Non-Competes Under Fire from NLRB General Counsel

Nelson Mullins Riley & Scarborough LLP

On May 30, 2023, NLRB General Counsel Jennifer Abruzzo issued Memorandum GC 23-08 (the “Memorandum”) outlining her position that the “proffer, maintenance, and enforcement” of non-competition provisions in employment contracts and severance agreements violates the National Labor Relations Act (the “NLRA”). The Memorandum, drawing on and expanding the guidance issued by the General Counsel following the NLRB’s decision in McLaren Macomb, calls upon NLRB Regional Directors to submit cases involving arguably overbroad non-competition provisions.

While not law, this Memorandum reflects the NLRB’s policy and enforcement priorities.  It marks the latest in a coordinated effort among multiple federal agencies to limit restrictive covenants.  In January 2023, the Federal Trade Commission (“FTC”) issued a notice of proposed rulemaking to ban covenants not to compete nationwide. 

The Memorandum claims that non-competition provisions interfere with employees’ rights under Section 7 of the NLRA, which include the right to self-organization, to form, assist, or join labor unions, to bargain collectively, and to engage in other concerted activities for the purposes of mutual aid or protection. The General Counsel urges the Board to adopt the standard she advocated in Stericycle, Inc., that provisions in employment agreements violate Section 8(a)(1) if they tend to chill exercise of Section 7 rights unless they are “narrowly-tailored to address special circumstances justifying the infringement on employee rights.”  The Memorandum claims that non-competition provisions “reasonably tend to chill employees in the exercise of Section 7 rights, when the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off access to other employment opportunities that they are qualified for based on their experience, aptitude, and preferences as to the type and location of work.”

The Memorandum articulates five ways that non-competition provisions allegedly discourage workers from exercising their Section 7 rights:

  1. Chilling employees from collectively threatening to resign to demand better working conditions because they fear retaliatory action or legal consequences for threatened breach of their non-competition obligations.
  2. Chilling employees from carrying out concerted threats to resign or actively resigning to secure improved working conditions.
  3. Chilling employees from concertedly seeking or accepting employment with a local competitor to obtain better working conditions.
  4. Chilling employees from soliciting their co-workers to work for a local competitor as part of a broader course of protected concerted activity.
  5. Chilling employees from seeking employment to specifically engage in protected activity by limiting employee mobility required to take part in some particular forms of protected activity.

The General Counsel concedes that existing Board law does not recognize a Section 7 right of employees to concertedly resign from employment but asserts that such a right “follows logically from settled Board law.”  While the Memorandum does not define “overbroad” non-competition provisions, it references agreements imposed on low or middle-wage workers who do not have access to trade secrets. The Memorandum applies the same analysis to provisions restricting the solicitation of employees but does not discuss the solicitation of customers and clients. It is unclear whether the Memorandum applies to non-competition agreements with supervisors, who are generally excluded from the NLRA.

The Memorandum directs the Regional Directors to submit cases with non-competition provisions that are “arguably unlawful” under the Memorandum and to seek “make-whole relief” for employees who, because 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.”

There are limited circumstances under which, in the General Counsel’s opinion, non-competition provisions may be lawful. These include provisions that restrict individuals’ ownership interests in a competing business and valid independent contractor relationships. However, the Memorandum takes the position that business interests in retaining employees or protecting special investments in training employees are unlikely to justify non-compete agreements. Instead, the Memorandum points to retention bonuses as “less restrictive” measures for protecting these investments.

Recommendations for Employers

Employers should continue to have all restrictive covenant agreements, offer letters, employment agreements, handbooks, and severance agreements carefully reviewed by counsel to ensure compliance with applicable state and federal guidelines. Care should be taken to prepare narrowly-tailored provisions. Employers should exercise particular caution when applying restrictive covenants to low or middle-wage wage workers, especially those who do not have ready access to trade secrets and proprietary information.

While this Memorandum is not law, it highlights the General Counsel’s continued push to expand the scope of the National Labor Relations Act. Nelson Mullins will continue to monitor the frequently changing guidance from the National Labor Relations Board and the General Counsel’s Office.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Nelson Mullins Riley & Scarborough LLP

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