an effort to obtain better working conditions;
• soliciting co-workers to work for a local competitor as part of a broader course of protected activity;
• and seeking employment, at least in part, to specifically engage in protected activity with other workers at an employer’s workplace.

The General Counsel does, however, recognize limited instances in which a non-compete agreement would not violate the NLRA:

• agreements which limit an individual’s managerial or ownership interests in a competing business, or,
• agreements which restrict properly classified independent-contractor relationships.

The memorandum concludes with a point noting that “narrowly-tailored” non-compete agreements may be justified by “special circumstances,” but does not elaborate further.

While the memorandum takes a broad view at banning non-compete agreements, the NLRA’s labor protections are generally limited to rank-and-file employees. “Managers” and “supervisors” as defined under the law are not covered by the act’s protections. In other words: non-compete agreements with legally-defined managers and supervisors appear to remain untouched by this new guidance.

FTC Rule Pending

The General Counsel Memorandum is just the latest effort from the federal government at curtailing non-compete agreements. Whereas the memorandum attacks non-compete agreements as restricting labor rights, the FTC’s proposed rule declares non-compete agreements are an “unfair method of competition” in the marketplace. And the two frameworks — the FTC’s proposed rule and the GC Memo 23-08 — differ in some key respects. In contrast to the General Counsel’s memo, the FTC’s rule applies to independent contractors, not just employees (as well as interns and volunteers).

The FTC is expected to vote in April 2024 on the final version of its proposed rule.

Proposed Amendment to New York Labor Law Would Prohibit Non-Compete Agreements

Apart from federal efforts, a proposed bill in the New York State Legislature looks to prohibit non-competes, too. The measure, Senate Bill 3100, would prohibit employers and employees from entering into non-compete agreements in the future. The law would give employees bound by a non-compete the right to sue in state court. In turn, courts would be empowered to void any contractual clause that functions as a non-compete, award damages to employees, and add attorneys’ fees. The bill was the focus of a State Senate Hearing in late May and quickly advanced through the Senate’s Labor Committee.

What’s Next?

There is a clear push against non-competes from various sectors of government, with no clear destination in sight.

The FTC’s rule, even if implemented, will likely be the subject of legal (and political) challengers.

The NLRB’s Memorandum acts as instruction for the NLRB’s field offices in processing and adjudicating complaints. But whether the memorandum triggers a sharp uptick in NLRB actions against non-unionized employers remains to be seen. The NLRA, in general, does not cover “managers” and “supervisors,” and businesses comfortable that they only maintain non-compete agreements with such employees most likely do not need to be overly concerned with the NLRB’s guidance on this matter. Moreover, the General Counsel’s view on non-compete agreements will not necessarily be endorsed by the NLRB, and even if it is, will certainly be subject to appellate challenges in the U.S. Circuit Courts of Appeal.

The N.Y. State Legislature’s push to curtail non-compete agreements however is a clear sign they’ll continue to face scrutiny. Should that bill (or a similar bill) become law, it would quickly invalidate employers’ abilities to enter into non-compete agreements.

And running in the midst of the current push against non-compete agreements is the uncertainty on the effect of other restrictive covenants, such as a non-solicit agreements.

While non-compete usage remains intact — for now — businesses that seek to protect vital interests through employment agreements should consult with their employment counsel on best practices and options in the face of these changes.