Labor Board Now Attacking Most Non-Compete Agreements

As this newsletter has often stated, almost every month the National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo comes out with some controversial and unprecedented NLRB position.  On May 30, 2023, she announced that the NLRB would consider most non-compete agreements to violate federal labor law, with only extremely narrow exceptions.  The theory is that non-compete provisions unreasonably tend to chill employees in the exercise of Section 7 rights, as such agreements could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities.  Generally speaking, this denial of access to employment opportunities chills employees from engaging in Section 7 activity because: employees know that they will have greater difficulty replacing their lost income if they are discharged for exercising their statutory rights to organize and act together to improve working conditions; employees' bargaining power is undermined in the context of lockouts, strikes, and other labor disputes; and an employer's former employees are unlikely to reunite at a local competitor's workplace, and thus be unable to leverage their prior relationships to encourage each other to exercise their rights to improve working conditions in their new workplace.  

She thus considers the proffer, maintenance, and enforcement of a non-compete provision to violate Section 8(a)(1) unless the provision is narrowly tailored to special circumstances justifying the infringement on employee rights.  She says that it is unlikely that an employer's justification would be considered reasonable in common situations, and that employers may protect training investments by less restrictive means, such as by offering a longevity bonus.  She notes that the employer's legitimate business interest in protecting proprietary or trade secret information can be addressed by narrowly tailored workplace agreements that protect those interests.  

She also states that provisions that clearly restrict only individuals' managerial or ownership interests in a competing business, or true independent-contractor relationships, may not violate the Act, and that there may be circumstances in which a narrowly tailored non-compete agreement's infringement on employee rights is justified by special circumstances.

A few months ago, the Federal Trade Commission (FTC) announced a policy against restrictive covenants, but its rulemaking will likely take another year or more and likely be the subject of legal challenge.  In contrast, the NLRB has already challenged an employer's non-compete agreement in a complaint against an allegedly unlawful agreement that forbid low-wage workers from getting a job with another company in the same business in the entire state for two years after separation.  The complaint also attacked bans on working for a competitor and soliciting customers, which are common in non-compete agreements.  In short, the NLRB intends to attack most common non-compete agreements.  

Federal government studies have found that about one in five American workers are covered by non-compete agreements, and most will be affected by this new NLRB policy.  It should be noted that NLRB policy is limited to agreements involving rank-and-file employees, as the Labor Act does not apply to managerial employees, confidential employees, and supervisors.  However, it should be noted that there have been mechanisms set up between the FTC and the NLRB to coordinate information on enforcement activities.  

Editor's Note:  The NLRB announcement has far-reaching and immediate impact.  The policy is not based on the existence of any type of ongoing union organizing campaign or anything of that nature, and it is very easy for an applicant or employee to file an unfair labor practice charge with the NLRB.  The NLRB could quickly issue a complaint, and the employer would be in a position of defending litigation and/or dropping a non-compete clause in some type of settlement agreement.  

Most employers, however, will choose to see how the law develops, before dropping what they consider to be critically important non-compete agreements.  Other employers may choose to narrow the type of employees they subject to non-compete agreements and to assert more narrow protective provisions, and possibly consider some type of "garden leave" approach, in which employees are paid during the term of their non-competition in some way.  This development should not lead to a panic situation until the law becomes developed before the NLRB, and the courts, or otherwise.  There is a possibility that so many charges will be filed that the cases will be held in abeyance pending NLRB determination of a selected "lead" case.  Such a procedure was followed a number of years ago concerning secondary boycott cases.  Another idea is to reserve the right in new employment agreements to rescind - to the extent permitted by law - payments and benefits given in consideration for a worker's non-compete promise, in the event the non-compete is required to be rescinded. 

This article is part of our July 2023 Newsletter.

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