NLRB General Counsel Says Non-Compete Agreements Violate the National Labor Relations Act

In a memorandum dated May 30, 2023 issued to all regional offices of the National Labor Relations Board, NLRB General Counsel Jennifer Abruzzo stated that non-compete agreements contained in employment contracts and severance agreements violate federal labor law except in limited circumstances. She called upon regional agency officers to submit cases involving arguably illegal non-compete agreements to an "Advice" division in her office that decides whether to issue complaints against employers in certain cases. In issuing this directive, Ms. Abruzzo is seeking cases to present to the National Labor Relations Board to obtain decisions from the Board which will turn her view on non-compete agreements into NLRB precedent with which all employers would be expected to comply.

General Counsel Abruzzo begins her memorandum by citing a report indicating that approximately 18.1% of American workers – roughly 28 million individuals – are subject to a non-compete agreement, including approximately 13.3% of workers earning less than $40,000 per year. These non-compete agreements prohibit employees from accepting certain types of jobs and operating certain types of businesses after the end of employment. Section 7 of the National Labor Relations Act provides employees rights "to self-organization, to form, join, or assist, labor organizations, to bargain collectively through representatives of their own choosing, or to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection." A provision in an employment agreement violates the NLRA if it reasonably tends to chill employees in the exercise of Section 7 rights unless it is narrowly tailored to address special circumstances justifying the infringement on employee rights.

Non-compete provisions, according to Ms. Abruzzo, typically are overbroad and reasonably tend to chill employees in the exercise of Section 7 rights, as they deny employees "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 the type and location of work." 

"Generally speaking," Ms. Abruzzo writes, "this denial of access to employment opportunities chills employees from engaging in Section 7 activities because: employees know that they will have greater difficulty replacing their lost income if they are discharged for exercising their statutory rights to organize and act together to improve working conditions; employees' bargaining power is undermined in the context of lockouts, strikes, and other labor disputes; and, an employer’s former employees are unlikely to reunite at a local competitor's workplace, and, thus be unable to leverage their prior relationships – and the communication and solidarity engendered thereby – to encourage each other to exercise their rights to improve working conditions in their new workplace."

Ms. Abruzzo states offering, maintaining, and enforcing non-compete agreements violates federal labor law because such would chill employees in engaging in five specific types of activity protected under Section 7 of the NLRA:

1. threatening to resign, either alone or in a group, to demand better working conditions;
2. carrying out concerted threats to resign or otherwise concertedly resigning to secure improved working conditions;
3. seeking or accepting employment with a local competitor to obtain better working conditions;
4. soliciting co-workers to go to work for a local competitor as a broader course of protected concerted activity; and
5. working at another company to organize from within (“salting”) to promote unionization there.

General Counsel Abruzzo does indicate that some non-competes could be enforceable if they are “narrowly tailored to special circumstances justifying the infringement on employee rights." Provisions that clearly restrict only an individual’s managerial or ownership interest in a competing business or a true independent-contractor relationship would not run afoul of the NLRA. Ms. Abruzzo also indicates that employers’ legitimate business interests in protecting proprietary or trade secret information can be addressed by narrowly tailored workplace agreements that protect those interests. She makes clear that she believes that "business interest in retaining employees or protecting special investments in training employees are unlikely to ever justify an overbroad non-compete provision."

Ms. Abruzzos’ memo follows on the heels of the Federal Trade Commission issuing a proposed rule last January seeking to ban the use of non-compete agreements. Moreover, this follows the February 21 decision of the NLRB, McLaren Macomb, holding that severance agreements with broad non-disparagement and/or confidentiality provisions violate Section 7 rights of employees under the NLRA. Ms. Abruzzo clearly seeks to follow on the McLaren Macomb decision to have the NLRB void most non-compete agreements for violating Section 7 rights.

Keep in mind that senior management and supervisors typically have no Section 7 rights, so their non-compete agreements should not present any issues under the NLRA. Ms. Abruzzo's directive here clearly invites those seeking to escape non-compete restrictions (including sales and  R+D employees) to file unfair labor practices with the NLRB. This no doubt will lead to protracted litigation, perhaps running simultaneously with civil actions by employers seeking enforcements in state or federal court, with lengthy appeals almost a certainty. Federal courts will have the ultimate say as to whether Ms. Abruzzo’s position here is correct when final NLRB decisions are brought to them on appeal. If federal appellate courts across the country disagree, this issue may ultimately be decided in the future by the U.S.  Supreme Court.

For now, employers should recognize that non-compete agreements will now be subject to scrutiny by the NLRB. Drafting narrowly-tailored restrictive covenants for those truly possessing highly sensitive trade secret information is certainly advisable at present. Calfee's Labor and Employment lawyers can provide guidance as to this ever-changing area of law soon to be front and center at an NLRB Regional Office near you.