On May 30, 2023, National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo released a memorandum announcing her opinion that most non-compete agreements violate the National Labor Relations Act (NLRA). Abruzzo advised all NLRB Regional Directors, Officers-in-Charge, and Resident Officers that she is taking the position that an employer’s proffer, maintenance, and enforcement of non-compete provisions in employment contracts and severance agreements violate the NLRA, with very limited exception. Abruzzo opines that noncompete agreements are unlawful because they “chill” employees from exercising their rights under Section 7 of the NLRA, which protects employees’ rights to take collective action to improve their working conditions.
Abruzzo’s memo does not yet have the force of law; it will only become law once the NLRB issues a decision or administrative rule consistent with Abruzzo’s position. However, it is safe to anticipate that NLRB Regional Offices will be actively looking for opportunities to file complaints against employers who use non-competes with NLRA-covered employees so that the issue can be considered by administrative law judges and ultimately be heard by the full Board of the NLRB.
Practical Impact
The NLRA applies to both unionized and non-unionized non-managerial and non-supervisory employees. Although most employers do not provide non-managerial and non-supervisory employees with employment agreements or non-compete agreements, some employers require all employees to sign non-compete agreements at the beginning of the employment relationship, during employment, or in the context of a severance or separation agreement and release upon the termination of the employment relationship. If an employer provides a non-compete to a non-managerial/non-supervisory employee in any of these contexts, there is now a substantial risk that the employer will face an unfair labor practice charge and possible complaint from the NLRB. Unfair labor practice charge/NLRB complaint legal defense costs are not necessarily covered by Employment Practice Liability Insurance policies.
In light of this development, any employer who requires non-managerial/non-supervisory employees to sign non-competes in any context should carefully consider whether to discontinue the use of non-competes for these types of employees unless it is willing to face almost inevitable litigation concerning these agreements.
Increasing Risk of Additional Restrictions on Non-Competes
Employers should also be prepared for possible further restrictions on non-competes involving managerial/supervisory employees and independent contractors. In January 2023, the Federal Trade Commission (FTC) proposed banning non-competes for nearly all types of workers, including the types of managerial and supervisory employees who are not covered by the NLRB General Counsel memo. The FTC estimates that the proposed rule would impact approximately 30 million Americans and boost wages by nearly $300 billion per year. The agency received nearly 27,000 comments on the draft rule as of April 2023. The FTC will follow the federal rulemaking process and is expected to vote on the final version of the proposed rule in April 2024.
The administrative scrutiny will not likely go away. The NLRB and FTC entered into a work-sharing agreement, so any issue concerning a non-compete raised at one agency will likely be scrutinized by the other agency. The Antitrust Division of the U.S. Department of Justice also recently commented on its skepticism on the use of non-competes. Several states have recently increased restrictions on the use of non-competes in various contexts.
The rapidly evolving legal landscape for non-competes portends increasing litigation regarding the enforceability of these agreements on a variety of fronts. Employers who require employees to sign non-competes in any context should carefully weigh the benefits of these agreements against the risk of legal challenge and the cost of almost inevitable litigation. Leech Tishman’s Employment & Labor Practice Group will keep clients advised of future developments.
If you would like additional information on this memo and the anticipated impact on non-compete agreements please contact Leech Tishman’s Labor & Employment Practice Group.