We have previously covered the intersection of the Federal Trade Commission and non-competes. Another federal agency has entered the non-compete and non-solicitation space.
In May 2023, General Counsel for the National Labor Relations Board, Jennifer Abruzzo, issued a memorandum (Memorandum GC 23-08) explaining that enforcement of non-compete clauses (and non-solicitations of employees) may violate Section 7 of the National Labor Relations Act. The memo explained that such provisions “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….” The memorandum outlined several concerns, including that a non-compete may prevent an employee from working for an employer with better working conditions (and for better compensation).
While the memo explained that employers have a “legitimate business interest in protecting proprietary or trade secret information…[i]t is unlikely that an employer’s justification would be reasonable in common situations where overbroad non-compete provisions are imposed on low-wage or middle wage workers who lack access to trade secrets or other protectible interests….”
Then, in June of 2024, an Administrative Law Judge for the NLRB issued a decision in J.O. Mory, Inc., Case Nos. 25-CA-309577, 25-CA-336995 (ALJ, 2024), invalidating an overly broad non-compete and non-solicit because the covenants violated the NLRA. In addition to determining that the employer retaliated against an employee for engaging in union activity, the ALJ held that the non-compete and non-solicit clauses in the employee’s agreement violated the NLRA because the overly broad clauses were “limiting the ability to engage in union and other protected activities.” The ALJ explained,
[i]f an employee knows they are barred from being involved in any capacity with any company that operates a similar business to [the employer], they will logically be more fearful of being fired and less willing to rock the boat because they face the prospect of being unable to find any work in their geographic area if they are fired or forced to leave their job.
And recently, in October of 2024, the NLRB’s General Counsel, Ms. Abruzzo, issued another memorandum (Memorandum GC 25-05). This memo expanded upon the May 2023 publication to focus on the remedies for overly broad covenants, and also addressed “stay-or-pay” provisions that require an employee to pay their employer upon separation. These provisions can take many different forms (from repayment for training, damages provisions, or reimbursement of sign-on bonuses).
The memo sought expanded remedies for unlawful covenants with the justification that “[s]uch provisions are, in fact, often ‘self-enforcing’ in that employees may forgo certain opportunities for fear of breaching their contractual obligations.”
The memo explained that a non-compete may restrict wages because an employee may not be able to leverage a new job for higher wages or accept a new role with higher pay. The memo further clarified that to fully comply with a non-compete, an employee may have to relocate or even leave the employee’s chosen industry. Due to these concerns, the memo articulated that “rescission alone will fail to remedy all the harms caused by the provision, and make-whole remedies…will not be sufficient.” Therefore, the memo recommended that employees be able to seek remedies for lost job opportunities, additional wages for being out of work for a longer time period, additional wages for taking a lower paying role, and costs related to relocation.
The two memoranda, coupled with the decision in J.O Mory, Inc., demonstrate the continued trend in the past decade to curtail and limit non-compete and non-solicit clauses. While a new presidential administration may impact the NLRB, the October 2024 memo is thorough and could influence changes at the state and local levels. Over the past dozen years, states have continued to pass new legislation impacting restrictive covenants.