NLRB Opens Second Front on Non-Compete Agreements
Updated: Jul 13
The NLRB has initiated a new effort to address non-compete agreements.
The NLRB General Counsel has issued a policy memo expressing its position that noncompetition agreements violate Section 8(a)(1) of the National Labor Relations Act (NLRA) because they prohibit employees from accepting certain types of jobs and operating certain types of businesses after the end of their employment.
The memo applies to union and nonunion employers and comes on the heels of the Board’s decision to impose restrictions on severance agreements.
While this memo does not yet have the force of law, it is a crucial insight into what arguments the General Counsel may make in future cases prosecuting employers for potentially illegal non-competition agreements before the employee-friendly Board and a predictor for what conclusions the Board may ultimately reach in these cases.
The General Counsel says noncompetition agreements violate the NLRA when employees could reasonably construe them to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for.
The General Counsel does allow that some non-competition agreements may not necessarily violate the NLRA if, for instance, they merely restrict parties’ managerial or ownership interests in a competing business or apply to authentic independent contractor relationships.
The General Counsel also leaves the possibility that a narrowly tailored noncompetition agreement’s infringement on employee rights may survive NLRA muster if justified by exceptional circumstances. Although not directly stated in the memo, since supervisors are excluded from the NLRA’s definition of “employee,” the memo should not extend to a non-competition agreement that an employer presents to a supervisor.
However, the memo both limits those defenses and rejects others. For example, it states that an employer’s desire to avoid competition from a former employee is not a legitimate business interest that could support an exceptional circumstances defense.
The General Counsel also reads federal anti-trust and constitutional law to hold that an employer’s interests in retaining employees as well as protecting employee training investments, proprietary information, and trade secrets do not justify overly broad noncompetition agreements when alternative solutions to those issues exist, such as employee longevity bonuses.
The memo suggests that noncompetition agreements would likely violate the NLRA, under any circumstances, when employers insert them into employment contracts signed by low- or middle-wage workers who either have no trade secrets or work in jurisdictions where such agreements are generally unenforceable, such as California.
The memo leaves unsaid what the model language looks like for sufficiently narrowly tailored noncompetition agreements, the extent to which noncompetition agreements would be permissible if enforceable under state law, or what exceptional circumstances are.
The memo justifies its conclusions by focusing on denied employment opportunities that employees may suffer from overly broad non-competition agreements. The General Counsel reasons that employees subject to noncompetition agreements will arguably struggle to replace lost income if they are fired for exercising their Section 7 rights, lose bargaining power during labor disputes featuring strikes or lockouts, and be less likely to reconvene with other employees interested in exercising their Section 7 rights at a former employer’s competitor.
The memo provides five types of employee Section 7 activity that the General Counsel argues would be jeopardized by overly broad non-competition agreements. First among them are concerted threats by employees to resign from their employers to demand better working conditions because such threats may be futile given the Board’s concern about retaliatory legal action by employers and the chilling effect such agreements might have. Concerning concerted resignations, the memo notes that while current Board law does not unequivocally recognize a Section 7 right to resign from employment concertedly, the General Counsel—for the first time under the Biden administration— argues that such a right follows logically from settled Board law, Section 7 principles, and the law‘s purposes. As a result, the General Counsel urges the Board to limit any NLRA case law to the contrary in the future.
Other Section 7 activities the 30 May GC Memo seeks to protect from overly broad noncompetition agreements include an employee’s rights to concertedly seek better working conditions at a prior employer’s competitors, solicit coworkers to join them at a competitor as part of their protected concerted activity, and engage in such activity with coworkers at their current workplace—including union organizing—out of fear that they will lose their job and be unable to find comparable employment elsewhere regionally or in a specific occupation or trade.
The recommended prohibition on overly broad noncompetition agreements follows the FTC proposed rule seeking to bar noncompetition agreements under federal law, preceded by increased state-level activity limiting the use and scope of noncompetition agreements, especially for lower-wage workers.
Moreover, before the memo and the FTC proposed rule, the FTC and the NLRB announced an information-sharing agreement, which lends further credence to the General Counsel’s stated commitment to an interagency approach to restrictions on exercising employee rights. The increased regulatory and administrative attention on the perceived inequitable bargaining power between employees and employers signals a continued focus on noncompetition agreements in employment.
The memo suggests that employees subject to noncompetition agreements may attempt to escape their contractual obligations to former (or current) employers by filing unfair labor practice charges against them with the Board. Additionally, given the historically tight US labor market and related nationwide employee Section 7 activities, including high-profile union organizing campaigns, the memo is especially relevant to employers with significant low- and medium-wage employees in high-turnover industries. It places employers in a difficult position, as they must balance protecting their businesses with the possibility that giving or enforcing noncompetition agreements could subject them to imminent litigation before the Board and exposure to undefined remedies owed to the covered employees.