Article NLRB General Counsel Issues Memorandum Arguing Noncompetes Are Illegal

Mondaq® Ltd; California (MO); On-site; USD 150,000 - 200,000; Full time

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NLRB General Counsel Issues Memorandum Arguing Noncompetes Are Illegal

In May 2023, the National Labor Relations Board's General Counsel Jennifer Abruzzo issued Memorandum GC 23-08, taking the position that noncompete provisions violate the National Labor Relations Act (NLRA) except in limited circumstances. Section 7 of the NLRA protects employees' rights to unionize, to join together to advance their interests as employees, and to refrain from such activity. This section applies to both unionized and non-union workplaces.

As explained in our June 12, 2023, alert, General Counsel Abruzzo argues that privately negotiated noncompete agreements could "reasonably tend to chill employees in the exercise of Section 7 rights." Last week, she reinforced this position by issuing Memorandum 25-01 on October 7, 2024, asserting that certain stay-or-pay provisions also infringe on employees' Section 7 rights and violate Section 8(a)(1) of the Act.

This announcement follows the Northern District of Texas striking down the FTC's attempt to ban noncompete agreements nationwide. General Counsel Abruzzo's latest memorandum focuses on these areas in relation to noncompete agreements:

• stay-or-pay provisions,
• proposed remedies, and
• changes to the posting requirements.

Stay-or-Pay Provisions

GC Abruzzo defines stay-or-pay provisions as any agreement under which an employee must pay their employer if they separate from employment, including training repayment provisions, educational repayment, quit fees, relocation stipends, damages clauses, sign-on bonuses, or other cash payments tied to a mandatory stay period.

The Memo suggests the Board find any such stay-or-pay provision to be presumptively unlawful under the NLRA. Employers can rebut this presumption by proving the provision advances a legitimate business interest and is narrowly tailored to minimize infringement on Section 7 rights by establishing that the provision is:

• voluntarily entered into in exchange for a benefit;
• has a reasonable and specific repayment amount;
• has a reasonable stay period, and
• does not require repayment if the employee is terminated without cause.

If the provision is not narrowly tailored but is otherwise compliant, the employer should rescind and replace it with a lawful provision. If the stay-or-pay provision is not voluntary, Abruzzo recommends rescission and notifying employees that the obligation and debt are forgiven.

Proposed Remedies

For violations of the NLRA due to noncompete provisions, the Memo argues that rescission alone is inadequate. Instead, it urges the NLRB to seek make-whole relief to recreate the conditions that would have existed without the unfair labor practice. For example, employees could seek damages for jobs they didn't receive because of an unlawful noncompete, requiring proof that:

• a vacancy existed for a better-paying job,
• they were qualified, and
• were discouraged from applying due to the noncompete.

If these criteria are met, the employer could owe the employee the difference in wages. The relief may also cover damages such as lost wages, relocation, or training costs. Additionally, Abruzzo calls for penalties against employers seeking to enforce unlawful noncompete agreements, including dismissing legal actions and reimbursing employees' legal costs.

Changes to Notice Posting Requirements

She recommends that in cases where employee mobility is threatened, the NLRB amend its notice-posting standards to:

• Alert employees that they may be entitled to wages or benefits if discouraged from pursuing other jobs due to noncompete provisions;
• Inform employees of potential compensation if they experience difficulties in securing comparable employment, such as longer unemployment or lower wages;
• Include contact information for the Regional Office for evidence submission.

Further, she suggests mailing notices to ensure all affected employees have the opportunity to read and act on the information.

What Now?

As previously noted in our alerts, these efforts reflect a broader trend to restrict or ban noncompete agreements at federal and state levels. Several states already prohibit noncompetes, and others have enacted restrictive laws. Even where enforceable, courts are exercising discretion to limit enforcement, especially where employees have not engaged in misconduct.

Employers should consider taking these steps:

• Review restrictive covenants regularly to ensure compliance with evolving laws, especially for organizations operating across multiple states.
• Assess whether less restrictive agreements, such as confidentiality or non-solicitation clauses, could suffice.
• Implement tiered restrictions, applying the most stringent only to high-level employees with access to critical information.

Footnote

The content of this article is intended to provide a general guide. Specific advice should be sought for individual circumstances.