NLRB GC Chills Non-Competes

On May 30,  Jennifer Abruzzo, General Counsel of the National Labor Relations Board, issued Memorandum GC 23-08 (the “Memo”) to all Regional Directors addressing the legality of non-compete agreements. Non-compete agreements are common in certain industries and can often be part of the hiring process. Laws in some states already restrict these agreements. For example, employers often include geographical and temporal limits to comply with varying state requirements, and some states require that employees earn above a certain threshold if the employer wants them to sign a non-compete agreement.

The General Counsel’s “Reasonably Chilling” Analysis

In the Memo, the General Counsel takes the position that most non-compete agreements violate the National Labor Relations Act. The General Counsel’s argument expands on the position she took in her March 7, 2022, brief to the NLRB in the still pending Stericycle case. In that brief, the General Counsel argued that any provision of an employment agreement violates the NLRA when it “reasonably chills” an employee’s ability to exercise their rights under Section 7 of the NLRA. The General Counsel’s Memo applies this as-yet unadopted legal standard to non-compete provisions and argues that non-compete provisions reasonably chill employees’ 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.”

The Memo also claims non-compete agreements often “reasonably chill” an employee’s ability to exercise the following claimed Section 7 rights:

1. The right to concertedly threaten to resign to demand better working conditions.
2. The right to carry out concerted threats to resign. The General Counsel admits Board law does not “unequivocally recognize” this right, but she expresses her belief this right does, in fact, exist and states her intent to “urge the Board to limit decisions inconsistent with that right to their facts or overrule them.”
3. The right to concertedly seek or accept employment with a local competitor to obtain better working conditions.
4. The right to solicit co-workers to go work for a local competitor as part of a broader course of protected concerted activity.
5. The right to seek employment, at least in part, to engage in protected activity (such as union organizing) which may require the organizer to seek jobs with multiple employers.

As noted, this analysis is based on a legal position that the Board has not adopted.  However, the Memo states that the General Counsel believes this analysis is also supported by the Board’s recent decision in McLaren Macomb, 372 NLRB No. 58.

A Limited Number of Non-Competes May Still Be Legal

The Memo reflects a special concern with how “medium” and “low wage workers” are impacted by non-compete agreements and notes a recent estimate that approximately 13.3 million individuals who make less than $40,000 per year are subject to non-compete agreements. However, the Memo does not restrict its analysis to “medium” and “low wage” earners.

The Memo notes that “not all non-compete agreements necessarily violate the NLRA.”  In particular, the Memo states agreements “that clearly restrict only individuals’ managerial or ownership interests in a competing business, or true independent contractor relationships” may not violate the NLRA.

The Memo also notes that a non-compete agreement or provision that is “narrowly tailored to special circumstances justifying the infringement on employee rights” may still be legal. However, the Memo states that “a desire to avoid competition from a former employee” and “business interests in retaining employees or protecting special investments in training employees” do not likely qualify.

Employers should, of course, be aware that employees can be covered by the NLRA even if they are not represented by a labor organization, so long as they meet the NLRA’s statutory definition. However, it should also be noted that the NLRA does have some limitations on the employees it covers. For example, the Act does not apply to most public sector employees, nor does it apply to supervisors. However, in other memoranda, the General Counsel has expressed a view that a supervisor may still be protected in some cases, for example, when refusing to enforce an illegal provision of an employment agreement.

Possible Make-Whole Remedy

To make things worse, the General Counsel also signaled the relief she will seek in cases involving non-compete agreements. The Memo states, “In appropriate circumstances, Regions should seek make-whole relief for employees who, because of their employer’s unlawful maintenance of an overbroad non-compete provision demonstrate that they lost opportunities for other employment, even absent additional conduct by the employer.” This opens the possibility that an employer may face liability if an employee can claim to have turned down another job – even if the employer was unaware of the job offer or took no action to enforce the non-compete provision.

The Memo also notes that it is irrelevant if an employee has agreed to such a provision as these are collective rights that cannot be waived.

Impact of the Guidance Memorandum

Fortunately for employers, the General Counsel’s memorandum does not have the weight of law. Rather, her legal position would need to be adopted by the NLRB and would likely face appeal in the federal courts. However, this Memo does direct the NLRB’s Regional Directors and offices to submit cases where this position can be litigated. Thus, employers may want to consider the potential for this new source of litigation.

Clark Hill attorneys will continue to monitor this developing issue and are prepared to partner with our clients to navigate this new issue. For more information, please contact Rick Fanning at rfanning@clarkhill.com or the Clark Hill attorney with whom you regularly work.

The views and opinions expressed in the article represent the view of the authors and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is it intended to be a substitute for professional legal advice.