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NLRB Continues To Enter New Territory By Advising That Non-Compete Agreements Violate The NLRA

6/12/23

Blue ballpoint pen on a non compete contract. Noncompete contract is an agreement between employee and employer, not to enter into competition in subsequence business effort. Legal concept.

By: Zachary Jarvis and Brad Adler

On the heels of the NLRB’s controversial decision in McLaren Macomb, 372 NLRB No. 58 (2023) finding generally that non-disparagement and confidentiality provisions violate the National Labor Relations Act (NLRA), the NLRB’s General Counsel (“GC”) recently showed an intent to wade further into new areas of the employer/employee relationship.  On May 30, 2023, the GC concluded in an Enforcement Memorandum that most non-compete agreements chill an employee’s Section 7 Rights and, therefore, violate the NLRA.  See Memorandum GC 23-08 (May 30, 2023). The GC encouraged the NLRB to prosecute non-compete agreements, even if the employer does not seek to enforce them.   

What Is The New Rule Based Upon? 

Under Section 7 of the Act, employees have the “right to self-organization, to form, join, or assist 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.” 29 U.S.C. § 157. Section 8(a)(1) does not allow an employer “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in [Section 7].” Id. § 158(a)(1). Accordingly, the GC has concluded that non-compete agreements chill Section 7 rights for several reasons, thereby violating Section 8(a)(1).   

What Non-Compete Agreements Would The New Rule Apply To? 

All non-compete agreements, including those already signed, and even if employers do not try to enforce them. Id. at 2, 6.  

Who Does The GC Want To Use The New Rule Against? 

The GC does not view efforts to retain employees or efforts to capitalize on training given to employees as legitimate business interests as it believes there are other less restrictive ways to protect these interests. Id. The GC also wants to use the new rule to punish broad non-compete agreements that apply to low-wage or middle-wage workers because these employees generally carry less risk when they move jobs. Id. at 5. Finally, the GC wants to use the new rule to punish non-compete agreements entered into in states where the provisions are unenforceable. Id. 

Does The GC’s Memorandum Apply To All Employees? 

The GC’s Memorandum applies to employees in both unionized and non-unionized workforces, but it does not apply to managers, most supervisors, independent contractors, and public sector employees. 

Are There Any Exceptions To The New Rule? 

The GC does recognize a limited number of exceptions. As a general rule, a non-compete agreement must be “narrowly tailored to address special circumstances” that justify infringing on an employee’s Section 7 rights. Id. at 1-2. The GC recognized that the protection of “trade secrets or other protectable interests” can qualify as a special circumstance. Id. at 5. The GC also recognized non-compete agreements that clearly only restrict an employee from holding a managerial or ownership interest in a competitor and, in some cases, independent-contractor relationships with competitors can qualify as a special circumstance. Id. at 5-6.  

Is The GC’s Enforcement Memorandum The Equivalent Of New Law? 

While Enforcement Memorandums do not represent the official legal position of the NLRB Board, they are reflective of the GC’s guidance to those members of the agency that are responsible for investigating and prosecuting charges against employers. As a result, what the GC says has a great deal of impact on how the Regional Offices handle various NLRB Charges and whether they pursue those Charges. 

So What Should An Employer Do About Its Non-Compete Provisions? 

In sum, the GC’s proposed rule has far-reaching consequences that apply to all non-compete agreements past, present, and future. If you have a non-compete agreement in force that you have questions about, have a non-compete agreement that you would like to use, or would like to explore alternative methods to ensure employee loyalty beyond a non-compete agreement, now is the time to assess your strategy on handling non-compete provisions.    

For more information, contact Zachary Jarvis at zachary.jarvis@fmglaw.com, Brad Adler at badler@fmglaw.com, or your local FMG attorney.

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