United States: We've Got A Test Case: The NLRB Files Its First Complaint Challenging The Validity Of Restrictive Covenants

The National Labor Relations Board moved from theory to practice in this administration's battle against restrictive covenants. Recently, the Regional Director of Region 9 of the National Labor Relations Board filed a consolidated complaint alleging that certain restrictive covenants contained in offer letters and policies in an employee handbook violated the National Labor Relations Act. This complaint is a logical outgrowth of GC Memo 23-08, in which NLRB General Counsel Jennifer Abruzzo set out her view that "the proffer, maintenance, and enforcement" of restrictive covenants violates Section 8(a)(1) of the NLRA. Undoubtedly, this matter will serve only as the first test case, but not the last. For that reason, and because the broader non-compete landscape has shifted, employers might consider revisiting their restrictive covenants practices to mitigate risk. The complaint also serves as a reminder that employers should review their employment policies and handbooks regarding employee communications—particularly if those policies restrict communications about compensation or other terms and conditions of employment.

This complaint involves charges brought by three individuals at an aesthetics clinic that offered non-surgical cosmetic procedures. According to the complaint, the clinic maintained a number of policies that run afoul of the NLRA, including:

• A confidentiality provision that expressly listed "salaries, bonuses, and compensation package information" in its scope;
• An insubordination policy that prohibited disparaging statements about management or other employees;
• A company communication policy that prohibited employees from making communications that could harm the "goodwill, brand, or business reputation" of the clinic;
• A non-compete provision that imposed a two-year limitation on the employee's ability to provide similar services within a 20-mile radius of the clinic, as well as a two-year limitation on customer and employee solicitation; and
• An "Exit Agreement" that included an acknowledgment that damages for any violation of the non-compete, client non-solicit, and employee non-solicit amounted to, respectively tens of thousands of dollars in costs spent training the breaching employee (prorated under certain circumstances), $25,000 per solicited client, and $150,000 per solicited employee.

According to the complaint, several employees became dissatisfied with their work and left the company. Upon their resignations, the employer demanded that the departing employees all repay certain training costs, and the employees filed a slew of unfair labor practice charges, alleging, among other things, the maintenance of unlawful work rules. The allegations in the complaint regarding the restrictive covenants are limited to identifying the covenants and alleging that the clinic terminated one employee for refusing to sign the Exit Agreement "and to discourage employees" from engaging in concerted activity.

The Region investigated the charges, and has now issued a consolidated complaint, alleging that these restrictive covenants violate Section 8(a)(1) of the NLRA under the theory that such covenants tend to chill employees in the exercise of their Section 7 rights. The complaint also included references to several internal messages where supervisors allegedly demanded that employees refrain from discussing their compensation or their communications with management.

The Region appears to be building their argument that post-employment restrictive covenants somehow implicate Section 7 rights. To do so, Region 9 has set out an interesting first test case: as alleged in the complaint, certain of the employer's policies seem to restrict discussions among employees relating to pay or employment conditions, which is unlawful. It's possible that the General Counsel might leverage these allegedly unlawful policies (or other favorable facts) to extract concessions related to the clinic's restrictive covenant program, or to argue that these policies collectively represent an unlawful limitation on employees' Section 7 rights.

But it is unclear at this point whether the Act can be stretched to cover restrictive covenants for statutory "employees" under the National Labor Relations Act.¹ Indeed, the General Counsel only recently began to target the enforceability of restrictive covenants by way of a memorandum to the Regions. That memorandum, in turn, provides little detail regarding what legal theories (if any) grant the Board the authority to interfere with covenants that become effective only when the employment relationship between an employer and employee end. Even if the NLRB does have such authority, it bears recalling that the states have developed 50 separate bodies of law regarding their enforceability of restrictive covenants. To the extent the Board follows the General Counsel's lead and finds the covenants at issue unlawful, the NLRB would wipe a large portion of that case law off the map (at least with respect to statutory employees).

Moreover, it's also unclear whether the NLRB has the bandwidth and resources to litigate restrictive covenant cases. Setting aside whether the creation of two distinct bodies of law – one for supervisors excluded from the Act and one for statutory employees – makes sense, the Board has limited resources. As GC Abruzzo explained in her report to Congress last year, the Regions are already stretched thin with their current case load. Adding a whole new tranche of cases to their dockets, particularly ones that move very fast and are heavily litigated, would seem to be a bridge too far.

While we do not recommend that employers modify their restrictive covenant programs based on theoretical risk from the NLRB, this complaint is a good reminder that employers should examine whether they have legitimate business interests sufficient to support restrictive covenants under state law, especially for employees not working in a management or supervisor role. Risks are increasing for companies that universally impose broad restrictive covenants on employees, both under the NLRA and under state law.

And the decision also serves as a reminder that overbroad employee handbooks and policies regarding the confidentiality of compensation or employment conditions present significant risk where the NLRB is on much stronger statutory grounds.

We will continue to monitor NLRB activity involving restrictive covenants, and employers with questions should reach out to their Seyfarth attorney.

Footnote

1. Most relevant to this post, the NLRA exempts supervisors from the definition of "employee."