NLRB General Counsel Says Non-Competes Are Unlawful

By Zeb Anderson, Isaac Linnartz, Kim Korando and David Ortiz

Under the Biden administration, administrative agencies have taken aggressive action attempting to banish non-competes and similar agreements from the workplace. On January 5, 2023, the Federal Trade Commission (“FTC”) announced a proposed rule that would ban non-compete agreements and announced multiple enforcement actions against employers who used non-competes in ways the FTC deemed unfair. This Alert summarizes the latest salvo, which comes from the National Labor Relations Board (“NLRB”).

On May 30, 2023, Jennifer Abruzzo, the NLRB’s General Counsel, issued a Memorandum asserting her view that the “proffer, maintenance, and enforcement of [non-compete] agreements” violates Section 8(a)(1) of the National Labor Relations Act. While the Memorandum leaves significant questions unanswered, it unequivocally puts employers on notice that the overbroad use and enforcement of non-competes by employers may run afoul of the Act as enforced by the NLRB.

Congress enacted the National Labor Relations Act in 1947 for a variety of purposes, including prescribing the “legitimate rights of both employees and employers in their relations affecting commerce” and protecting the “rights of individual employees in their relations with labor organizations.” 29 U.S.C. § 141. Section 7 of the Act protects the rights of employees 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.” 29 U.S.C. § 157. It is unlawful for employers to interfere with, restrain, or coerce employees in their exercise of such rights. 29 U.S.C. § 158(a)(1). Violations are subject to civil and criminal penalties under the Act. Notably, while the Act applies to both unionized and non-unionized workforces, it does not apply to supervisors, who are defined to include employees who have authority to “hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward, or discipline other employees, or responsibly to direct them, or to adjust their grievances, or effectively to recommend such action,” as long as exercising such authority requires “the use of independent judgment.” 29 U.S.C. § 152(11).

According to the Memorandum, non-competes “reasonably tend to chill employees” in the exercise of their rights under the Act. Non-competes do so where they “could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities.” Without unfettered access to other employment opportunities, employees may be chilled from exercising their rights under the Act for fear of retaliation from their current employers. The Memorandum identifies several activities allegedly chilled by non-competes, including concertedly threatening to resign to demand better working conditions or seeking or accepting employment with a local competitor to obtain better working conditions.

As a result, the Memorandum concludes, non-competes violate the Act by chilling the exercise of employees’ rights under the Act “unless the provision is narrowly tailored to special circumstances justifying the infringement on employee rights.” The Memorandum does not much offer much guidance as to what those special circumstances are other than provisions prohibiting “individuals’ managerial or ownership interests in a competing business.”

One might ask reasonable questions concerning the Memorandum. For example, the Memorandum does not expressly address the fact that the NLRB has not previously opined that non-competes violate the Act, even though it was enacted in 1947. Employers used non-competes for decades before and after the Act’s passage without issue. The Memorandum also does not define the term “non-compete,” but appears to lump employee non-solicitation provisions under the same umbrella without analyzing whether that makes sense. Nor does it offer any analysis of the constitutional issues that might arise if the NLRB sought retroactive enforcement against non-competes entered into before May 30, 2023. No doubt these and other questions will be hashed out in litigation in the years ahead.

In the interim, the Memorandum highlights the risks associated with relying on non-competes given the choppy regulatory waters and potential for FTC and NLRB enforcement actions against employers. At a minimum, employers should examine and reconsider their strategic use of non-competes, particularly for employees in one or more of the following categories: (i) low or medium-wage employees, (ii) employees in non-supervisory roles; (iii) employees in low-skill roles, or (iv) employees whose duties do not involve significant customer interaction or access to highly confidential or trade secret information.

Smith Anderson and its Non-Compete and Trade Secrets group will continue to monitor and provide updates on significant developments. If you have any questions related to this Alert or your strategic approach to non-competes, please contact Zeb Anderson or Isaac Linnartz.