It’s no secret that non-compete agreements have recently come under greater scrutiny by the federal government. In July 2021, President Joe Biden signed an Executive Order on “Promoting Competition in the American Economy” that, among other things, directed the Federal Trade Commission (“FTC”) to consider curtailing the use of non-compete agreements. Then, in January of this year, the FTC responded to the Executive Order by proposing a broad and sweeping rule that would prohibit employers across the country from entering into non-compete agreements with their workforce. Now, Jennifer Abruzzo, the General Counsel of the National Labor Relations Board, has joined this growing chorus, stating that non-compete agreements violate the National Labor Relations Act (“NLRA” or “Act”), except in limited circumstances.
On May 30, 2023, the General Counsel issued GC Memorandum 23-08 in which she argued that non-compete agreements are overbroad, and may violate the NLRA, “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 type and location of work.” She reasoned that this denial of access to employment opportunities purportedly chills protected activity under Section 7 because: (1) employees know they will have greater difficulty finding another job if they are discharged for exercising their rights to organize and act together to improve working conditions; (2) their bargaining power during strikes, lockouts, and other labor disputes is undermined; and (3) as former employees of an employer, they are unlikely to “reunite” at a local competitor and encourage each other to exercise statutory rights to improve working conditions at their new employer.
Moreover, the General Counsel argued that non-compete agreements chill employees from engaging in five specific types of protected activity:
- They chill employees from concertedly threatening to resign to demand better working conditions.
- They chill employees from carrying out concerted threats to resign or otherwise concertedly resigning to secure improved working conditions.
- They chill employees from concertedly seeking or accepting employment with a local competitor to obtain better working conditions.
- They chill employees from soliciting their co-workers to go work for a local competitor as part of a broader course of protected concerted activity.
- They chill employees from seeking employment, at least in part, to specifically engage in protected activity (e.g., union organizing) with other workers at an employer’s workplace.
In the General Counsel’s view, the “proffer, maintenance, and enforcement” of non-compete agreements that would reasonably tend to chill employees from engaging in these activities would violate the Act unless they are “narrowly tailored to special circumstances justifying the infringement on employee rights.” The General Counsel did not explain what she believes might constitute “special circumstances,” although she provided examples of what likely would not: avoiding competition from former employees, retaining employees, and protecting special investments in employee training. Those activities, according to the General Counsel, would not justify the use of a non-compete agreement.
The General Counsel also acknowledged that employers have a legitimate business interest in protecting proprietary or trade secret information, but noted that such interests can be protected by narrowly tailored “workplace agreements.” She also allowed that some non-compete agreements might not violate the Act if they don’t restrict employment relationships, such as if they restrict ownership interests in a competing business or independent contractor relationships, or under “special circumstances” (again, undefined) that justify a narrowly-tailored non-compete.
Importantly, the General Counsel’s memorandum is not binding, and thus does not change existing law or render all non-compete agreements unlawful. Furthermore, while the NLRA protects “employees” (union and non-union), it does not protect “supervisors” who are excluded from Section 7’s protections. As such, non-compete agreements with supervisors or managers should not be affected by her memorandum. That said, the General Counsel is looking for a case to bring to the Board, and in that regard, directed the Regional Offices to submit to the Division of Advice cases involving non-compete agreements that are “arguably unlawful” under her analysis.
Whether the General Counsel’s position ultimately carries the day remains to be seen. Although the current employee-friendly Board may be sympathetic to her position, the federal courts of appeals – which review Board decisions – may not. We anticipate that there will be legal challenges by employers to an adverse Board decision. Moreover, her memo sets up a clash with states, which have traditionally regulated non-compete agreements. For example, under Pennsylvania law, employers have legitimate business interests in their investments in specialized employee training and trade secrets or confidential information that may be protected by non-compete agreements. See, e.g., WellSpan Health v. Bayliss, 869 A.2d 990, 996 (Pa. Super. Ct. 2005).
We will be monitoring the NLRB and will provide updates on any action by the Board with respect to non-compete agreements. If you have any questions about the General Counsel’s memorandum or other issues involving non-compete agreements, please contact any member of our Labor and Employment Practice Group.