Jennifer Abruzzo, general counsel for the National Labor Relations Board (NLRB), issued a memorandum on May 30, 2023, finding that except in limited special circumstances, non-competition agreements – including the act of merely giving employees non-competition agreements or maintaining existing ones – violate Sections 7 and 8 of the National Labor Relations Act (Act). The memorandum states, “Except in limited circumstances, I believe the proffer, maintenance, and enforcement of such agreements violate Section 8(a)(1) of the Act.”
Further, even though the NLRB is focused on employee organizing and the right to collective bargaining and on low- and middle-wage workers, the memorandum suggests a broader reach.
The memorandum is not the federal government’s first attack on non-compete agreements. The Federal Trade Commission (FTC) recently published for comment a proposed rule that would ban all forms of non-competition agreements except in the context of the sale of a business. While the comment period has ended, the FTC has yet to issue its final rule, which is almost certain to face challenge in the courts. Moreover, non-disclosure agreements and statutory trade secret protections would still be available to employers.
In her memorandum, Abruzzo found that “[g]enerally speaking, non-compete agreements between employers and employees prohibit employees from accepting certain types of jobs and operating certain types of businesses after the end of their employment.” She went on to say that “[n]on-compete provisions are overbroad, that is, they reasonably tend to chill employees in the 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 the type and location of work.”
The five types of activities protected under Section 7 of the Act that Abruzzo believes are chilled by non-competes are:
- “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 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.”
- “ seeking employment, at least in part, to specifically engage in protected activity with other workers at an employer’s workplace.”
Abruzzo conceded that there may exist “special circumstances” that justify the infringement of employee rights, however, “a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.” Further, she believes some of the traditional legitimate business interests, such as retaining employees or protecting special investments in training, are unlikely to justify an overly broad non-compete “because U.S. law generally protects employee mobility, and employers may protect training investments by less restrictive means, for example, by offering a longevity bonus.” Finally, Abruzzo stated that “employers’ legitimate business interest in protecting proprietary or trade secret information can be addressed by narrowly tailored workplace agreements that protect those interests.”
Despite the above, Abruzzo concludes her memorandum stating that not all non-compete agreements necessarily violate the Act. While the memorandum does not go into detail, she does say that non-compete agreements may not violate the Act where:
- “employees could not reasonably construe the agreements to prohibit their acceptance of employment relationships subject to the Act’s protection”;
- “provisions that clearly restrict only individuals’ managerial or ownership interests in a competing business, or true independent-contractor relationships”; or
- “a narrowly tailored non-compete agreement’s infringement on employee rights is justified by special circumstances.”
There are, however, a few things employers should keep in mind with respect to Abruzzo’s memorandum.
- The Act only applies to certain categories of employees. For example, employees who fall within the Act’s definition of “supervisor” are not protected by it. Similarly, management employees are generally not within the Act’s coverage.
- Abruzzo’s memorandum merely reflects her opinion of how the NLRB should rule if faced with a case involving a non-compete agreement. The NLRB, a five-member panel that interprets the Act, has not ruled on the matter.
- NLRB decisions are subject to challenge in the federal courts. Thus, if the NLRB chooses to adopt Abruzzo’s position, a court challenge is likely to follow.
In light of Abruzzo’s memorandum and the FTC’s recently proposed rule, what are the action items for employers?
- Employers who have entered into non-competition agreements with employees should closely follow any new developments on these issues.
- Employers who have entered into non-competition agreements with employees should revisit those agreements to determine whether this memorandum and/or the FTC Rule affect them, as it is likely they are impacted by at least one of these.
- Employers who regularly have employees enter into non-competition agreements at the start of their employment should determine whether that is a practice they should continue or if there is some other means to protect their business.
- Where employers decide they will continue to use non-competition agreements, they should revisit those agreements to ensure they are narrowly tailored.
- Employers should review their employee confidentiality agreements to ensure they are written so that they are enforceable as a means of protecting their business and that they are taking the appropriate steps to make sure such agreements are enforceable.
- If employers do not regularly use employee confidentiality agreements, they should determine whether such agreements should be used to help them protect their competitive advantage.