NLRB General Counsel Takes on Non-Compete Agreements
In a memorandum dated May 30, 2023 (the “Memorandum”), the General Counsel of the National Labor Relations Board (NLRB) announced her position that most non-compete agreements aimed at non-supervisory employees violate the National Labor Relations Act (NLRA). Although this Memorandum does not have the force of law, it is now the General Counsel’s intention to investigate and prosecute overly broad non-compete agreements with the goal of setting new precedent.
As explained in the Memorandum, Section 7 of the NLRA protects employees’ right to, among other things, engage in concerted activities for the purpose of collective bargaining or other mutual aid or protection. Section 8(a)(1), in turn, makes it an unfair labor practice for an employer “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in [S]ection 7.”
The NLRB General Counsel takes the position that non-compete agreements interfere with employees’ rights to concertedly threaten to resign in order to secure better working conditions, because restrictive covenants render such threats futile. The General Counsel further opines that non-compete agreements interfere with employees’ right to solicit their co-workers to work for local competitors as part of a broader course of protected concerted activity.
Scope of NLRA Applicability
The NLRA does not apply to high-level managers, supervisors, independent contractors, government workers, agricultural laborers, domestic servants, individuals employed by a parent or spouse, or employees covered by the Railway Labor Act. Per NLRB Guidance (the “Guidance”), “managers” are defined as those who represent management interests by taking or recommending actions that effectively control or implement employer policy.
The Guidance also defines “supervisor” as any individual who has the authority, acting in the interest of an employer, to (1) cause another employee to be hired, transferred, suspended, laid off, recalled, promoted, discharged, assigned, rewarded, or disciplined, either by taking such action or by recommending it to a superior; or (2) who has the authority to responsibly direct other employees or adjust their grievances; provided, in all cases, that the exercise of authority is not of a merely routine or clerical nature, but requires the exercise of independent judgment. To qualify as a supervisor on the basis that a person “recommended” some qualifying action, the recommendation generally needs to be taken without independent investigation by superiors.
Regarding the second “responsibly direct” test, three factors have been considered: (i) whether the person has substantial authority to ensure a work unit achieves management's objectives and is not closely overseen by superiors; (ii) whether the person is held accountable for the work of direct reports; and (iii) whether the person exercises significant discretion and judgment in directing the work unit. As an example, the Guidance notes that a “strawboss” who merely informs other employees that they are to be laid off, but who did not themselves make that decision, is not a supervisor. Similarly, courts have found that job function, rather than title, determines supervisory status. Generally, individuals need to spend at least 10% of their total work time performing supervisory duties to qualify as a supervisor.
While the Memorandum indicates that there might be special circumstances justifying a narrowly tailored non-compete agreement, rather than describing what would constitute such “special circumstances,” the General Counsel instead describes situations that generally do not constitute such “special circumstances,” such as: (1) a desire to avoid competition from a former employee; (2) a business interest in retaining employees or protecting special investments in training employees, which could instead be addressed by such other means as offering a longevity bonus; and (3) a business interest in protecting proprietary or trade secret information, which could instead be addressed by narrowly tailored agreements.
Given this, it is unclear when exactly a non-compete agreement would be justified against an NLRA-covered employee. In the General Counsel’s view, such scenarios would be extraordinarily rare.
Take-aways for Employers:
· If an employer decides to proffer, maintain, or enforce a non-compete agreement against an employee on the basis that the employee is a supervisor or independent contractor under the NLRA, it should seek legal counsel to determine whether the employee truly constitutes a supervisor or independent contractor under the law.
· Regarding employees covered by the NLRA, employers considering proffering non-compete agreements should weigh the potential costs of doing so.
o First, the proffer itself is illegal according to the General Counsel, regardless of whether the employee signs it.
o Second, if the employee does sign it and obtains employment, they might still file a complaint with the NLRB—after which any adverse action against the employee might be construed as retaliation.
o Third, if the employee does not sign the agreement and is therefore not offered employment, and subsequently files a complaint with the NLRB, they may be able to claim retaliation and, if successful, obtain instatement and back-pay.
o Regardless of whether such complaints are successful, employers may have to spend time and money defending themselves before the NLRB.
· Similarly, employers who have existing non-compete agreements with employees or former employees covered by the NLRA may want to consider whether they should advise those employees or former employees that they consider the non-compete agreement null and void. The potential costs of not doing so include:
o An existing employee might file a complaint with the NLRB, after which any adverse action against them might be construed as retaliation (regardless of whether the original complaint is successful).
o A former employee who files a successful complaint with the NLRB on this basis might obtain such relief as the compensation they could have earned working for a competitor but for the non-compete agreement. (This would also be the potential cost to an employer attempting to enforce a non-compete agreement).
The General Counsel’s Memorandum is not the only law governing the enforceability of non-competition agreements – Extensio Law has written about a patchwork of relevant state laws and federal laws that also govern this complex issue. Given the complexity and rapid evolution of the legal principles applicable to these agreements, we advise employers to check with employment law counsel before making any decisions about the use or enforcement of restrictive covenants in the United States.