The US National Labor Relations Board’s (NLRB’s) general counsel issued guidance on May 30 announcing that noncompete provisions contained in many employment agreements violate the National Labor Relations Act unless narrowly tailored to special circumstances justifying the restrictions.
The guidance, contained in Memorandum 23-08 (GC Memo 23-08), directs field investigators to look for and refer noncompetes that may violate the National Labor Relations Act (the Act) to NLRB headquarters for review and possible prosecution. The general counsel contends that the proffer, maintenance, and enforcement of noncompete agreements could, in theory, “reasonably be construed by employees” to interfere with their exercise of Section 7 rights.
Per the general counsel, noncompete agreements can be lawful if “narrowly tailored to special circumstances justifying the infringement on employee rights.” Although the general counsel does not provide any examples of such special circumstances, the memorandum states that an employer’s desire to avoid competition is not a legitimate interest. Likewise, “retaining employees or protecting special investments in training employees” will likely never justify an overbroad noncompete provision. The general counsel suggests employer’s interests could be protected in less restrictive means—for example, by offering a longevity bonus.
Regarding protecting proprietary or trade secret information, the general counsel’s view is that employers’ legitimate business interests can be addressed by narrowly tailored workplace agreements that protect those interests.
While general counsel memos are not binding law, GC Memo 23-08 serves as a pronouncement, from the prosecutorial perspective, that noncompete provisions in employment agreements may violate the Act. The pronouncement gives the NLRB regional offices permission to seek information from employers on noncompete agreements during pending or future investigations. It is likely that employers will face general inquiries during investigations asking whether they proffer or enter into noncompete agreements.
It is unclear from GC Memo 23-08 what prosecutorial focus the general counsel intends to pursue. Much of the discussion centers on unfair noncompete agreements involving lower-wage or lesser-skilled workers who lack access to trade secrets or other protectible interests.
The general counsel clearly views noncompetes in these situations to be unlawful. It is difficult to predict the other situations where noncompetes will be challenged. Retaining full discretion to determine what noncompete will be considered sufficiently “narrowly tailored to special circumstances justifying the infringement on employee rights,” the general counsel may seek to invalidate noncompetes on a much broader scale.
The general counsel’s new position regarding noncompetes does not apply to agreements with statutory supervisors and managerial employees, as those positions have been specifically excluded under the Act. GC Memo 23-08 also does not apply to independent contractors or business entities.
The general counsel offers an imaginative justification for why noncompetes violate Section 7 of the NLRA, which generally affords employees the right to unionize, collectively bargain and engage in other concerted activity for mutual aid or protection. The general counsel contends that noncompetes interfere with employees’ Section 7 rights by denying them the ability to quit or change jobs by cutting off their access to other employment opportunities.
This denial of access to other employment chills Section 7 activity because it, among other things, makes changing jobs more difficult if terminated for such activity, discourages employees from concertedly threatening to resign because such threats could be viewed as futile given noncompete restrictions, undermines employees’ bargaining power in strikes or other labor disputes, and makes it unlikely that former employees will reunite at a competitor to engage in concerted activity.
According to the general counsel, noncompete agreements could also chill individuals, such as union organizers, from joining a company for the purpose of organizing workers because they would not be completely free to leave and join the next organizing target.
Although the NLRB may ultimately adopt the general counsel’s interpretation of the Act, the novel theory may face scrutiny by the circuit courts.
The general counsel’s memorandum is the latest government challenge to noncompetes in employment agreements and is the NLRB’s latest encroachment on common employee restrictive covenants.
In addition to an increasing number of state restrictions on noncompetes, the Federal Trade Commission (FTC) recently commenced rulemaking seeking to ban employee noncompetes more broadly. The FTC is not expected to vote on its proposed rule—which faces significant headwinds—until April 2024. Given the NLRB general counsel’s broad prosecutorial discretion and the Act’s jurisdiction over private sector employers, GC Memo 23-08 has largely—at least in the near term—supplanted the FTC’s rulemaking process.
Beyond non-competition clauses, the NLRB has also set its sights on other employment agreement restrictions. In February 2023, the Board held that confidentiality and non-disparagement provisions are unlawful for employees covered by the Act, and the general counsel later issued guidance regarding that decision identifying other provisions that could be problematic, including non-solicitation clauses, no poaching clauses, broad liability releases and covenants not to sue provisions, and cooperation requirements involving any current or future investigations. Thus, noncompete agreements, which the general counsel generally defines as “prohibit[ing] employees from accepting certain types of jobs and operating certain types of businesses after the end of their employment,” are not the NLRB only concern.
Because the general counsel’s position is not law, some employers may choose to wait and see what transpires with the anticipated litigation of these agreements. That said, to best avoid or defend against expected future unfair labor practice charges concerning noncompete agreements, consider the following actions:
Morgan Lewis has established a Noncompete Task Force that is closely monitoring broader developments concerning noncompete agreements in the United States, including a LawFlash and FAQs on the FTC’s proposed rule banning noncompete clauses.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following: