The General Counsel of the National Labor Relations Board (NLRB or Board), Jennifer A. Abruzzo, recently issued a memorandum stating that “the proffer, maintenance, and enforcement” of noncompete provisions in employment contracts and severance agreements violate the National Labor Relations Act (NLRA or Act) except in limited circumstances.
Noncompete Agreements and Concerted Activity
In her May 30 memorandum to regional directors and other Board personnel (GC Memorandum 23-08), Abruzzo writes that noncompete provisions are overbroad, denying employees the “ability to quit or change jobs by cutting off access to other employment opportunities.” She argues that this denial violates Section 7 of the NLRA, which protects employees’ right to take concerted activity to improve their working conditions. Specifically, Abruzzo identifies five types of activities allegedly protected under Section 7 of the Act that she claims noncompete provisions chill employees from engaging in:
- Concertedly threatening to resign to demand better work conditions.
- Carrying out concerted threats to resign or otherwise concertedly resigning to secure improved working conditions.
- Concertedly seeking or accepting employment with a local competitor to obtain better working conditions.
- Soliciting co-workers to go work for a local competitor as part of a broader course of protected concerted activity.
- Seeking employment, at least in part to specifically engage in protected activity with other workers at an employer’s workplace.
What About Legitimate Business Interests?
Abruzzo argues that “a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.” She defends this view by writing that “overbroad [noncompete] provisions are imposed on low-wage or middle-wage workers who lack access to trade secrets or other protectible interests.” The memorandum, however, is unclear as to whether a distinction exists between protection of customer relationships and concerted activity directed toward co-workers. Traditionally, employers use noncompete agreements with sales employees, who have Section 7 rights, to protect customer relationships. While these employees may lack access to trade secrets, there is a strong argument that customer relationships are legitimate business interests. Indeed, in some states (such as Florida), customer relationships are specifically identified by statute as business interests properly protected by noncompete agreements.
Noncompete (and Other) Agreements Under Attack
The General Counsel’s memorandum is the latest pronouncement by the federal government (following the lead of a number of states) challenging the legitimacy of noncompete agreements. On Jan. 5, the Federal Trade Commission proposed a new rule under Section 5 of the Federal Trade Commission Act that would significantly restrict noncompete agreements between employers and workers. In addition, this is not the first adverse stance Abruzzo has taken against agreements traditionally used by employers. As we previously reported, the General Counsel has disapproved of confidentiality and non-disparagement provisions in employee severance agreements.
What Should Employers Do Now?
Although whether the Board ultimately will adopt the General Counsel’s position is not 100 percent certain, it is highly likely that this current Board will do so. As a result, employers should review their noncompete agreements to evaluate whether they are defensible in light of the General Counsel’s memorandum. Noncompete provisions are still capable of being lawfully drafted, according to the NLRB, and the General Counsel’s memorandum generally does not apply to noncompete agreements used for high-level, managerial employees (who in most instances are not statutory employees under the Act). That said, traditional post-termination restrictive covenants for non-supervisory employees may need to be substantially limited to comply with the General Counsel’s guidance.
Should you need to discuss this memorandum and its effect on your organization in greater detail, the BakerHostetler Labor Relations and Noncompete and Trade Secrets practice teams are available to assist.
Authors: Pat Muldowney and Natalie Mousa