Noncompete Agreements on the Chopping Block (Again)

By Christine M. Zinter
Bullard Law,

Following on the heels of the Federal Trade Commission’s (“FTC”) January 5, 2023 proposed rule to bar nearly all noncompete agreements (see our May 8 b-Alert), National Labor Relations Board (“NLRB”) General Counsel, Jennifer Abruzzo, has opined in her May 30 Memorandum GC 23-08 that “overbroad” noncompete agreements violate the National Labor Relations Act (“NLRA”).

This would impact both non-unionized and unionized employers. However, a manager or supervisor’s noncompete would seemingly be unaffected by this pronouncement because the NLRA only applies to nonmanagerial, nonsupervisory staff—the employees most likely to have noncompetes.

Abruzzo’s Memorandum theorizes that “overbroad” noncompetes (which she does not define, but rather implies any noncompete that “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” – in other words, virtually all noncompetes) chill employees from exercising their Section 7 (of the NLRA) rights to take collective action to improve their working conditions. As such, Abruzzo believes “the proffer, maintenance and enforcement of such agreements violate Section 8(a)(1) or the Act.”

For instance, if an employee knows they will have difficulty finding a new job and replacing their income if they are discharged for exercising their rights to try to organize or improve working conditions, they will be discouraged from engaging in that protected activity. Further, employees fearing an inability to access other work due to a noncompete, would think twice before threatening to resign in order to secure better working conditions, or to accept employment with a competitor to obtain better working conditions, or to solicit their coworkers to go to work for a competitor as part of a broader course of protected concerted activity.

In her opinion, it would be “unlikely” that an employer’s business interests in protecting its investments in employees, particularly low- to middle-wage workers, is unlikely to ever justify an overbroad noncompete. Instead, Abruzzo suggests that employers fearful of losing the time and training they have invested in their employees offer them longevity bonuses rather than noncompetes.

In one small “gift” to employers, she does, at last, suggest that it might be acceptable to restrict an individual employee’s managerial or ownership interests in a competing business or in true independent contractor relationships and “special circumstances.”

What Does This Mean for Employers?

As various federal agencies continue their quest to crack down on the use of noncompete agreements, employers may consider eliminating their use, particularly with low-wage earners who have no access to proprietary or trade secrets. This should not be a problem for employers in Oregon and Washington since both states already limit noncompetes to employees earning more than $100,000 per year (as adjusted for inflation).

It should be noted this Memorandum is not a statement or ruling of the law but rather a statement that the General Counsel’s intent is to use her prosecutorial power to investigate noncompete-related claims. It would be up to the Board to issue a legal decision on a case or release an administrative rule agreeing with her position before it becomes law. However, the Memorandum instructs Regional NLRB offices to submit noncompete cases to the Division of Advice, which will then decide whether to issue a formal complaint.

In the meantime, the FTC received nearly 27,000 public comments in the 60-day public response window. They are not expected to vote on a final rule prior to April 2024, at which point any changes to the law would not take effect until 180 days after the final rule is published. Even after that, however, the rule is likely to face legal challenges on several grounds, especially whether the FTC has the authority to issue such a rule in the first place.

The content of this Alert is provided for general information purposes only. It should not be considered legal advice or used as a substitute for consulting an attorney for legal advice.

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