Non-compete agreements are contractual agreements that restrict an employee’s ability to work for a competitor after leaving their current employer. These agreements have become common across a variety of industries, with some employers requiring all employees to sign non-competes as a condition of employment. However, there is growing concern that non-compete agreements may violate employee rights and harm competition. In a recent memo, National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo asserted that non-compete agreements should be prohibited in most cases.
In the memo, Abruzzo explains her view that, except in limited circumstances, employee non-competition agreements violate the NLRA. The NLRA refers to the National Labor Relations Act, which defines and protects the rights of employees and employers in the private sector. Abruzzo argues that non-compete agreements between employers and employees should be prohibited because they interfere with employee rights under Section 7 of the NLRA.
According to Abruzzo, non-compete provisions tend to restrict an employee’s Section 7 rights when the provisions could reasonably be construed to limit an employee’s access to other employment opportunities. Section 7 of the Act provides employees with the right to engage in concerted activities for the purpose of mutual aid or protection. Abruzzo contends that non-compete agreements, by limiting an employee’s ability to seek other employment, weaken this protected activity.
Proposed new standard for determining the permissibility of non-compete provisions
The memo proposes a new standard for determining the permissibility of non-compete provisions. Under this standard, non-compete agreements will be presumptively illegal unless the employer can show that the restriction is narrowly tailored and necessary to protect a legitimate business interest. The burden of proof will be on the employer to demonstrate the legality of the non-compete agreement.
Invalidity of using non-compete provisions to prohibit competition from former employees
According to Abruzzo, however, the desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstance defense. Employers may still protect legitimate business interests, such as proprietary or trade secret information, by using narrowly tailored workplace agreements, but the desire to avoid competition is not a sufficient reason to restrict an employee’s access to other job opportunities.
Protecting legitimate business interests through narrowly tailored workplace agreements
Abruzzo also notes that employers may still protect legitimate business interests by using narrowly tailored workplace agreements. These agreements can be used to safeguard confidential information, trade secrets, customer relationships, and other business interests. However, Abruzzo emphasizes that such agreements must be carefully crafted so that they do not conflict with employee rights under the Act.
Limitations on NLRB jurisdiction exist over “employees” as defined in the Act
Employers should note that the NLRB only has jurisdiction over “employees” as defined in the Act. Independent contractors, for example, are not covered by the Act and are not subject to its protections. However, Abruzzo indicates that the NLRB will view non-compete agreements that appear to be designed to misclassify employees as independent contractors as violations of the Act.
It’s important to clarify that the memo is not yet a law
Importantly, this memo is not yet a law. However, it represents a significant statement of intent from the NLRB General Counsel that could signal future rulemaking or enforcement actions. Employers should pay close attention to these developments and adjust their practices accordingly.
The significance of the memo and other federal and state activity is related to the enforceability of non-compete agreements
The memo, along with other federal and state activities, signals that a sea change may be coming for the enforceability of non-competition agreements. Several states have already enacted laws that restrict the use of non-compete agreements, and the federal government is increasingly taking an interest in the issue. For example, the Federal Trade Commission is conducting a study on non-compete agreements and has held public hearings on the topic. Legal scholars and labor advocates have raised concerns that non-competes restrict competition, inhibit innovation, and suppress wages. This memo adds to the growing chorus of voices calling for reform.
In conclusion, non-compete agreements are facing increased scrutiny from regulators, lawmakers, and labor advocates. This memo from the NLRB General Counsel asserts that, in most cases, non-compete agreements violate employee rights under the Act. While the memo is not yet law, it represents the government’s evolving position on the issue. Employers should review their non-compete agreements and consider whether and when to enter into such agreements. Employers should also consult with legal counsel to understand the potential risks and liabilities associated with non-compete agreements. As the policy landscape around non-compete agreements continues to shift, employers need to stay aware of emerging developments and adjust their practices accordingly.