On May 31, 2023, the General Counsel for the National Labor Relations Board (NLRB), Jennifer Abruzzo, issued a memorandum (the “Memorandum”) detailing her position that non-competition agreements (noncompetes), except in rare circumstances, violate the National Labor Relations Act (NLRA).
The Memorandum, although not the official position of the NLRB, is a significant development for employers and indicates an area where the NLRB’s respective regional offices will likely be prosecuting unfair labor practice claims. Notably, the NLRA covers most private-sector non-supervisory employees, even those not represented by a union, making the Memorandum noteworthy even to employers without a unionized workforce.
It remains unclear whether the NLRB will adopt this position, as such an adoption would have monumental effects on existing workplace contracts and employment negotiations between employers and employees. However, as noted here, the Board has shown its willingness in recent months to invalidate otherwise commonplace contract clauses — like nondisparagement and confidentiality provisions — which have historically been used by employers.
The Memorandum also constitutes the latest headwinds against the enforcement of noncompetes across the United States and follows the Federal Trade Commission’s Proposed Rule issued on Jan. 5, 2023, which, if made final would invalidate nearly all noncompetes in the employment context.
Under Section 7 of the NLRA, employees have the right to engage in certain protected and concerted activities related to their employment, for example, the right to join or support a union or the right to work together with their co-workers in an effort to better their working conditions. In the Memorandum, the General Counsel took the position that noncompetes, by their very nature, interfere with employees’ exercise of rights under Section 7, and, thus, “the proffer, maintenance, and enforcement of such agreements violate Section 8(a)(1) of the [NLRA].”
Applying this standard, the General Counsel concluded that noncompetes are by their nature overbroad, and “reasonably tend to chill employees in the exercise of Section 7 rights when the provisions 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 that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.” Under the General Counsel’s logic, limiting an employee’s ability to work for a competitor removes the potential leverage which the employee has to affect change at their job by threatening to quit. As to any potential justification for noncompetes, the General Counsel stated that “a desire to avoid competition from a former employee is not a legitimate business interest” that could support such a restriction. The General Counsel noted other ways to do so, such as offering a longevity bonus or protecting proprietary or trade secret information through more narrowly-tailored agreements, which she believes would be valid under the NLRA.
The General Counsel noted that some noncompetes could also be enforceable where they are very limited, such as when they restrict only managerial or ownership interests in a competing business, or, in the context of independent contractor relationships, or where the noncompete is otherwise narrowly tailored and justified by “special circumstances.”
Finally, the General Counsel advised the NLRB regions to, in appropriate circumstances, seek make-whole relief for employees who, because of their employer’s unlawful maintenance of an overbroad noncompete, can demonstrate that they lost opportunities for other employment, even absent additional conduct by the employer to enforce the noncompete (i.e., the “impact” of the noncompete).
Ms. Abruzzo’s Memorandum could apply to a portion of a company’s workforce regardless of whether the company is unionized because she argues that many non-compete agreements violate the section of the NLRA that applies to both unionized and non-unionized environments. Clients should know that only non-supervisory and non-managerial employees are covered by the NLRA; independent contractors, managers, most supervisors, and public sector employees are excluded.
The Memorandum itself does not have the force of law. Nevertheless, Ms. Abruzzo’s directive suggests to those seeking to escape noncompete restrictions that they should file unfair labor practices with the NLRB. While the memorandum does not represent the official legal position of the entire agency, it does represent guidance to the regional offices charged with investigating and prosecuting charges against employers and will influence future NLRB investigations. Whether the NLRB itself shares Ms. Abruzzo’s view is yet to be seen.
Ms. Abruzzo’s Memorandum does not necessarily require clients to take any immediate action. Considering that noncompetes may now be scrutinized by the NLRB, and the development of the laws in the areas of noncompetes, clients should review their restrictive covenant agreements to determine whether they protect a legitimate competitive business interest and are not overly broad in terms of time, scope, and geographic reach. Regardless of whether the NLRB adopts the position of the General Counsel, employers should always review the various options to protect their legitimate business interests and intellectual property.