Following several months of litigation regarding the Federal Trade Commission’s 2024 Non-Compete Rule, which was ultimately halted by a federal Texas court, the National Labor Relations Board (“NLRB”)’s General Counsel, Jennifer Abruzzo, issued Memorandum GC-2501, addressing her position on non-compete provisions and other restrictive covenants in employment agreements.
It remains unknown whether the FTC’s efforts under the Trump Administration will advocate for a ban on non-competes.
In her latest article, KingSpry’s Employment Law Chair, Avery E. Smith, Esq., discusses General Counsel Abruzzo’s key recommendations and offers guidance to employers as they navigate the complexities associated with non-compete implementation and enforcement under the Trump Administration.
The NLRB’s Position
On May 30, 2023, General Counsel Abruzzo issued a Memorandum providing that, in most cases, the proffer, maintenance, or enforcement of non-compete provisions violates the National Labor Relations Act (the “Act”). Her latest Memorandum expands on this position and further discusses the restrictive nature of “stay-or-pay” provisions.
Non-Compete Provisions
In her latest Memorandum, General Counsel Abruzzo highlights the restrictive nature of non-competes, providing that “unlawful non-compete provisions may have a harmful financial impact on employee wages and benefits by explicitly restricting employees’ job opportunities.” She further claims that the recission of an unlawful non-compete alone is not sufficient to remedy all harms.
Moving beyond previous efforts to ban the enforcement of non-competes, General Counsel Abruzzo proposes that make-whole relief be extended to cases involving unlawful non-competes. Meaning, if an employee demonstrates that they passed on a better job opportunity due to an unlawful non-compete, the employer would be liable for the difference in pay and/or benefits that said employee could have received.
“Stay-or-Pay” Provisions
The Memorandum also addresses “stay-or-pay” provisions, which are a type of agreement that require an employee to pay their employer if they separate from employment within a certain timeframe. Such provisions may include training repayment agreements, educational repayment contracts, quit fees, and sign-on bonuses.
Because these provisions tend to interfere with employees’ Section 7 rights, General Counsel Abruzzo recommends that the NLRB find “any provision under which an employee must pay their employer if they separate from employment…within a certain timeframe” presumptively unlawful.
She does, however, propose that employers be given the opportunity to rebut such findings by proving that the stay-or-pay provision (1) advances a legitimate business interest and (2) is narrowly tailored to minimize any infringement on employees’ Section 7 rights.
Similarly to unlawful non-competes, General Counsel Abruzzo recommends that make-whole relief be extended to cases involving unlawful stay-or-pay provisions.
Key Takeaways for Employers
Although the Memorandum does not constitute law and has no binding effect on the NLRB, it demonstrates General Counsel Abruzzo’s unfavorable outlook on restrictive covenants. In fact, employment matters pertaining to non-competes and restrictive covenants have been gaining traction. On June 13, 2024, an NLRB Administrative Law Judge ruled that overly broad non-compete and non-solicitation provisions in an employment agreement violated an employee’s labor rights under the Act.
As we enter a new regulatory scheme under the Trump Administration, employers are encouraged to keep abreast of the ongoing complexities regarding the use of restrictive covenants and ensure that their enforcement of such provisions is narrowly tailored to advance legitimate business interests.
