NLRB GC’s Action Potentially More Far-Reaching than Federal Trade Commission’s Proposed Rule Banning Non-Competes Altogether

On May 30, 2023, the General Counsel to the National Labor Relations Board (the “NLRB”), Jennifer A. Abruzzo, issued a memorandum stating that most non-compete agreements violate the National Labor Relations Act (the “Act”).  In doing so, General Counsel Abruzzo directed the NLRB’s regional offices to investigate employers using non-competes to determine whether their usage is “overbroad” or not.  General Counsel Abruzzo also directed the regional offices to seek make-whole relief for employees who lost employment opportunities because of a non-compete agreement, even where the employer did not enforce the agreement and, if necessary, present evidence of such lost opportunities at trial.

While General Counsel Abruzzo’s memorandum is not binding – that would require an NLRB decision – it does signal the NLRB’s enhanced enforcement efforts with respect to non-compete agreements.  General Counsel Abruzzo’s memorandum comes on the heels of the Federal Trade Commission’s (“FTC”) proposed January 2023 rule banning nearly all non-compete agreements. See our alert on the FTC’s proposed rule here.  The effectiveness of the FTC’s rule has been postponed until at least April 2024, and it is expected that there will be several legal challenges to that rule, which may be even more difficult in light of the current Supreme Court’s negative view of administrative actions that potentially expand Federal statutes absent clear Congressional direction.  This makes the NLRB General Counsel’s action even more important today.

In General Counsel Abruzzo’s memorandum, she states that the Act protects both unionized and non-unionized employees with, among other things, rights to self-organization, to bargain collectively, and to engage in other concerted activities for the purpose of mutual aid or protection.  General Counsel Abruzzo argues that a non-compete violates the Act if it “reasonably tends to chill employees in the exercise of… [their] rights unless it is narrowly tailored to address special circumstances justifying the infringement” and further argues that employees are denied access to these rights where a non-compete prevents employees from, among other things, replacing lost income if they are discharged for exercising their statutory rights to organize, or threatening to join a competitor to improve working conditions.  General Counsel Abruzzo goes on to state that “business interests in retaining employees or protecting in retaining employees or protecting special investments in training employees are unlikely to ever justify an overbroad non-compete provision because U.S. law generally protects employee mobility, and employers may protect training investments by less restrictive means, for example, by offering a longevity bonus.”

While General Counsel Abruzzo’s memorandum addresses non-competes generally, she ultimately narrows her focus to non-competes that are imposed on low-wage or middle-wage workers who lack access to trade secrets or other protectible interests, and says that non-competes that restrict only an employee’s managerial/supervisory or ownership interest in a competing business, or a true independent contractor relationship could be enforceable.

Given the current environment, employers should catalog usage of their current non-compete agreements to determine which employees are bound by them (e.g., managers, supervisors, etc.), and discuss with executive compensation counsel to determine where waivers or amendments may be needed, as well as how to use other methods to protect a company’s interests.