United States: NLRB's General Counsel Provides That The Use Of Non-compete Agreements Violates Federal Labor Law

On May 30, 2023, National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo (GC Abruzzo) issued Memorandum GC-23-08 (GC's Memo), setting forth her opinion that most non-compete provisions violate the rights afforded to employees under Section 7 of the National Labor Relations Act (NLRA). Although the NLRA applies to almost all private employers, its protections generally extend only to non-supervisory employees (except if a supervisor is retaliated against for opposing an unfair labor practice).

The GC's Memo Joins a Trend

Commiserate with recent trends across the landscape of employment law, the GC's Memo posits that the "proffer, maintenance, and enforcement" of non-compete provisions violate the NLRA's Section 7 rights afforded to employees. Such rights protect employees' ability to engage in self-organization, collective bargaining, and other protected concerted activity. The GC's Memo provides that any non-compete provision which "reasonably tends to chill" an employee's right to engage in Section 7 activity violates the NLRA unless the employer can show that "it is narrowly tailored to address special circumstances justifying the infringement."

Unquestionably, this position was foreshadowed in the NLRB's recent McLaren Macomb decision and GC Abruzzo's subsequent Memorandum GC 23-05 providing guidance thereon. The GC's Memo likewise falls in step with state laws outright banning non-competes in recent years (with Minnesota's ban effective July 1, 2023) and the Federal Trade Commission's (FTC) controversial proposition to ban the use of non-competes in employment agreements nationwide.

The GC's Position

GC Abruzzo's view is that non-compete provisions are generally overbroad and, therefore, violative of the NLRA where "the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access" to subsequent employment. By GC Abruzzo's measure, non-competes act to chill Section 7 rights because (i) employees are aware they will have difficulty obtaining replacement employment if terminated for exercising their Section 7 rights; (ii) given the inability to replace lost income, the employees' bargaining power is diminished in lockouts, strikes, and other disputes; and (iii) the non-compete prohibitions render it unlikely that employees will reunite at a new workplace rendering them "unable to leverage their prior relationships ... to encourage each other to exercise their rights."

Specifically, the GC's Memo identifies five types of Section 7 protected activity that is chilled by non-competes:

• Concertedly threatening to resign to demand better working conditions;
• Concertedly resigning to secure better working conditions;
• Concertedly seeking or accepting employment with a local competitor to obtain better working conditions;
• Soliciting co-workers to a local competitor as part of broader protected concerted activity; and,
• Seeking employment to specifically engage in protected concerted activity with other employees at an employer's workplace – such as union organizing.

Exceptions to the GC's View

By way of exception to GC Abruzzo's general view that non-competes chill employees' Section 7 rights, the Memo provides that employers may still maintain non-competes that: (1) only restrict managerial or ownership interest in a competing business, (2) true independent contractor relationships, and (3) where special circumstances justify the use of such narrowly tailored agreements. While the GC's Memo does not provide guidance on what satisfies such "special circumstances," it recognizes an employer's legitimate interest in protecting proprietary or trade secret information. GC Abruzzo opines that retraining employees or protecting special investments in training are unlikely to support the need for an overbroad non-compete provision, suggesting instead that longevity bonuses be used to protect such interests.

For Now, The GC's Memo is Only Guidance

Importantly, the GC's Memo is not binding law, but a review of the law as the GC interprets it and is meant to provide guidance on the types of cases GC Abruzzo will afford prosecutorial priority. Contained within the Memo is a directive to the NLRB's regional offices to seek "make-whole relief" (i.e., back pay and benefits) from employers for employees who can demonstrate they lost out on subsequent employment because of an overbroad non-compete provision, even where the employer did not take action to enforce the provision. The GC's Memo also directs the NLRB regional offices to seek and obtain evidence from employers in cases involving a non-compete provision.

At this point, the GC's Memo remains a suggested directive. Ultimately, the NLRB will determine whether, and in what circumstances, non-compete agreements violate the NLRA. Of course, if the NLRB decidedly follows the GC's guidance, we can expect to see challenges spilling over into the court system.

Employer Takeaways

Because the GC's Memo is guidance and not law, employers may be inclined to assume the risk, take no action, and merely wait to see what approach the NLRB takes.

However, given the contents of the GC's Memo and the memorandum of understanding highlighted between the NLRB, the U.S. Department of Justice, and the FTC, employers should be conscious of the apparent messaging – employer's overly broad restrictions on employees' job mobility may result in governmental action. Employers who want to take affirmative steps now to help avoid future unfair labor practice claims should (i) review existing non-compete provisions applied to non-supervisory employees to ensure such provisions are narrowly tailored to the business's legitimate protectable interest; (ii) ensure those interests are well documented, and real demonstrable harm exists absent the use of non-compete provisions; and (iii) use only the necessary provisions with clear differentiating between when to use non-compete provisions, non-solicit provisions, and nondisclosure provisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.