The Non-Compete Agreement Showdown: After The FTC's Final Rule Setback, The NLRB Gears Up To Tackle Non-Compete Agreements

As employers continue to monitor the legal challenges against the FTC's final rule banning most non-compete agreements, they should not overlook similar efforts by other federal agencies and/or state legislatures ...
United States Employment and HR

As employers continue to monitor the legal challenges against the Federal Trade Commission's (FTC) final rule banning most non-compete agreements, they should not overlook similar efforts by other federal agencies and/or state legislatures to limit and/or prohibit the use and enforcement of non-compete agreements between employers and employees.

To that end, the National Labor Relations Board's (NLRB) has primed itself to take its own swing at non-compete agreements. On October 7, 2024, NLRB General Counsel Jennifer Abruzzo issued a 17-page memo focused on the use of overly broad non-compete agreements. It expands on her May 30, 2023 memo, in which she opined that non-compete agreements tended to chill an employee's rights to engage in concerted activity protected under Section 7 of the National Labor Relations Act, including advocating for improved working conditions through concerted efforts to obtain employment with other employers or carry out concerted threats of resignation.

In the October 7, 2024 memo, the general counsel took her warnings regarding overly broad non-compete agreements a step further, specifically stating her intent to prosecute employers who require their employees to sign non-compete and "stay-or-pay" provisions, including those that take the form of training repayment agreement provisions (sometimes referred to as TRAPs), educational repayment contracts, quit fees, damages clauses, sign-on bonuses or other types of cash payments tied to mandatory stay periods and other contracts under which employees must pay their employer in the event that they separate from employment.

In the memo, the general counsel highlighted the NLRB's commitment to reviewing any agreements which may tend to limit an employee's Section 7 rights, stating, "I believe such provisions must be narrowly tailored to minimize that infringement on Section 7 rights in order to respect the rebalance of 'economic power between labor and management' Congress sought in passing the Act."

The memo also previewed the general counsel's intentions to remedy the "harmful financial impact on employee wages and benefits" that may result from unlawful non-compete provisions "by explicitly restricting employees' job opportunities."

However, the general counsel did not leave employers entirely unequipped to address her warnings. The memo contained a proposed framework for assessing the lawfulness of such stay-or-pay provisions. To be lawful, according to the general counsel, stay-or-pay agreements must be fully voluntary and tied to a conferred benefit without unduly infringing upon an employee's Section 7 rights. They also must satisfy the following criteria:

  • A reasonable and specific repayment amount;
  • A reasonable "stay" period; and
  • No repayment required if terminated without cause.

In the memo, the general counsel warned employers that they will have a 60-day period, or until December 6, 2024, to cure any preexisting stay-or-pay provisions that advance a legitimate business interest, in light of the specific requirements contained within her proposed framework.

The general counsel's memo is the latest development in the non-compete showdown, demonstrating that non-compete provisions are in the crosshairs of more than one federal agency. While not binding law, the memo sheds critical light on how the general counsel interprets this area of federal labor law moving forward. Employers should consult with legal counsel to review their non-compete provisions to ensure they are narrowly tailored to a legitimate business interest and not overly broad, as well as review any stay-or-pay provisions to ensure compliance with the memo's outlined framework for legality.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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