NLRB Stance on Non-Competes Flips Again
After the Biden-era Federal Trade Commission (FTC) issued its sweeping ban on most non-compete agreements, these and other employment agreements governing post-separation rights and restrictions have been squarely in the spotlight. Although the current administration has taken a much more employer-friendly stance on the use of non-competes and other protective agreements, issues surrounding their use continue to arise. Most recently, the National Labor Relations Board (NLRB) Division of Advice issued a memorandum expressing the current General Counsel's view on the use of post-employment non-compete agreements.
The current view departs significantly from the Biden-era view that overly broad non-compete agreements may violate employees' Section 7 rights under the National Labor Relations Act (NLRA). While the memorandum opinion gives employers greater confidence in the current NLRB enforcement views, employers should continue to carefully monitor ongoing developments—both at the state and federal level.
Post-Separation Non-Competes: Background
Business owners have historically relied on non-compete agreements to protect their business interests, value and trade secrets. Critics argue that non-compete agreements make it more difficult for workers to change jobs and demand higher pay and restrict overall competition in the labor market. In recent years, the FTC has sharply targeted non-competes via enforcement actions.
Under NLRA Section 8(a)(1), it's generally considered an unfair labor practice for employers to interfere with or restrain employees' Section 7 rights under the NLRA. Specifically, Section 7 provides employees with the protected 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."
The Biden-era NLRB General Counsel found that non-compete agreements restrict employees' Section 7 rights by restricting their ability to seek (or threaten to seek) alternative employment via a protected "concerted activity".
The Current Advice Memorandum
The most recent advice memorandum addressed a situation where two employees left employment to work for a competitor. Each employee had entered into a six-month non-compete, non-disparagement, non-solicitation and confidentiality agreement. The issue addressed was whether the agreements violated the employees' Section 7 rights granted under NLRA Section 8.
In the memorandum the current General Counsel recommended dismissing the charges against the employer, finding that non-compete agreements do not always violate employees' Section 7 rights. The General Counsel reasoned that employees subject to these agreements would understand that they prohibit disclosing confidential information to competitors, rather than restrict protected communications between the employees.
The memorandum demonstrates that the NLRB will not decline to enforce non-compete agreements based on Section 7 violations alone.
Notably, the memorandum found that the non-solicitation and non-disparagement clauses were arguably unlawful—but that dismissal was warranted because the employer had not tried to enforce these clauses against the employees.
Steps for Employers Going Forward
It's important to remember that this recent memorandum does not change the law or constitute binding precedent for administrative law judges. While it may deter charges from being filed in the first place based on Section 7 violations, employers should continue to review any non-compete agreements and other restrictive covenants.
Last year, the FTC announced that non-compete agreements will be evaluated based on case-by-case analyses. It also announced that factors that will be relevant include (1) the size of the company, in terms of the number of employees and the business itself, (2) the pool of employees subject to non-compete agreements (whether all employees or a certain class of employees), (3) the behavioral, temporal and geographic scope of the non-compete agreements and (4) whether the employment responsibilities of the employees with non-compete agreements justified the restrictions.
Employers should also remember that this advice memorandum reflets the current federal position on the enforceability of restrictive covenants. Many states have imposed their own restrictions and standards—and an agreement may be unenforceable under state law even if it passes muster at the federal level.
California, Minnesota, North Dakota and Oklahoma ban the use of non-compete agreements entirely. 34 states and Washington, D.C. restrict the use of non-competes in some manner. While each state is slightly different, the rules are frequently changing, and employers should pay close attention to the state laws relevant to their business.
Conclusion
The modified NLRB position should be welcome news for employers who rely on non-competes, because it clarifies that not all restrictive covenants will be problematic, assuming that they are drafted carefully and are not overly broad. Still, employers should always exercise caution when attempting to impose these and similar post-employment restrictions. Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.