NLRB General Counsel Enters the Fray on Non-Competes, Declaring They May Violate Federal Labor Law

For more than a year, the Federal Trade Commission has been mulling on whether the federal government should regulate employee non-compete agreements. Traditionally, those agreements limit where and for whom an employee may work after leaving their job. The General Counsel for the National Labor Relations Board (NLRB) has now entered the fray, opining that such agreements interfere with employees’ rights under Section 7 of the National Labor Relations Act (NLRA).

In her May 30 memo (GC 23-08), General Counsel Jennifer Abruzzo maintains that, because Section 7 protects employees’ right to engage in concerted activities for the purpose of organizing, any action of an employer that interferes, restrains, or coerces employees in the exercise of those rights, including non-compete clauses, could constitute an unfair labor practice. The memo states unequivocally that non-compete provisions “are overbroad,” and “reasonably tend to chill employees in the exercise of Section 7 rights” when they deny employees the ability to quit or change jobs because employees know that they will have greater difficulty finding a new job if they are discharged for organizing, and thus are less likely to do so. Specifically, the memo says that non-competes chill employees from:

• threatening to resign to demand better working conditions;
• carrying out threats to resign;
• seeking employment with a competitor to obtain better working conditions;
• soliciting co-workers to seek employment with a competitor to obtain better working conditions; and
• seeking employment to engage in protected activity with other workers.

According to the General Counsel, “[T]he proffer, maintenance, and enforcement of a non-compete provision that reasonably tends to chill employees from engaging in Section 7 activity … violate Section 8(a)(1) unless the provision is narrowly tailored to special circumstances justifying the infringement on employee rights.”

While General Counsel Abruzzo does not declare all non-competes to be de facto unfair labor practices, she does advise severely limiting their use. In the General Counsel’s view, such business interests as retaining employees, protecting special investments in training employees, or a desire to avoid competition are not likely to constitute legitimate business interests that would support a special circumstances defense.

The memo does say that some non-compete agreements are ok under the Act because employees could not reasonably construe the agreements to prohibit their acceptance of employment relationships subject to the Act’s protection. As an example, the memo states that provisions that clearly restrict only individuals’ managerial or ownership interests in a competing business, or true independent-contractor relationships, would likely be acceptable under the Act. The memo also concedes that “there may be circumstances in which a narrowly tailored non-compete agreement’s infringement on employee rights is justified by special circumstances,” but does not give any specific examples.

This lack of specificity could prove problematic for employers.  Historically, the enforceability of non-compete agreements has been the province of state law, with some states, such as California, prohibiting them in almost all circumstances, and other states allowing their enforcement if reasonable in time and scope and justified by the need to protect a legitimate business interest of the employer, such as the protection of customer relationships or confidential information.  What is unclear from the General Counsel’s memo is whether the General Counsel would deem a non-compete agreement that is otherwise justified by a legitimate business interest and enforceable under state law to violate the NLRA.

Although the General Counsel does not address non-competes signed by managers and supervisors, employers should bear in mind that employees in those positions do not generally fall within the protections of the NLRA. Thus, to the extent that an employer’s use of non-compete agreements is limited to its managerial and executive staff, those agreements fall outside of the reach of the General Counsels memo.

Be Proactive

The role of the NLRB General Counsel is to investigate and pursue alleged violations of the NLRA, similar to the role of a prosecutor in criminal proceedings.  It is important to remember that a GC memo has no binding legal effect and does not represent the views of the Board itself. Nevertheless, General Counsel memos convey the General Counsel’s priorities and the type of complaints that the General Counsel is likely to pursue through enforcement proceedings before the NLRB and the courts. Also, given that both General Counsel Abruzzo and a majority of the Board are Democratic appointees, the Memo itself does provide a strong indication of how the Board may rule in future cases.    

Please consult with a Franczek attorney if you have any questions.