Non-Competes Called Unlawful - Again
In a new memo issued by the General Counsel (GC) for the National Labor Relations Board (NLRB), “the proffer, maintenance, and enforcement of a non-compete provision” is described as a violation of Section 8 of the National Labor Relations Act (NLRA) in almost all circumstances.
Prior Efforts to Make Non-Competes Unlawful:
In January this year, the Federal Trade Commission (FTC) invalidated the non-compete agreements of three employers as antitrust violations, and proposed a Rule that would ban non-compete agreements across the United States in almost all situations. It also stressed that other types of agreements, such as non-solicitation agreements and confidentiality agreements, that are functionally equivalent to a non-compete agreement would be prohibited. The proposed FTC Rule only contains a limited carve out for situations where a substantial owner of a business sold the business. The comment period for the proposed Rule has ended, but a final rule has not yet been issued.
The Workforce Mobility Act of 2023 (WMA) was proposed with bipartisan support in the Senate. The WMA would ban most non-compete agreements, but would provide more carve-outs than the FTC proposed Rule.
In addition to these federal efforts to limit the use of non-compete agreements, many state laws have been enacted prohibiting or limiting their use, with legislation pending in many more.
Why the NLRB’s GC Calls Non-Competes Unlawful:
The GC’s memo calling non-compete agreements a violation of the NRLA is based on the following:
- Section 7 of the NLRA protects the rights of employees “to self-organization, to form, join, or assist labor organizations . . . to engage in other concerted activities.”
- Section 8(a)(1) of the NLRA makes it an unfair labor practice “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 7.”
- Non-compete agreements “chill employees in their exercise of Section 7 rights, when the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.”
- The only exception is where the non-compete agreement “is narrowly tailored to special circumstances justifying the infringement on employee rights. In this regard, a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.” Protection of trade secrets is also rejected as a broad basis for such agreements.
The memo goes on to explain in more detail how non-compete agreements chill employees in their exercise of Section 7 rights. In addition, it provides a bit of guidance on the special circumstances that might justify a non-compete, explaining that a limitation only on an employee’s managerial or ownership interest in a competing business could be permissible. Notably, the GC Memo does not address whether things like non-solicitation agreements and confidentiality agreements may be viewed the same as non-compete agreements if they are functioning in the same way as a non-compete agreement.
Practical Consequences of GC Memo:
While the GC Memo is a broad condemnation of non-compete agreements, it has limited effect, especially at the moment. First, a GC Memo is not law. It is the GC’s statement of interpretation of the law and recommendation to regional offices on how to carry out their responsibility for enforcing the NLRA. For it to become applicable legal precedent, the NLRB must rule on a particular case. Even then, appeals through the court system are likely.
Employers should also remember that not all employees are covered by the NLRA. The Act provides express exclusions from coverage for public-sector employees, agricultural and domestic workers, independent contractors, workers employed by a parent or spouse, employees of air and rail carries covered by the Railway Labor Act, and supervisors. And, while not expressly excluded by statute, nonsupervisory managerial employees and certain “confidential employees” have been held to be excluded by the courts. Accordingly, many of the employees that employers would view as most likely needing to be subject to non-compete agreements in order to protect legitimate business interests may not be covered. Significantly, though, employees like nonsupervisory sales representatives would be covered.
While there may not be a need for employers to take immediate action in response to the GC Memo, employers should consider examining how and when they use non-compete agreements. The tide has definitively turned against their use in many states and soon the federal law will follow in some manner. Our team of labor and employment lawyers is available to help with such an analysis.