NLRB General Counsel Expands Crackdown on Non-Competes with New Focus on ‘Stay-or-Pay’ Agreements

National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo released GC Memo 25-01 on October 7, 2024 further urging the Board to find non-compete agreements, particularly “stay-or-pay” practices, unlawful and broaden the remedies available for such cases. The General Counsel contends that non-compete and “stay-or-pay” agreements hinder employees’ rights to engage in concerted activities under Section 7 of the National Labor Relations Act based on the theory it restricts employee mobility. The memorandum further sets forth a framework for determining the legality of non-compete and “stay-or-pay” agreements.

This guidance builds on her May 2023 directive, which instructed NLRB field offices to submit cases involving non-compete agreements for further investigation and potential prosecution.

PROPOSED NEW REMEDIES FOR UNLAWFUL NON-COMPETE AGREEMENTS

GC Memo 25-01 asserts that merely rescinding an unlawful non-compete provision is insufficient to fully remedy the harm experienced by employees. General Counsel Abruzzo articulates the necessity for the Board’s Regions to pursue make-whole relief to adequately compensate employees for the “ill effects of unlawful non-compete provisions.”

General Counsel Abruzzo’s guidance paves the way for employees who claim a non-compete agreement prevented them from pursuing a better job opportunity to obtain remedies. These remedies would require the employer to compensate the employee for the difference, including pay and benefits, between what they would have received absent the provision and what they actually did receive during the same period.

To qualify for such a remedy, the employee must demonstrate that (1) there was a specific job vacancy with a better compensation package, (2) they were qualified for the position, and (3) a non-compete provision prevented or discouraged them from applying for the job. The General Counsel says that any uncertainty regarding the likelihood of the hiring, salary, or even start date should be resolved in favor of the employee.

Former employees may also be eligible for relief if they adhered to an unlawful non-compete provision during their post-employment period and can demonstrate that it caused them to be out of work longer than they otherwise would have been. Possible relief may include compensation for lost wages, moving expenses, retraining costs, and other foreseeable damages.

‘STAY-OR-PAY’ AGREEMENTS

“Stay-or-pay” provisions generally require employees to repay their employer if they terminate employment—whether voluntarily or involuntarily—within a specified timeframe. This includes various forms of agreements, such as training repayment agreement provisions, educational repayment contracts, quit fees, damages clauses, sign-on bonuses, retention bonuses, and other types of cash payments tied to a mandatory stay period, as well as other contracts.

PROPOSED BURDEN-SHIFTING FRAMEWORK FOR ‘STAY-OR-PAY’ AGREEMENTS

Under GC Memo 25-01, the General Counsel contends that “stay-or-pay” agreements are presumptively unlawful. An employer can rebut that presumption by demonstrating the provision “advances a legitimate business interest” and “is narrowly tailored to minimize any infringement on Section 7 rights.”

Employers must show that the provision is voluntarily entered into in exchange for a benefit, has a “reasonable and specific” repayment amount, has a “reasonable stay” period, and does not require repayment if the employee is terminated without cause.

• Voluntary Entry: An employee must voluntarily choose to receive tuition benefits for education not specifically required for the job. Costs for trainings mandatory for the job cannot be included in a stay-or-pay contract.
• Specific Repayment Amount: The repayment amount should be specified and not exceed the actual cost of the benefit provided by the employer.
• Reasonable Stay Period: What will be considered a reasonable stay period depends on various factors, including the cost of a benefit; generally, a higher cost may justify a longer stay period and vice versa.
• Termination Without Cause: If an employee is terminated without cause, a clause requiring repayment would be automatically unlawful.

PROPOSED REMEDIES FOR ‘STAY-OR-PAY’ AGREEMENTS

General Counsel Abruzzo highlights significant differences in remedies for voluntary versus nonvoluntary “stay-or-pay” agreements.

The General Counsel recommends that voluntary “stay-or-pay” agreements made with informed consent that lack narrow tailoring should be rescinded and replaced with lawful alternatives alongside traditional make-whole remedies.

In contrast, the GC Memo recommends nonvoluntary “stay-or-pay” agreements or those without proper disclosure should be rescinded, the debt nullified, and the employees compensated for financial harm. If an employer attempts to enforce such unlawful provisions, the affected employees should be made whole and compensated for legal fees and any impact on their credit ratings.

PROPOSED NEW NOTICE REQUIREMENTS

The General Counsel recommends the NLRB revise its standard notice posting to inform employees regarding both non-compete and “stay-or-pay” provisions and ensure they receive full compensation for any related harms.

The notice should inform employees of the following:

• Their potential entitlement to differential damages (wages or benefits) if they were discouraged from pursuing or unable to accept other job opportunities due to the non-compete provision;
• Their eligibility for additional compensation if they separated from employment and faced difficulties securing comparable jobs because of the non-compete provision; and
• Instructions for contacting the Regional office during the notice-posting period if they have evidence of such damages or compensation claims.

SAFE HARBOR – PROSECUTORIAL DISCRETION

General Counsel Abruzzo indicated that she would exercise prosecutorial discretion by providing employers a 60-day safe harbor to amend preexisting “stay-or-pay” agreements that “advance a legitimate business interest” and comply with GC Memo 25-01. Accordingly, since the memorandum was issued on October 7, employers have until December 6, 2024 to address these agreements. Any new arrangements made after the memorandum’s issuance will be subject to prosecution without a grace period.

PRACTICAL TAKEAWAYS

General Counsel Abruzzo warns that maintaining unlawful non-compete or “stay-or-pay” agreements may constitute unfair labor practices under the NLRA. The risk of enforcement, the available damages, and the relatively low burden placed on employees to establish a claim and recover damages may reduce employee mobility and deter strategic hiring.

If employers are no longer able to offer upfront incentives—such as sign-on bonuses or training that enhances the employees’ overall value to competitors—without the fear that the employees can promptly leave and keep those incentives, employers will need to exercise more caution when making hiring decisions.

To mitigate legal risks, employers should consider the following actions:

• Review all existing employment agreements for compliance with the new guidelines
• Assess employee benefits programs to determine if any conditions or repayment clauses could create unintended “stay-or-pay” obligations
• Clearly identify legitimate business interests in repayment agreements
• Train HR personnel and management on recognizing and addressing potentially unlawful agreements

Employers are advised to consult with legal counsel before enforcing any non-compete agreements or entering into new agreements with employees.