NLRB General Counsel Says Noncompete Agreements Violate Federal Labor Law

The National Labor Relations Board (NLRB) General Counsel (GC) issued a memorandum on May 30, 2023, declaring her opinion that the “proffer, maintenance, and enforcement” of noncompete agreements in employment contracts and severance agreements violate the National Labor Relations Act (NLRA) “except in limited circumstances.”

Quick Hits

• The GC issued a memorandum explaining that the use of noncompete provisions in employment is an unfair labor practice except in limited circumstances.
• The GC’s memorandum explained that avoiding competition from a former employee would not qualify as a legitimate business interest.
• The GC’s memorandum noted that businesses may have legitimate interests in protecting proprietary or trade secret information through narrowly tailored workplace agreements.
• The GC’s memorandum does not apply to noncompete agreements offered to supervisory or managerial employees within the meaning of the NLRA.

Noncompete Provisions

In a position foreshadowed by the GC’s March 2023 memorandum on the impact of the NLRB’s decision in McLaren Macomb, the GC’s new memorandum explained that noncompete agreements are overbroad in violation of Section 8(a)(1) to the extent they “reasonably tend to chill employees” from engaging in protected NLRA Section 7 activity. The GC stated that a violation will be found unless employers can show that such a “provision is narrowly tailored to special circumstances justifying the infringement of employee rights.”

That standard is the same as the standard that the NLRB is considering adopting in the forthcoming Stericycle, Inc. case, which principally relates to employer workplace rules and handbooks.

According to the memorandum, a “desire to avoid competition from a former employee” is not a legitimate business interest that could support a special circumstances defense.” Further, protecting “special investments in training employees” is “unlikely” to ever justify a noncompetition restrictive covenant because of the general protection for employee mobility under “U.S. law.” The GC also noted that such interests may be protected through less restrictive means, such as a longevity bonus.

Because the NLRA applies to only employees with Section 7 rights, the GC’s memorandum seemingly does not apply to noncompete agreements offered to supervisory or managerial employees within the meaning of the NLRA.

‘Overbroad’

The GC explained that, in her view, noncompetes are “overbroad” because they “tend to chill employees in the exercise of Section 7 rights” to improve working conditions. While noncompete agreements have long been used to protect employers’ legitimate business interests, according to the GC, they may chill protected concerted activity because employees may understand the noncompetition restrictive covenants as denying their ability to quit or change jobs or blocking them from seeking other opportunities for which they may be qualified.

The GC opined that the denial of access to employment opportunities created by noncompete provisions chills Section 7 activity because, for example: employees “know that they will have greater difficulty in replacing their lost income if they are discharged for exercising their statutory rights to organize and act together”; “employees’ bargaining power is undermined in the context of … labor disputes”; and “an employer’s former employees are unlikely to reunite at a local competitor’s workplace, and, thus be unable to leverage their prior relationships” to encourage the improvement of working conditions in a new workplace.

Further, the GC identified five additional types of activity in her view protected by Section 7 of the NLRA that she believes noncompetes interfere with or restrain:

• “concertedly threatening to resign to demand better working conditions”;
• “carrying out concerted threats to resign or otherwise concertedly resigning to secure improved working conditions”;
• “concertedly seeking or accepting other employment with a local competitor to obtain better working conditions”;
• “soliciting their co-workers to go work for a local competitor as part of a broader course of protected concerted activity”; and
• “seeking employment … specifically to engage in protected concerted activity with other workers at an employer’s workplace.”

At the same time, the GC did note that “not all non-compete agreements necessarily violate the NLRA,” specifically:

• “provisions that clearly restrict only individuals’ managerial ownership interests in a competing business”;
• “true independent-contractor relationships”; or
• “circumstances in which a narrowly tailored non-compete agreement’s infringement on employee rights is justified by special circumstances.”

The GC also noted that employers have legitimate business interests in protecting proprietary or trade secret information but that such interests “can be addressed by narrowly tailored workplace agreements.”  Notably, the GC indicated that employer justifications will rarely be considered reasonable in situations involving noncompete provisions “imposed on low-wage or middle-wage workers who lack access to trade secrets or other protectable interests.” Many states already prohibit the use of noncompete agreements with low-wage workers.

The GC instructed the Regional Offices to submit cases to the NLRB’s Division of Advice involving noncompete provisions that are “arguably unlawful” and, where appropriate, “seek make-whole relief for employees” who can show that an “overbroad” noncompete provision caused them to lose out on other employment opportunities, “even absent additional conduct by the employer to enforce the provision.”

Next Steps

The GC’s May 30, 2023, memorandum confirms that noncompetition agreements are an enforcement priority for her office. Importantly, the GC’s memorandum reaches restrictive covenants applicable both during and after employment, not simply to post-employment restrictions. The memorandum, unfortunately, leaves ambiguity for employers as it does not contain specific examples of provisions that the GC views as problematic, focusing, instead, on broad concepts and defining noncompete agreements as “agreements between employers and employees prohibit[ing] employees from accepting certain types of jobs and operating certain types of businesses after the end of their employment.”

In a footnote, the GC highlighted her office’s “interagency approach” to protecting employee rights. In 2022, the GC entered into memoranda of understanding with both the Federal Trade Commission (FTC) and the U.S. Department of Justice’s Antitrust Division that addressed noncompete agreements in employment. However, the NLRB GC’s May 30, 2023, memorandum comes after the FTC issued a proposed rulemaking that would ban noncompete provisions in employment contracts, which has not yet been finalized.

Regardless of the final outcomes of the FTC rulemaking and the GC’s position on the issue, the message to employers is consistent as it has been for years (including because of actions in state legislatures and in the courts): employers should ensure that all restrictive covenants are narrowly tailored to serve their legitimate business interests. This means properly differentiating between application of noncompetition, nonsolicitation (customer and employee), and nondisclosure agreements.

Ogletree Deakins will continue to monitor developments and will provide updates on the Traditional Labor Relations and Unfair Competition and Trade Secrets blogs as additional information becomes available. Important information for employers is also available via the firm’s webinar and podcast programs.

Follow and Subscribe                                                                                                                        LinkedIn | Twitter | Webinars | Podcasts