National Labor Relations Board General Counsel (“GC”) Jennifer Abruzzo recently issued Memorandum GC 25-01 (“Memorandum”), suggesting new remedies for non-competes found to violate the National Labor Relations Act (“NLRA”) and proposing that the National Labor Relations Board (“NLRB”) presume “stay-or-pay” provisions to be unlawful. Although the Memorandum is not binding law, employers should expect GC Abruzzo to direct the NLRB’s regional offices to bring complaints and seek remedies consistent with the Memorandum. The NLRA generally only extends protections to nonsupervisory and nonmanagerial employees, and therefore the Memorandum is not applicable to non-compete or stay-or-pay provisions for employees who are supervisors or managers under the NLRA.
Make-Whole Relief for Unlawful Non-Competes
Part I of the Memorandum expands upon a May 2023 memo in which GC Abruzzo outlined her position that, except in limited circumstances, non-compete provisions violate the NLRA. In the new memo, GC Abruzzo asserts that the financial harms for employees subject to unlawful non-competes extend beyond costs associated with discipline or legal action and include “more pernicious harms” associated with attempted compliance, such as foregoing higher-paying job opportunities or incurring relocation costs. Arguing that rescission—the typical remedy for offending non-compete provisions—fails to address these harms, GC Abruzzo proposes “make-whole relief” for employees impacted by unlawful non-competes. Make-whole relief would include any wage and benefits differential caused by the non-compete restriction; costs of finding new employment that complied with the non-compete, such as lost wages due to being out of work longer or accepting a lower-paying job, or moving or retraining costs; and legal fees associated with defending against a claim regarding an unlawful non-compete.
“Stay-or-Pay” Provisions Framework
Part II of the Memorandum proposes that the NLRB adopt a new framework for assessing so-called “stay-or-pay” provisions, to presume that any such provision is unlawful regardless of whether it was entered into voluntarily. Stay-or-pay provisions are “any contract under which an employee must pay their employer if they separate from employment” and include training or educational repayment provisions, quit fees, damages clauses, and sign-on-bonuses or other types of cash payments tied to a mandatory stay period.
The Memorandum explains that stay-or-pay provisions should be presumed unlawful because they interfere with rights guaranteed in Section 7 of the NLRA. Specifically, GC Abruzzo asserts that by creating an increased financial risk associated with termination, employees are chilled from engaging in protected activity to better their working conditions. However, the Memorandum proposes that an employer could overcome the presumption that a stay-or-pay provision is unlawful by meeting this four part test:
- The provision was voluntarily entered into in exchange for a benefit. If the benefit is a training that is mandatory or a condition of employment, then any repayment provision would not be voluntary. By contrast, if the repayment is for third-party training for a credential needed for promotion, for a third-party course to obtain or maintain a credential, or for an educational degree, such repayment obligations can be voluntary. Employers should specify the voluntary nature of the arrangement in the related contract. If the repayment obligation is for a cash payment like a relocation stipend or sign-on bonus, such payments are only voluntary if the employee is given the option of taking the payment up front or deferring receipt of the payment until the end of the stay period.
- The repayment is reasonable and specific. The repayment cannot be more than the cost to the employer of the benefit bestowed, and the employer must inform the employee of the repayment amount before the employee assumes the stay requirement.
- The stay period is “reasonable”. The Memorandum does not provide examples of reasonable durations for stay periods, but suggests that where the cost of the benefit is greater, the stay period may be longer. Additionally, if an employer prorates the repayment obligation on a monthly or quarterly basis, that would weigh in favor of the stay period being reasonable.
- There is no repayment if the employee is terminated without cause.
Similar to Part I, the Memorandum proposes make-whole remedies for unlawful stay-or-pay provisions, with remedies depending on whether the provision was entered into voluntarily, whether the employer has attempted to enforce the provision, and whether (like a non-compete) the provision denied the employee a better employment opportunity, as follows:
- Entered into voluntarily. The employer should rescind the offending provision and may replace it with a lawful one. For example, the replacement provision could reduce the repayment cost to mirror the employer cost, reduce the stay period, and/or clarify that no repayment is required on a termination without cause.
- Entered into involuntarily. The employer should rescind the provision and notify employees of the rescission and that any debt has been nullified and will not be enforced.
- Employer attempted to enforce. The employer should retract the enforcement action and make the employee whole for any financial harms resulting from the enforcement attempt, to include compensation for any repayments made by an employee, reimbursement for any legal or other fees incurred defending the employer’s action, and remedying any additional financial harms.
- Prevented employment opportunities. Like for non-competes, the employer should compensate any employees who were deprived of better job opportunities given the constraints of the stay-or-pay provision for the difference in terms of pay or benefits. The employee must show there was a vacancy available for a job with a better compensation package, they were qualified for the job, and they were discouraged from applying for or accepting the job because of the stay-or-pay provision.
It is also important to note that for existing stay-or-pay provisions, the Memorandum states that employers have 60 days, or until December 6, 2024, to cure any defects as specified above, and the NLRB will begin bringing enforcement actions after this 60-day period. The cure period does not extend to stay-or-pay arrangements entered into after October 7, 2024.
Looking Ahead
Although the new Memorandum is not binding law, employers should anticipate that the NLRB and its regional offices will further scrutinize non-competes and stay-or-pay provisions. Consistent with GC Abruzzo’s May 2023 memo, earlier this year an NLRB Administrative Law Judge ruled that non-compete and non-solicitation provisions violated the NLRA. And as a prelude to this Memorandum, in February the NLRB Region 9 obtained a settlement involving non-compete and training repayment provisions. As such, and particularly in light of the 60-day cure period for stay-or-pay provisions, employers should take stock of their current restrictive covenant agreements and carefully weigh the benefits and risks associated with revising existing agreements or entering into any new arrangements.