Financial Danger Ahead!

Despite the fact that non-compete and non-solicitation agreements are specifically allowed by statute in the vast majority of the States, the National Labor Relations Board (“NLRB”) is poised to challenge the legality of many such agreements as a violation of employee rights under the National Labor Relations Act (the “Act”). In an Advice Memo issued on May 30, 2023, the NLRB’s General Counsel instructed the Regional Offices of the NLRB to take up and prosecute unfair labor practice charges based on an employer’s use of “overbroad” non-compete agreements.

Rationale Given for Addressing Non-Competes as Potential Unfair Labor Practices

The Advice Memo is based on the premise that most non-compete and non-solicitation agreements violate Section 8(a)(1) of the Act which makes it an unfair labor practice for an employer “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in Section 7” of the Act. Section 7 of the Act guarantees employees “the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection,” as well as the right “to refrain from any or all such activities.”

The Advice Memo asserts that the restrictions that are imposed by non-compete agreements chill employee rights to engage in Section 7 activities because they remove the safety net of obtaining alternative employment if they are fired or otherwise retaliated against for exercising such rights. The General Counsel identified five specific circumstances where Section 7 rights could be chilled by a non-compete agreement:

  1. They chill employees from concertedly threatening to resign to demand better working conditions.
  2. They chill employees from carrying out concerted threats to resign to secure better working conditions.
  3. They chill employees from concertedly seeking or accepting employment with a local competitor to obtain better working conditions.
  4. They chill employees from soliciting their co-workers to go work for a local competitor as part of a broader course of protected activity.
  5. They chill employees from seeking employment, at least in part, to specifically engage in protected activity with other workers at an employer’s workplace.

Application to Existing Agreements and Potential Consequences

The Advice Memo takes the position that employees cannot contractually waive their Section 7 rights in individual contracts and any non-compete agreements that violate Section 7 rights should be treated as unfair labor practices in the same manner as the NLRB has recently decided to treat confidentiality and non-disparagement clauses in severance agreements. (See NLRB Changes Settlement Landscape) Notably, this means that most private employers with non-compete agreements, not just union shops, should be concerned about the impact of this Advice Memo on their non-compete agreements.

General Counsel has urged the NLRB to seek “make whole” remedies for employees who can demonstrate they lost other opportunities due to the existence of an overbroad non-compete agreement even if the employer took no specific action to enforce it. This could open a virtual flood gate of claims by employees looking for a payoff for jobs they claim to have lost.

Recognition of Exceptions to Blanket Enforcement

 The Advice Memo concludes that “overbroad” non-compete agreements have the unlawful chilling effects described above and so should be addressed as unfair labor practices. Accordingly, it is vitally important to determine what is permissible and what is “overbroad”. In that regard, General Counsel notes that enforceable agreements “need to be narrowly tailored to special circumstances justifying the infringement on employee rights” and then cites the well-established law of most states that enforceable non-compete agreements require a legitimate business purpose such as preventing the misappropriation of valuable trade information and customer relationships provided during the course of employment while unenforceable agreements simply restrain competition. General Counsel opines that a legitimate business interest does not include simple retention of employees or the protection of investments in training, which she asserts can be addressed through less restrictive means such as longevity bonuses.

The Advice Memo also excludes from its scope agreements that restrict employees from managerial or ownership interests in competing businesses.

Why Wade in Now?

The NLRB’s sudden interest in the issue of non-competes follows President Biden’s Executive Order on Promoting Competition in the American Economy issued in July of 2021 which led to the January 2023 proposed rules by the Federal Trade Commission to end most non-compete agreements and appears to be part of the White House Task Force on Worker Organizing and Empowerment’s mandate to take a “whole-of-government” approach to empower workers and unions. This is evident not only from the timing but from the use of the common rationale given by both the FTC and General Counsel that non-competes unfairly limit job mobility by low-wage or middle-wage workers and that employer’s legitimate interests in protecting propriety or trade secret information can be addressed by narrowly tailored workplace agreements that protect those interests. General Counsel also points to the fact that there is a memo of understanding between the NLRB, the FTC, and the Department of Justice’s Antitrust Division to report to one another cases involving non-compete agreements that may violate laws enforced by more than just the agency receiving the initial complaint.

What to Do Now

The typical remedy in most states for overbroad non-compete agreements is to limit or eliminate their enforcement. As a result, many employers push the envelope on not only the scope and duration of the agreements but also the classifications of employees required to sign them. The potential application of the NLRB’s “make whole” remedy requires a rethinking of that approach. While the FTC and various states eventually may make many non-competes illegal as a matter of regulation or statute, in the meantime, it is imperative that employers review their existing non-competes to make sure they are not “overbroad” and not in the cross hairs of the NLRB. The failure to do so could be very expensive, especially for those employers who have required most of their employees to sign non-compete agreements without a careful analysis of which employees truly should be restricted from competitive employment.

The Employment Team at Rhoades McKee stands ready to assist employers in reviewing their non-compete agreements as the law continues to evolve.

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