NLRB General Counsel Says ‘Stay-or-Pay’ Provisions Are Unlawful, Calls for Make-Whole Remedies for Noncompetes

Quick Hits

• The NLRB issued a memo announcing the GC’s position that employment provisions requiring employees to remain at an employer for a specific period or repay certain costs may be unlawful.
• The memo further warns employers that the NLRB will seek expanded remedies for unlawful, overly broad noncompete and stay-or-pay provisions.
• In an unusual step, the GC announced that employers will have a sixty-day window to cure, consistent with standards announced in the memo, any preexisting stay-or-pay provisions that advance legitimate business interests.

Memorandum GC 25-01 has two key components: (1) it addresses the GC’s view of a proper remedial framework for overly broad noncompete provisions; and (2) it sets forth a framework for assessing the lawfulness of “stay-or-pay” provisions, which are defined by the GC as any contracts that require employees to pay their employer if they separate from employment within a certain time period. Importantly, the GC’s memo relates only to nonsupervisory employees, as the Act does not extend to supervisory or management personnel with noncompete or stay-or-pay provisions.

Direction on Potential Remedies for Unlawful Noncompete Provisions

Following up on a separate GC memo from May 2023, the latest memo begins by expanding on the GC’s view of appropriate remedies for noncompete provisions viewed as unlawfully overly broad under the National Labor Relations Act (NLRA) in agreements with nonsupervisory/nonmanagerial employees covered by Section 7 of the NLRA.

The GC instructs the NLRB regional offices to seek monetary make-whole remedies when employees “demonstrate that they were deprived of a better job opportunity as a result of [an unlawful] non-compete provision.” To warrant such relief, an employee must show that: “(1) there was a vacancy available for a job with a better compensation package; (2) they were qualified for the job; and (3) they were discouraged from applying for or accepting the job because of the non-compete provision.”

According to the memo, employees who have separated from the employer “may also be entitled to make-whole relief for additional harms or costs associated with complying with the unlawful non-compete provision.” These harms can include lost pay for being without a job, the difference in pay from a job with lesser compensation, moving costs to relocate outside a geographic region covered by the noncompete provision, or retraining costs to obtain a job in another industry, according to the memo.

In addition to these remedial positions, the GC also recommended that the NLRB regional offices update the standard NLRB notice postings in noncompete cases. The GC recommended that the notices be updated to include various notifications to current and former employees about the availability of potential compensation if they were harmed by a noncompete during the NLRA’s statutory limitations period. The GC also recommended that the notices include language directing current and former employees to contact regional offices if they have evidence meeting the standards the GC created for “unenforceable” noncompetes. If adopted and implemented, such NLRB notices will begin to look like notices commonly mailed to potential members of class action cases.

The NLRB GC Proposes a New Framework for ‘Stay-or-Pay’ Provisions

While the employer community was already aware of the GC’s effort to mount NLRA challenges to noncompete provisions, most of the recent memo addresses a new area of expansion. It articulates the GC’s view that many common stay-or-pay provisions are potentially unlawful. The GC defines stay-or-pay provisions as agreements with payments tied to a mandatory stay period under which employees must repay their employer certain bonuses/benefits if they voluntarily or involuntarily separate from employment before the expiration of the stay period. Examples of stay-or-pay provisions include educational repayment contracts and sign-on or relocation bonuses tied to a mandatory period of employment.

The memo states the GC’s position that stay-or-pay provisions violate Section 8(a)(1) of the NLRA unless “they are narrowly tailored to minimize any interference with Section 7 rights” and employers can meet a specific test for whether the provision “advances a legitimate business interest.” The GC announced that she will urge the NLRB to adopt a test requiring the employer to show that challenged language:

1. “is voluntarily entered into in exchange for a benefit”—“meaning that employees must be permitted to freely choose whether to [agree to the provision] and may not suffer an undue financial loss or adverse employment consequence if they decline”;
2. “has a reasonable and specific repayment amount”—meaning the repayment amount is “no more than the cost to the employer of the benefit bestowed, and the debt amount [is] specified up front”;
3. “has a reasonable ‘stay’ period”—a “fact-specific” inquiry “based on factors such as the cost of the benefit bestowed, its value to the employee, whether the repayment amount decreases over the course of the stay period, and the employee’s income”; and
4. “does not require repayment if the employee is terminated without cause”—meaning it “must effectively state that the debt will not come due if the employee is terminated without cause.”

The GC asserts that the NLRB should order the rescission and replacement of unlawful stay-or-pay provisions even if the employee voluntarily entered into them. According to the GC, employers may be liable for other remedies, including make-whole remedies for missed employment opportunities similar to the GC’s position regarding noncompete provisions. The GC also has recommended that, in stay-or-pay cases, the standard NLRB notice postings be modified as discussed above in the context of noncompete matters.

In recognition of the new framework with its specific requirements, the GC announced that she would “grant employers a sixty-day window from the date of issuance of this memorandum to cure and preexisting stay-or-pay provisions that advance a legitimate business interest.” That sixty-day window runs through December 6, 2024. But note that the GC indicated the NLRB regional offices will be directed to issue complaints, absent settlement over any new stay-or-pay arrangement entered into after the date of the memo, without any sixty-day reprieve.

Next Steps

The GC’s memo is not law because the GC does not have the authority to “make” law. But the GC’s memo articulates the GC’s view of the NLRB’s enforcement position and the GC’s skepticism of the lawfulness of restrictive covenants—and now stay-or-pay provisions. Over the past year, cases regarding noncompete provisions, training repayment provisions, and other restrictive covenants have been gaining traction in the NLRB.

For example, in June 2024, an NLRB administrative law judge ruled that broad noncompete and nonsolicitation provisions in an employment agreement violated the NLRA. That ruling came after the NLRB regional director for Region 9-Cincinnati, in February 2024, obtained a settlement in a case alleging the employer maintained employment agreements with unlawful noncompete and training repayment provisions that restricted employees’ mobility.

The GC’s aggressive expansion of the NLRB’s focus on noncompetes and stay-or-pay provisions comes at an interesting time. Federal courts in Texas ruled that the NLRB does not have the power to adjudicate traditional unfair labor practice claims (these cases are on appeal). The effort of the Federal Trade Commission (FTC), another federal administrative agency, to ban noncompetes also recently suffered a dramatic setback when a Texas federal court ruled that the FTC lacked authority to regulate noncompetes. If the FTC lacks that power, it is reasonable to question the GC’s authority on the similar subject matter.

It is expected that the GC (and the NLRB) will continue to pursue the GC’s agenda and that the GC’s position will likely be tested in federal courts. In the meantime, employers may want to take note of the GC’s position and evaluate whether taking any actions consistent with the latest GC memo may pose potential business harm or competitive damage to an organization, and if such harms outweigh the penalties that the NLRB may assess by not complying with the GC’s memo.

Employers may wish to seriously consider their risk tolerance and balance what is more important to them if they cannot have both protection and compliance. As always, employers may want to consider whether their restrictive covenants are narrowly tailored to advance legitimate business interests.

Ogletree Deakins will continue to monitor developments and will provide updates on the Traditional Labor Relations and Unfair Competition and Trade Secrets blogs.

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