The National Labor Relations Board (NLRB) General Counsel (GC) recently issued an enforcement memorandum (GC Memo 23-08), asserting that particular non-compete provisions in employment contracts and severance agreements violate the National Labor Relations Act (Act).
While not legally binding, this memo is a strong indication of continued efforts among both state and federal lawmakers and regulatory agencies to curtail the use of non-compete agreements.
Background
The crux of GC Memo 23-08 is an argument that non-compete agreements typically infringe on employee rights protected by Section 7 of the Act, unless framed within narrowly tailored “special circumstances justifying the infringement on employee rights.” The memo rejects the notion that a desire to avoid competition from a former employee is a legitimate business interest that could support a special circumstances defense.
The memo asserts that non-compete clauses broadly infringe on employees’ Section 7 rights and thus, are unlawful unless they are carefully circumscribed. Abruzzo questions the blanket justification of retaining employees or safeguarding special investment in employee training and argues that they seldom, if ever, justify an expansive non-compete provision.
The GC’s recent action follows a series of similarly controversial memos, involving issues such as invalidating confidentiality and non-disparagement provisions in severance agreements (McLaren Macomb, 372 NLRB No. 58 (2023)), rethinking employees’ rights to refrain from mandatory meetings, and limiting electronic monitoring of employees.
Overbroad Non-Compete Agreements
The memo takes particular issue with overbroad non-compete agreements, which, it argues, violate the Act when they could reasonably be interpreted to limit employees’ mobility and access to alternative employment opportunities. The GC opines that such clauses might dilute employees’ bargaining power and discourage organizing and other forms of employee activism.
Among the protected activities the memo argues that non-compete agreements could infringe upon include:
- Threatening to resign collectively to secure better working conditions;
- Executing concerted threats to resign to improve working conditions;
- Actively seeking or accepting employment with a local competitor to improve working conditions;
- Encouraging colleagues to join a local competitor as part of broader concerted activity; and
- Pursuing employment, at least in part, to engage in protected activity, including union organizing, with other workers at their employer’s workplace.
However, the memo concedes that non-compete provisions may be lawful if they restrict only managerial or ownership interests in a competing business, independent contractor relationships, or if they protect proprietary information or trade secrets.
Implications for the Future
Although the memo is not binding, it indicates a trend towards federal curtailment of non-compete agreements nationwide. This shift aligns with the Federal Trade Commission’s Notice of Proposed Rulemaking in January 2023, which recommended a nationwide ban on non-compete agreement. And on April 12, 2023, House Bill No. 4399 was introduced in the Michigan House of Representatives, which would place more restrictions on Michigan employers’ use of non-compete clauses, including banning non-competes with minors or low-wage workers.
Employers, whether unionized or not, should closely monitor these developments and reassess their use of non-compete agreements, ensuring they are narrowly tailored and focused on protecting legitimate business interests. Failure to do so may expose businesses to increased scrutiny and potential legal challenges under quickly evolving statutory and regulatory frameworks, at both the state and federal level, governing such agreements.
If you have any questions, or require assistance, please contact Zana Tomich.
