On the heels of the National Labor Relations Board’s decision in McLaren Macomb, which invalidated most confidentiality and nondisparagement provisions in a variety of employment agreements (as we covered here and here), NLRB General Counsel Jennifer Abruzzo (the “GC”) issued GC Memorandum 23-08 on May 30, 2023, announcing that, in her view, the proffer, maintenance, and enforcement of non-compete provisions violate Section 8(a)(1) of the National Labor Relations Act (the “Act”) except in very limited circumstances. This direct challenge to the lawfulness of commonly-used non-compete agreements mirrors the Federal Trade Commission’s (“FTC”) recent proposed rulemaking that would ban employers from imposing such agreements on their workers, and follows the Board’s memoranda of understanding with the FTC and the Department of Justice’s Antitrust Division, both of which addressed the anticompetitive effects of non-compete agreements (covered here).
The GC requests Regions to submit to the NLRB’s Division of Advice all cases involving non-compete provisions that are arguably unlawful, and suggests Regions should seek make-whole relief for statutory employees who, because of their employer’s unlawful maintenance of an overbroad non-compete provision, can demonstrate they lost opportunities for other employment, even absent additional conduct by the employer to enforce the provision.
GC’s View That Most Non-Competes Will Violate the Act
The GC advances the novel theory that most non-compete agreements could reasonably be construed by employees to interfere with employees’ exercise of rights under Section 7 of the Act, because these agreements tend to deny employees “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.” This, according to the GC, chills employees from exercising or engaging in Section 7 rights 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.” The GC’s view is most non-compete agreements undermine employees’ bargaining power in the context of lockouts, strikes, and other labor disputes because former employees are unlikely to reunite at a local competitor’s workplace, and, thus be unable to leverage their prior relationships. The GC also believes such agreements discourage employees from concertedly threatening to resign to demand better working conditions or carrying out concerted threats to resign or otherwise resigning to secure improved working conditions. The GC also believes these agreements chill union organizers, known as salts, from organizing workers at one workplace because they would be precluded from organizing a competitor target employer.
To buttress her ever-expanding view of Section 7, the GC cited the Board’s recent decision in McLaren Macomb, 372 NLRB No. 58, slip op. at 4, 7 (2023) which found non-disparagement and confidentiality provisions in severance agreements to violate the Act, finding “the ‘future rights of employees as well as the rights of the public may not be traded away’ in a manner which requires ‘forbearance from future . . . concerted activities.’”
Exceptions to the Non-Compete Ban Only Found in “Special Circumstances” Under GC’s View
In the GC’s estimation, non-compete provisions that are narrowly tailored to special circumstances justifying the infringement on employees’ rights may not violate the Act. Although the precise bounds of these “special circumstances” were not explained by the GC, the memorandum did acknowledge that certain non-compete agreements cannot reasonably be construed to prohibit employee’s acceptance of employment relationships under the Act and are therefore permissible, such as provisions that clearly only restrict individuals’ managerial or ownership interests in a competing business, or true and properly classified independent-contractor relationships. Likewise, employers will likely be safe in limiting dissemination of proprietary and confidential information, so long as such provisions are narrowly tailored and serve a legitimate business interest. Critically, a general desire to avoid competition from a former employee is not going to be a legitimate business interest that can excuse a non-compete provision and support a special circumstances defense. Likewise, business interests in retaining employees or protecting special investments in training employees are not going to justify a non-compete, according to the GC.
Although the GC’s memorandum 23-08 does not carry the weight of law, employers should expect to see their non-compete (and other employee restrictive covenant agreements) closely scrutinized by the Regional offices of the NLRB, with a corresponding uptick in unfair labor practice charges. Complaints will likely start to issue from the various Regions based on the GC’s viewpoint, and it is very possible the Board will ultimately adopt the GC’s position on the validity of non-compete agreements under Section 7 of the Act.
For those employers who do not wish to take a wait and see approach, employers should consider reviewing any non-compete and other restrictive covenant provisions for nonsupervisory personnel with their employment counsel, and consider the business justification for such restrictive covenants and their overall tolerance for risk. In addition, employers may wish to contemplate implementing changes to their restrictive covenant practices to protect business interests, such as the GC’s suggestion to offer longevity bonuses for employee retention and employee training investments, and to narrowly tailor workplace agreements to protect proprietary and/or trade secret information.