Almost two years ago, President Joe Biden issued Executive Order 14036, which broadly addresses promoting competition in the American economy. Among the measures considered in that executive order was greater scrutiny of employee non-compete agreements. See our previous alert. In January 2023, the Federal Trade Commission issued a Notice of Proposed Rulemaking that if converted into a full regulation would render most non-compete agreements invalid; that rule is still under consideration, and experts speculate that, if it is enacted at all, it will be significantly watered down.
Into this landscape, the General Counsel of the National Labor Relations Board (NLRB) has inserted her agency’s authority in hopes of further restricting employee non-compete agreements. On May 30, 2023, NLRB General Counsel Jennifer Abruzzo sent a memorandum to the various Regional Directors and other NLRB officials explaining her theory that most employee non-compete agreements violate the National Labor Relations Act (NLRA). In the memorandum, General Counsel Abruzzo directs the various NLRB regions to be on the lookout for cases to bring against employers that enter into, or even propose, employee non-compete agreements.
The NLRA, enacted by Congress in 1935, has never been interpreted to prohibit, or even to limit, employee non-compete agreements. General Counsel Abruzzo, however, explains in her memorandum that, in her opinion, most such agreements are unlawful throughout the United States because they “interfere with, restrain, or coerce employees in the exercise” of their 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.” How she comes to that conclusion requires some mental gymnastics.
Essentially, General Counsel Abruzzo argues that non-compete provisions interfere with workers’ rights because they limit an employee’s option to threaten to or actually quit or change jobs in support of demands to an employer for different or better pay and working conditions, either individually or in a group. She argues that while there might be some “special circumstances” that would make an employee non-compete agreement lawful, as a general rule “the proffer, maintenance, and enforcement of a non-compete provision that reasonably tends to chill employees from engaging in…activity as described above violates” the NLRA.
The good news for employers that proffer, maintain, and enforce employee non-compete agreements is that the NLRB General Counsel does not have the power to make rules like this. Instead, she acts as a prosecutor, choosing certain cases as vehicles to try to convince the full NLRB to adopt her (unconventional) view of the scope of the NLRA. And even if she found an appropriate case and convinced the NLRB to adopt her view, that decision itself would be subject to review by a federal court. We are many years away from any sort of definitive ruling that the NLRA restricts employee non-compete agreements.
In addition, no matter the ultimate result of the General Counsel’s quest to use the NLRA to invalidate employee non-compete agreements, the NLRA itself does not apply to a large swath of employees subject to such agreements. The NLRA specifically excludes from its definition of “employee” any supervisor. The term “supervisor” means “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.” As a practical matter, many of the employees whom employers most want to bind with non-compete agreements fit this definition.
While the NLRB is unlikely to hold that the NLRA prohibits employee non-compete agreements—and it is particularly unlikely to do so soon—employers that use employee non-compete agreements should take this as yet another warning that such agreements are subject to increasing scrutiny. Employers are well advised to limit non-compete agreements to employees with significant customer contact and/or access to confidential business information. As the background rules vary significantly from state to state, employers should review such agreements with counsel to enhance the chances that they will be held to be enforceable.
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