Businesses that enforce non-compete provisions in their employment contracts and severance agreements violate the National Labor Relations Act (NLRA), the National Labor Relations Board’s (NLRB) general counsel said in a new memo Tuesday.

The memo sent to all NLRB officials yesterday argues that overly broad non-compete clauses have a chilling effect on workers exercising their rights under section 7 of the NLRA, which protects employees’ rights to take collective action to improve their working conditions.

General Counsel Jennifer Abruzzo believes such agreements stop employees from threatening to resign to improve working conditions or seek employment with a local competitor to obtain better working conditions.

Non-competes also interfere with employees soliciting their co-workers to move to a competitor as part of a broader course of protected concerted activity, according to the federal agency’s top lawyer.

“Non-compete provisions reasonably tend to chill employees in the exercise of section 7 rights when the provisions 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 that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work,” said Abruzzo.

She added that this denial of access to employment opportunities interferes with workers’ section 7 rights in a number of ways. “Workers know that they will have greater difficulty replacing their lost income if they are discharged for exercising their statutory rights to organise and act together to improve working conditions,” she said.

“Their bargaining power is undermined in the context of lockouts, strikes, and other labour disputes, and their social ties and solidarity leading to improvements in working conditions at workplaces are lost as they scatter to the four winds.”

Abruzzo did admit that, in some cases, non-competes could be lawful if the provisions clearly restrict only individuals’ managerial or ownership interests in a competing business, or true independent-contractor relationships.

Moreover, there may be circumstances in which a narrowly tailored agreement’s infringement on employee rights may be justified by special circumstances.

Earlier this year, the Federal Trade Commission proposed a sweeping ban on non-competes clauses after describing them as an exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.

The US Department of Justice’s Antitrust Division has also ramped up its enforcement of what it sees as anti-competitive practices, including non-compete, non-solicitation, non-poach, wage fixing, and non-disclosure provisions.

In her latest memo, Abruzzo said she is committed to an interagency approach to restrictions on the exercise of employee rights, including limits to workers’ job mobility, including information sharing and referrals to other agencies.

Reacting to the news from New York, Littler’s Phil Berkowitz suggests that the general counsel’s memo unfairly characterises non-competes, and gives short shrift to their lawful purpose as well as the extensive law supporting their enforceability. 

“These agreements, if properly and carefully drawn, protect the legitimate business interests of the employer, while providing valuable benefits to the employee,” he says.

“Courts in the vast majority of US states recognise that an agreement is lawful if it is supported by valuable consideration (such as access to employee customers and valuable, confidential trade secrets), is reasonable in time and geographic scope, does not unreasonably deprive the employee of their livelihood, and, again, if it protects the employer’s legitimate business interests.” 

Noting that non-competes are rarely imposed on low-wage workers, and that it would be unfair to suggest otherwise, Berkowitz adds: “Employers make significant investments in their businesses by creating customer goodwill and legitimate and confidential business and trade secret information. 

“They willingly share this information with new employees with the understanding that when and if the employee departs, they will not make unfair and unlawful use of that information. Employers have the right to expect, If at some point the parties part ways, that agreements willingly and lawfully entered into at the time of hire will be enforced, and that their legitimate interests will be protected.”

Also weighing in with reaction, Ogletree Deakins’ Jenn Betts in Pittsburgh notes that the memo, unfortunately, leaves ambiguity for employers as it “does not contain specific examples of provisions that the general counsel views as problematic, focusing, instead, on broad concepts and defining non-compete agreements as ‘agreements between employers and employees prohibit[ing] employees from accepting certain types of jobs and operating certain types of business after the end of their employment’.” 

Christine Bestor Townsend, from Ogletree’s Milwaukee office, adds: “Employers should, as always, focus on ensuring all restrictive covenants are narrowly tailored to protect legitimate business interests for the best chance of enforcement in state or federal court and before the NLRB.  

“Employers should remember that while the memorandum is the position of the general counsel of the NLRB, complying with state law is of utmost importance in successfully protecting legitimate business interests through restrictive covenant agreements.

“As always, companies are required to comply with applicable state law, including recent changes, and ensure agreements are narrowly tailored to protect legitimate business interests exclusively limited to the responsibilities employee performed, or customers with whom employee had business contact – and in the area where employee performed the responsibilities.”

Offering a final observation, Seyfarth Shaw’s Cary Burke in Atlanta notes that Abruzzo’s memo does not carry the force of law. “Even if the Board adopts it wholesale – which is an open question – its application would be limited to non-supervisory employees. In other words, it would not apply to managers or independent contractors. 

“Beyond that, it’s totally unclear to me what a Court of Appeals would do with a possible Board decision invalidating restrictive covenant agreements, to say nothing of the Supreme Court. With all that in mind, while this memo might present employers with an opportunity to think about whether and how they make use of restrictive covenants, I don’t think there’s a need to throw the baby out with the bathwater here and get rid of them altogether.”

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