Employers and organizations that seek to restrain competition by requesting or requiring that individuals enter non-competes or other restrictive agreements may want to think twice as they may be engaging in an unfair labor practice.
On October 7, 2024, National Labor Relations Board (NLRB ) General Counsel Jennifer Abruzzo (“General Counsel”) issued Memorandum GC 25-01 (“Memo”) advising that, with limited exceptions, non-compete provisions and stay-or-pay provisions in employment contracts violate the National Labor Relations Act (NLRA). While not binding, the Memo provides a detailed discussion of the types of provisions that may be viewed as unlawful, as well as remedies for such provisions, recommendations to the NLRB, and consequences for employers who fail to adhere to the guidelines therein.
Unlawful Non-Compete Provisions
The General Counsel explains that, in most circumstances. non-compete provisions are unlawful and violate NLRA Section 7 because such provisions have a harmful effect on an employee as they restrict an employee’s ability to change employment or to use prospective employment options to leverage a raise in their current position. This may negatively impact an employee’s finances in terms of wages and benefits since their job opportunities are explicitly restricted. If an employee changes jobs when there is a non-compete provision in place, the employee will usually face additional financial burdens such as having “to relocate, take a position outside of their field for a lower salary, or pay for training to qualify for a position not covered by the provision.”
Remedies for Unlawful Non-Compete Provisions
The General Counsel states that the harmful effects of non-compete provisions on employees should be remedied through rescission of the provision along with “make-whole” relief (monetary damages). This combination of remedies aims to put employees in as close to the same position as possible as if their employer had not required their acceptance of the unlawful provision as a term of employment.
During the notice-posting period, an employee should be permitted to demonstrate that the unlawful provision deprived the employee of better job opportunities. An employee must demonstrate:
- There was a vacancy available for a job with a better compensation package;
- The employee was qualified for the job; and
- The employee was discouraged from applying to the job or accepting the job because of the non-compete provision.
If these criteria are satisfied, then an employer must compensate the employee (by pay or benefits) for the difference between what the employee received and what the employee would have received during the same period.
Second, the General Counsel advised that individuals who separated from the employer “may also be entitled to make-whole relief for additional harms or costs associated with complying with the unlawful non-compete provision.” For instance, this might include the costs the former employee incurred to relocate to comply with a non-compete provision restricting similar employment within a certain geographical area.
Recommendations to the NLRB Regarding Unlawful Non-Compete Provisions
To assist the regional offices with ensuring employees are fully compensated for such harms, the General Counsel recommended that the NLRB amend its standard notice-posting to solicit relevant information from employees.
The notice should:
- Alert employees that they may be entitled to a differential (in terms of wages or benefits) if they were discouraged from pursuing, or were unable to accept, other job opportunities due to the non-compete provision;
- Notify employees that they may be entitled to other compensation if they separated from employment and had difficulty securing comparable employment due to the non-compete provision, such as by being unemployed longer, accepting a job with a lower compensation package, moving outside the provision’s geographic scope, or incurring retraining costs to become qualified for jobs in a different industry; and
- Include language directing individuals to contact the regional office during the notice-posting period if they have evidence related to (1) or (2).
The notice should be mailed to both current and former employees, who were subject to a non-compete provision since the beginning of the Section 10(b) period, to provide an opportunity to read the notice and obtain relief, if appropriate.
Unlawful Stay-Or-Pay Provisions
Stay-or-pay provisions obligate an employee to pay their employer if the employee separates from their employment, whether voluntarily or involuntarily, within a certain timeframe. According to the General Counsel, similar to non-compete provisions, these stay-or-pay provisions can infringe upon Section 7 rights, because such provisions also restrict employee mobility by making it untenable or financially difficult for an employee to resign from employment, and increase an employee’s fear of being retaliated against and terminated for engaging in protected activity. Stay-or-pay provisions can take different forms such as educational repayment contracts, training repayment agreement provisions (TRAPs), quit fees, repaying sign-on bonuses, damages clauses, etc.
Such stay-or-pay provisions may also violate Section 8(a)(1) of the NLRA, unless narrowly tailored to minimize any infringement (i.e., being voluntarily entered into). However, provisions that allow for repayment of the cost of any optional benefits given to employees may be permissible.
Remedies for Unlawful Stay-Or-Pay Provisions
The General Counsel thus advised the NLRB to find that any stay-or-pay provision under which an employee must compensate their employer if they separate from their employment, whether voluntarily or involuntarily, within a certain timeframe is presumptively unlawful. The employer may rebut that presumption by proving that the stay-or-pay provision advances a legitimate business interest and is narrowly tailored to minimize any infringement on Section 7 rights. Thus, an employer must establish that the provision:
- Was voluntarily entered into in exchange for a benefit (meaning the employee must be allowed to freely choose whether the employee agrees with the provision, and the employee must not suffer an undue financial loss or adverse employment consequence if the employee declines. With respect to training repayment agreements, this means that the training cannot be mandatory. For cash payments such as for relocation or retention, employees must be “given the option between taking an up-front payment subject to a stay-or-pay or deferring receipt of the same bonus until the end of the same time period”);
- Has a reasonable and specific repayment amount, meaning the repayment amount cannot exceed the cost to the employer of bestowing the benefit to the employee, and the amount must be specified before the employee agrees to the provision;
- Has a reasonable “stay” period, which is a fact-specific determination dependent on: (i) the cost of benefit bestowed; (ii) its value to the employee; (iii) if the repayment amount decreases during the stay period; and (iv) the employee’s income; and
- Must state that the debt will not come due if the employee is terminated without cause.
If a stay-or-pay provision is unlawful, the General Counsel suggests two types of remedies. If a stay-or-pay agreement is voluntarily entered into, but is not narrowly tailored according to the four-part test, the General Counsel recommends replacing the unlawful aspects of the agreement with lawful provisions and undertaking other remedies. However, for nonvoluntary stay-or-pay arrangements, the General Counsel advises the Board to remedy the provision’s harmful effects by requiring that the employer rescind the provision and notify employees that the “stay” obligation has been eliminated and that any debt has been nullified and will not be enforced against them.
Recommendations to the NLRB Regarding Unlawful Stay-or-Pay Provisions
Similar to employees subject to non-compete provisions, an employee subject to a stay-or-pay provision must have the opportunity to come forward and demonstrate that the employee was deprived of better employment opportunities. As such, the employer must compensate employees subject to a stay-or-pay provision for the differential in terms of pay or benefits where an employee can show that: (1) there was a vacancy available for a job with a better compensation package; (2) they were qualified for the job; and (3) they were discouraged from applying for or accepting the job because of the stay-or-pay provision. In addition, the General Counsel similarly recommends amending the NLRB’s notice-posting language as it pertains to these provisions in the same way it recommended amending the language for unlawful non-competes.
The General Counsel concludes the Memo by stating that considering this new proposed framework and specific requirements, it will provide employers with a 60-day window from October 7, 2024, to cure any preexisting stay-or-pay provisions that advance a legitimate business interest. The General Counsel will not pursue cases involving preexisting stay-or-pay provisions if the employer takes affirmative action to conform the provisions to the new framework and provides notice to employees of the changes. The General Counsel further stated that absent settlement, it will issue complaints over the proffer, maintenance, or enforcement of any unlawful stay-or-pay arrangement entered into after October 7, 2024, without a 60-day reprieve.
Takeaways
The Federal Trade Commission (FTC) rule banning non-compete agreements has been stuck in litigation. Although the rule will likely be struck down based on recent decisions of federal district courts in Texas (see Ryan LLC v. Federal Trade Commission, Civil Action No. 3:24-CV-00986-E (N.D. Texas August 20, 2024) (striking down the FTC rule, holding that the FTC exceeded its authority in issuing the rule, and finding the rule was arbitrary and capricious in violation of 5 U.S.C. § 706(2) of the Administrative Procedures Act)), and Florida (see Properties of the Villages, Inc. v. Federal Trade Commission, Case No. 5:2024cv00316 (M.D. Florida. August 14, 2024) (entering a temporary injunction prohibiting the enforcement of the FTC rule, finding the FTC had exceeded its authority, but limiting the injunction to the named plaintiff), the NLRB has made an affirmative pronouncement that non-compete agreements and stay-or-pay provisions may violate the NLRA.
In light of the General Counsel’s Memo, employers who in the past routinely entered into such agreements with employees may want to rethink their position and consider minimizing the risk of enforcement proceedings going forward. If employers still seek to enter into such agreements, they should ensure that the agreements are narrowly tailored to identify the specific legitimate business interest that they are seeking to protect. Additionally, employers may want to consider confidentiality and/or non-disclosure agreements instead if they seek to protect intellectual property, confidential and proprietary information, and/or trade secrets. Employers may also consider non-solicitation agreements to prevent employees from contacting or recruiting a company’s clients, customers, or employees after they leave their employment. Employers based in New Jersey and New York should also ensure they closely monitor state developments.
This summary is for informational purposes only and is not intended to constitute legal advice. This information should not be reused without permission.
