Challenges to non-competes by the federal government continue unabated under the Biden Administration. In the latest effort by the federal government to curtail the use of non-competes, which are traditionally governed by state law, on May 30, 2023, Jennifer A. Abruzzo, Esq., General Counsel of the NLRB, issued a memorandum attacking non-compete agreements as violative of the National Labor Relations Act (“Act”). General Counsel Abruzzo’s memorandum claims that non-compete provisions in employment and severance agreements violate the Act when they interfere with an employee’s exercise of rights under Sections 7 and 8(a)(1) of the Act and that a broad non-compete provision could “chill” an employee from engaging in activities protected by the Act. This development comes on the heels of the Federal Trade Commission’s January 5 proposed rule which would in large part ban non-compete agreements.
One purpose of the Act is to protect employees who seek better working conditions without fear of retaliation. Section 7 protects an employee’s “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.” Section 8(a)(1) of the Act prohibits an employer from “interfer[ing] with, restrain[ing], or coerc[ing] employees in the exercise of the rights guaranteed in section 7.”
The General Counsel claims that broad non-competes frustrate the Act’s purpose by denying employees access to employment opportunities out of fear of retaliatory legal action for breaching the non-compete. The memorandum argues that overbroad non-compete provisions could reasonably be construed to interfere with an employee’s ability to quit or change jobs. Moreover, a broad non-compete purportedly makes it difficult for an employee to improve working conditions by threatening to resign or carrying out concerted threats to resign. In addition, broad non-competes arguably make it difficult for employees to seek employment with and to reunite at a competitor’s workplace to organize and act together to improve working conditions.
The General Counsel memorandum clarifies the NLRB’s enforcement position that a non-compete that prevents competition and “chills” an employee from protected activities under Section 7 violates the Act. The General Counsel concedes, however, that under certain special circumstances, a narrowly tailored non-compete may lawfully infringe on employee rights, but preventing an employee from competing with the employer “is not a legitimate business interest that could support a special circumstances defense.” According to the memorandum, there are other incentives an employer can use to protect its legitimate business interests, e.g., such as a confidentiality agreement, or a longevity bonus that protects the investment the employer makes in training the employee.
Note that this enforcement position is limited to non-competes entered into with an employer’s statutory employees, and not to non-competes with supervisors, managers, executives, confidential employees, or independent contractors.
Given the NLRB’s current enforcement position, it is essential that employers review the non-compete provisions in employment and severance agreements that they use for statutory employees and ensure they are narrowly tailored to address an employer’s legitimate business interests while also protecting employee rights under the Act. Employers should expect that employees looking to defeat or challenge their non-compete agreements will file unfair labor practice charges with the NLRB. Employers need to be more selective in whom they apply non-competes to, and for what purposes.
Creative and sophisticated employers will, with proper legal guidance, still be able to protect their confidential and proprietary information and goodwill. However, the process has just become more difficult.