Jun 9, 2023Client Alert

Do Employment Non-Competition Agreements Violate the National Labor Relations Act?

The legality of employment non-competition agreements has been a hot topic in 2023.  Highlights include the Federal Trade Commission’s proposed rule to make most employment non-competition agreements an unfair deceptive trade practice under federal law, another federal bill seeking to prohibit them, and Minnesota joining a number of states where such agreements are banned. The National Labor Relations Board’s General Counsel, Jennifer A. Abruzzo, added fuel to the ongoing debates regarding the future of employment non-competition agreements.  On May 30, 2023, in a memo to all regional directors, officers-in-charge, and resident officers, Abruzzo expressed her views that, except in limited circumstances, non-competition agreements between employers and employees interfere with employees’ exercise of rights under Section 7 of the National Labor Relations Act (“NLRA” or “Act”).

Section 7 of the NLRA guarantees employees the “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.”  Section 8(a)(1) of the Act makes it an unfair labor practice for an employer “to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in Section 7” of the Act.

In her memo, Abruzzo concludes that most non-competition agreements are overbroad and unlawful because they prevent employees from exercising their rights under Section 7 of the NLRA.  Abruzzo explains such agreements limit employees’ access to other employment opportunities when the provisions reasonably could be construed by employees to deny them the ability to quit or change jobs.  Abruzzo also argues that post-employment non-competition obligations interfere with employees’ Section 7 activities in other ways because:

  • employees know that they will have greater difficulty replacing their lost income if they lose their jobs for exercising Section 7 rights to organize and act together to improve working conditions;
  • employees’ bargaining power is weakened in the context of lockouts, strikes, and other labor disputes; and
  • an employer’s former employees are unlikely to reunite working at a local competitor, and, thus be unable to leverage their prior relationships to encourage each other to exercise their rights to improve working conditions in their new workplace.

Specifically, Abruzzo claims that non-competition agreements interfere with employees’ ability to engage in the following five specific types of activity protected under Section 7 of the Act:

  • concertedly threaten to resign to demand better working conditions;
  • carry out concerted threats to resign or otherwise concertedly resign to secure improved working conditions;
  • concertedly seek or accept employment with a local competitor to obtain better working conditions;
  • solicit their co-workers to go work for a local competitor as part of a broader course of protected concerted activity; and
  • seek employment, at least in part, to specifically engage in protected activity with other workers at an employer’s workplace.

Because the NLRA applies only to nonmanagerial, nonsupervisory staff, the memo should not affect non-competition agreements of managers and supervisors.  Abruzzo emphasizes the interests of protecting low-wage and middle-wage workers by claiming that it is unlikely an employer’s justification would be considered reasonable where overbroad non-competition provisions are imposed on low-wage or middle-wage workers who lack access to trade secrets or other protectible interests.

In her memo, Abruzzo also acknowledges that not all non-competition agreements necessarily violate the NLRA.  In some instances, non-competition agreements may not violate the Act if they restrict only individuals’ managerial or ownership interests in a competing business, or true independent-contractor relationships.  She also recognizes that there may be special circumstances in which a narrowly tailored non-competition agreement’s infringement on employee rights can be justified.  Also, workplace agreements designed to protect proprietary or trade secret information are not affected by the memo as Abruzzo contemplates their continued existence and use.

Practical considerations
The NLRB General Counsel’s memo is not binding law; yet, it signals where the Biden Administration currently stands in connection with the efforts to ban or severely limit the use of employment non-competition agreements.  Abruzzo concludes her memo by directing all NLRB regional offices to submit cases concerning “arguably unlawful” non-competition agreements to the NLRB Division of Advice and seek make-whole relief for employees subject to unlawful non-competition covenants who can show lost employment opportunities because of such agreements.

Employers who rely on non-competition agreements, and especially those employers who require non-managerial or non-supervisory employees sign non-competition agreements, should consult with counsel to assess and re-evaluate such agreements in light of the memo.

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