[UPDATED 11/27/2023: NLRB Makes Good on Its Promise to Challenge Non-Competes]
On May 30, 2023, Jennifer Abruzzo, General Counsel for the National Labor Relations Board (NLRB), issued a memorandum to all regional offices stating that non-compete agreements in employment contracts and severance agreements violate Section 7 of the National Labor Relations Act (NLRA) with limited exceptions. Abruzzo urged regional agency officers to submit cases involving arguably illegal non-compete agreements to a division in her office that will decide whether to issue complaints against employers.
What Does the Memorandum Say?
Section 7 of the NLRA states that employees, union and non-union, have:
“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, or to refrain from any and all such activities.”
Five types of Activity Protected by Section 7
Employers violate Section 8(a)(1) of the NLRA if they interfere with, restrain, or coerce employees from the exercise of these rights. Abruzzo states that non-competes “chill” employees from engaging in five types of activities protected by Section 7:
- Threatening to resign to demand better working conditions.
- Carrying out concerted threats to resign or otherwise concertedly resigning to secure improved working conditions.
- Seeking or accepting employment with a local competitor to obtain better working conditions.
- Soliciting co-workers to go to work for a local competitor as a broader course of protected concerted activity.
- Working at another company to organize within to promote unionization there.
Further Explanation
According to Abruzzo, employers may violate the NLRA by proffering, maintaining, or enforcing non-compete agreements. In her explanation, Abruzzo claims most non-compete agreements are overbroad and deny employees the ability to quit or change jobs by cutting off access to other employment. Abruzzo writes:
“Generally speaking, this denial of access to employment opportunities chills employees from engaging in Section 7 activity because: employees know that they will have greater difficulty replacing their lost income if they are discharged for exercising their statutory rights to organize and act together to improve working conditions; employees’ bargaining power is undermined in the context of lockouts, strikes, and other labor disputes; and, as employer’s former employees are unlikely to reunite at a local competitor’s workplace, and, thus be unable to leverage their prior relationships – and the communication and solidarity engendered thereby – to encourage each other to exercise their rights to improve working conditions in their new workplace.”
When is a Non-Compete Enforceable?
While Abruzzo aims to eliminate the majority of non-compete agreements, there are situations in which she still considers them lawful. Per the memorandum:
“There may be circumstances in which a narrowly tailored non-compete agreement’s infringement on employee rights is justified by special circumstances.”
Although Abruzzo does not clearly define what makes a non-compete narrowly tailored to meet the requirement, she does provide a few examples, such as when a provision restricts only an individual’s managerial or ownership interests in a competing business or in a true independent-contractor relationship. Additionally, senior management and supervisors typically have no Section 7 rights, so their non-compete agreements would not present any issues under these guidelines. Finally, Abruzzo also states that an employer’s legitimate business interests in protecting proprietary or trade secret information can be addressed by narrowly tailored non-compete agreements to protect those interests.
Implications and Future Challenges
The memorandum follows on the heels of the Federal Trade Commission issuing a proposed rule in January seeking to ban non-compete agreements, as well as the NLRB’s February ruling in McLaren Macomb, which held that severance agreements with broad non-disparagement and confidentiality provisions violate Section 7.
While the memorandum is not law, it does show a shift in Abruzzo’s enforcement priorities and the NLRB is likely to consider these arguments once a non-compete agreement case is brought before the Board. When this situation arises and a non-compete agreement is challenged as an unfair labor practice, Abruzzo is advising Regional Officers to seek the “make-whole remedy”, which would include compensation to employees for all direct or foreseeable monetary harms they incurred as a result of the employer’s unlawful maintenance of an overbroad agreement. Thus, an overbroad non-compete agreement, although not necessarily a financial liability on its own, may be so if challenged by the NLRB.
Employers Should be Mindful Moving Forward
For Ohio employers, complying with the NLRB memorandum may not be difficult since the validity of non-compete agreements under Ohio law is based in part on the scope of business interests the agreement seeks to protect. For example, in Brentlinger Enterprises v. Curran, the court held that non-compete agreements are found reasonable only when the employer can show, by clear and convincing evidence, that restrictions (1) are not greater than necessary for the protection of the employer’s legitimate business interests, (2) do not impose undue hardship on the employee, and (3) are not injurious to the public. The court lists factors in determining whether a non-compete clause is reasonable, such as:
- The clauses’ geographic and temporal limits.
- Whether the employee represents the sole customer contact.
- Whether the employee possess confidential information or trade secrets.
- Whether the clause seeks to restrain ordinary, rather than unfair, competition.
- Whether the clause stifle the pre-existing skills of the employee or only those skills which were developed while working for the employer.
- The balance of the clause’s detriment to the employer and employee.
- Whether the clause restricts the employee’s sole means of support.
- Whether the restrict employment is merely incidental to the main employment.
Generally, the only business interests sufficient to justify enforcement of a non-compete agreement are preventing the disclosure of a former employer’s trade secrets or the use of a former employer’s proprietary customer information to solicit the former employer’s customers.
NLRB’s Focus and What Employers Should Consider Next
In the wake of the memorandum, The NLRB has actively targeted non-compete agreements, emphasizing their violation of employees’ rights under the NLRA. Recent actions against Juvly Aesthetics in Cincinnati, Ohio spotlight this crackdown, urging employers to reconsider restrictive terms that hinder fair competition and employee mobility
For now, employers should be mindful of what language is used in their non-compete agreements to ensure they are narrowly tailored to protect a legitimate business interest rather than impair fair competition by keeping employees from leaving. As long as Ohio employers are following the standard set forth in Brentlinger, the memorandum may not pose a threat in the future.
For additional information or assistance with a review of your employment policies and non-compete agreements, please contact KJK’s Chair of Labor and Employment, Rob Gilmore (RSG@kjk.com; 216.736.7240),or any of our other partners in our Labor and Employment Practice Group.