General Counsel of NLRB Takes Position Most Non-Compete Agreements Between Employers and Non-Supervisory Employees Violate the National Labor Relations Act

On May 30, 2023, the General Counsel of the National Labor Relations Board, Jennifer Abruzzo,  issued Memorandum GC-23-08 (“Memo”) asserting that the National Labor Relations Act  bans most non-compete provisions between employers and employees.

So, what is a non-compete anyway? Generally speaking, a non-compete agreement is a contract where an employee agrees not to compete with an employer after the current employment relationship has ended. Historically, these agreements have been enforceable in most jurisdictions, if reasonably limited in scope, time, and geographic area.

The Memo contends that a non-compete agreement is considered an unfair labor practice and a violation of Section 8(a)(1) if it reasonably tends to chill employees in the exercise of Section 7 rights “unless it is narrowly tailored to address special circumstances justifying the infringement on employee rights.” According to the GC, avoiding competition from a former employee does not qualify as a legitimate business interest. Likewise, the GC has essentially rejected outright an employer’s reliance on its “special investments” related to training employees, citing, instead, to the generally recognized protections related to employee mobility. The GC advised these types of interests may be adequately protected through less restrictive means (i.e., a longevity bonus).

The GC’s memorandum explained that overbroad non-compete agreements in employment contracts violate the NLRA because they discourage employees from exercising their rights to unionize and take advantage of other employee protections, such as collective bargaining. Thus, according to the Memo, overbroad non-compete clauses chill the exercise of Section 7 rights because those clauses make it harder for employees to get a new job if terminated for acting together to improve working conditions.

Takeaways from the GC’s Memo

If a non-compete provision can be reasonably interpreted by employees as barring them from accepting a different position or leaving their current ones, according to the GC, such provisions discourage employees from participating in five activities that are properly protected under Section 7. According to the Memo:

First, non-compete agreements discourage employees from concertedly threatening to resign to demand better working conditions. Her reasoning is that employees would view their own threats as futile, since they have limited other employment opportunities and would otherwise fear retaliatory legal action for threatening to breach their non-competes.

Second, non-compete agreements chill employees from actually carrying out “concerted threats to resign or otherwise concertedly resigning to secure improved working conditions.” The GC noted that the employees’ right to concertedly resign from their position is not unequivocally recognized in Section 7, however, such a right “follows logically” from established NLRB precedent, Section 7 principles, and the purposes of the NLRA.

Third, non-compete agreements discourage employees from concertedly searching for or accepting employment with local competitors for the purpose of obtaining better working conditions.

Fourth, non-compete agreements have the effect of discouraging employees from soliciting their co-workers to go work for a competitor as part of a “broader course of protected concerted activity”, such as forming labor organizations and/or engaging in collective bargaining. This is because employees bound by non-competes cannot accept these opportunities without breaking their non-compete agreements and due to the soliciting employees’ fear of other retaliatory legal action.

Lastly, non-compete agreements chill employees from looking for employment, at least in part, for the purpose of engaging in protected activities with other workers at an employer’s worksite. General Counsel expressed her concern that non-competes effectively limit employees from the kind of mobility required to engage in protected activity, such as union organizing, which may involve finding work with several employers in a particular trade and geographic area.

Requirements for Section 7 Compliant Non-Compete Agreements

The GC concluded her Memo, noting not all non-compete agreements necessarily violate the NLRA. For instance, she indicated non-compete agreements restricting only an individual’s ownership or managerial interests in a competing business or a non-compete agreement involving a true independent contractor relationship would likely not violate the NLRA. Otherwise, she ended the Memo stating there might be circumstances where a narrowly tailored non-compete agreement’s infringement on employees’ rights can be justified by special circumstances. Unfortunately, those special circumstances were not delineated. By narrowly tailored, we understand the GC means the employer must have a “legitimate business interest” that would justify infringing on employee rights and mobility, such as protecting trade secret or proprietary information, and, further, the non-compete restrictions would need to be limited in scope, narrowly addressing that precise express legitimate purpose.

Conclusion

Employers should revisit and carefully consider any policy or practice requiring non-supervisory employees to be bound by non-compete clauses. Based on other recent developments in this area of the law, this was already true based on the increasing number of states banning non-compete agreements or otherwise limiting their use. Also, don’t forget the FTC has likewise been making headlines and significant noise about its disfavor of non-competes as well, as it considers a potential future ban. Given these factors and the GC Memo’s broad reach and expansive scope, employers should consult with legal counsel before taking steps to enforce non-compete agreements with non-management employees. Additionally, since the trend to disfavor non-competes with non-management employees continues to expand and such employees may be able to compete directly despite any non-compete in place, it is now more essential than ever that employers make sure they have strong trade secret/non-disclosure agreements (covering items such as nonpublic financial information and customer lists) in place to prevent potential harm when an employee leaves his or her employment.