NLRB General Counsel Believes Most Non-Compete Agreements are Unlawful and Encourages Regional Offices to Submit Relevant Cases that Qualify as Unlawful under Her Analysis

[co-author: Taylor Horn, Summer Associate]

National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo recently issued a memorandum stating that most non-compete agreements violate the National Labor Relations Act (NLRA). Abruzzo’s opinion is not the official opinion of the NLRB itself and does not have the force of the law behind it. However, it will still impact the cases submitted by the NLRB’s regional offices, and may encourage plaintiff’s attorneys to advise their clients to file charges with the NLRB to challenge non-compete agreements.

Section 7 of the NLRA gives most private sector nonsupervisory employees the right “to form, join, or assist in labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection, and [also] the right to refrain from any or all such activities.” 29 U.S.C. §157. In her memorandum, Abruzzo explains her view that non-compete agreements impede employees’ rights under Section 7 of the NLRA to collectively bargain, self-organize, join labor organizations, and engage in related activities. She reasons that, by impeding these rights, non-compete agreements violate Section 8(a)(1) of the NLRA which states that an employer cannot “interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 7.” Since non-compete agreements interfere with these Section 7 employee rights they thereby violate Section 8(a)(1).

A non-compete agreement is a contract between an employer and an employee that prevents the employee from competing with the employer by barring employees from accepting related jobs or operating relevant businesses after they leave their employer. Abruzzo explains her view that non-compete agreements “chill” employees’ ability to better their working conditions by preventing employees from seeking out superior work environments. She details five types of protected activity under Section 7 of the NLRA that are “chilled” by non-compete agreements:

1. Threatening to quit as a way to demand improved working conditions — Abruzzo explains that the threat would be “futile” if the employee cannot actually obtain a different position elsewhere.
2. Carrying out threats to resign or resigning to achieve better working conditions — Abruzzo explains that while current board law does not recognize this right, in her view, it “follows logically from settled board law, Section 7 principles, and the Act’s purpose.”
3. “Seeking or accepting employment” with a different local company in order to obtain improved working conditions.
4. Recruiting coworkers to work for a local competitor “as part of a broader course of protected concerted activity” — Abruzzo explains that employees cannot pursue these opportunities without violating their non-compete agreements, and potential recruiters could fear retaliatory legal action and refrain from attempting to recruit them, even though that retaliation “would likely violate” the NLRA.
5. Seeking employment for the purpose of engaging in protected activity such as union organizing — Abruzzo explains that union organizers often try to organize entire industries; if an individual is not able to obtain a second job in the same industry then he or she is stymied from organizing multiple workplaces in the same industry.

When are Non-Competes Permissible?

Abruzzo suggests that there may be narrow grounds under which non-competes may be permissible under the NLRA, for example, when such agreements are “narrowly tailored to special circumstances justifying the infringement on employee rights. She advises that a legitimate business reason to support “narrowly tailored workplace agreements” may include an employer’s need to protect proprietary information or when such restrictions “clearly restrict only individuals’ managerial or ownership interests in a competing business, or true independent-contractor relationships.” In contrast, she further explains that she believes that preventing employee competition, retaining employees, or safeguarding investments in employee training are not legitimate business interests that justify a non-compete agreement. Finally, Abruzzo warns that a non-compete is unlikely to be reasonable when an “overbroad…provision” impacts non-high-wage employees who do not know trade secrets or similar information.

Practical Takeaways for Employers

This memorandum follows a series of federal government action to discourage or disallow most non-compete agreements. In 2021 President Biden issued an Executive Order encouraging the Federal Trade Commission (FTC) to ban or limit non-compete agreements. At the beginning of this year the FTC proposed a rule prohibiting non-compete clauses. The Antitrust Division of the Department of Justice is in favor of the rule, as are many states.

Due to this trend, employers are advised to consider whether existing and new non-compete clauses are “narrowly tailored” to protect the company’s interests while not overly restricting an individual employee’s ability to earn a living in their chosen field. Employers should be aware that as managers and supervisors are not covered by the NLRA, asking them to sign non-compete agreements should not trigger any NLRB action.

Abruzzo has instructed the NLRB’s regional offices to submit cases that are “arguably unlawful” under her analysis. Therefore, employers who continue to use non-compete agreements may anticipate potentially facing NLRB unfair labor practices charges.