The use of non-compete agreements has been a hot topic lately. While the Federal Trade Commission’s sweeping ban on the use of any non-compete agreements in employment contexts has officially been set aside (pending appeal), business clients shouldn’t think that they’re out of the woods. The National Labor Relations Board (NLRB) has also taken aim at restrictive covenants that can serve to tie an employee to their employer. The NLRB general counsel, Jennifer A. Abruzzo, has now openly stated that she intends to prosecute employers who use overly broad non-compete agreements and stay-or-pay provisions. Employers who are currently making use of either non-compete agreements or stay-or-pay arrangements should carefully evaluate those agreements to ensure that they’re in line with the NLRB position.

The FTC non-compete ban: background

Earlier in the year, the FTC issued a rule that would have prevented employers from using nearly any type of non-compete agreement. On August 20, a federal district judge in the Northern District of Texas set aside the FTC's non-compete ban as unlawful, and exceeding the FTC's authority, in Ryan LLC v. Federal Trade Commission. The judge found the rule to be unconstitutional and arbitrary and capricious in violation of the Administrative Procedures Act.

Just a few days before, another federal court for the Middle District of Florida had ruled that the FTC's sweeping ban on the use of non-compete agreements is unenforceable. In Properties of the Villages, Inc. v. Federal Trade Commission, however, the judge was careful to note that it was only prohibiting the FTC from enforcing the ban against the plaintiff. The Florida judge relied on the “major questions doctrine”, which states that when an agency is making an economically and politically significant decision, it must point to specific Congressional authorization for the power it is exercising.

Absent the nationwide ban, the FTC rule would have gone into effect September 4. Now, the FTC has appealed the Florida decision, setting the stage for a potential Supreme Court Review.

The NLRB position

The NLRB general counsel has now thrown stay-or-pay provisions into the mix via a memo she released early in October. Stay-or-pay arrangements can take many forms, such as requiring an employee to repay training expenses, education expenses or even signing bonuses if they separate from employment. Sometimes the stay-or-pay provision even applies if the employer decides to terminate the employee without cause. Any type of agreement where an employee must pay their employer if they separate from employment within a certain amount of time falls within the general counsel’s memo.

The NLRB position is that these types of arrangements have the same effect as non-compete agreements in that they prevent employees from engaging in activities designed to improve working conditions in violation of their Section 7 rights.

That said, the general counsel fell short of actually banning non-competes or stay-or-pay arrangements. Instead, the memo was clear that these arrangements must be narrowly tailored to further a legitimate business interest.

The memo did outline the circumstances under which a stay-or-pay agreement can be legitimate and enforceable: the arrangement must (1) be voluntarily entered into in exchange for a benefit, (2) have a reasonable and specific repayment amount, (3) have a reasonable “stay” period and (4) not require repayment if the employee is terminated without cause.

Note that even if the provision does satisfy the general counsel’s guidelines, she urged the NLRB to consider any type of stay-or-pay provision to be presumptively illegal. Assuming the NLRB adopts the position, it would be up to the employer to rebut the presumption of illegality. The general counsel also advocates for awards of economic damages to make employees whole again if their employer used an illegal contract (rather than mere rescission of the illegal contract).

The employee would be eligible to seek damages if (1) there was a vacancy available for a job with a better compensation package, (2) they were qualified for the job, and (3) they were discouraged from applying for or accepting the job because of the non-compete provision.

Employers who are wondering what the NLRB position means should be advised that the memo does not have the force of law. Instead, the memo directs regional directors in NLRB offices to issue complaints with respect to unlawful arrangements, which are heard before administrative law judges. These decisions can be appealed to the NLRB, and the NLRB decision does become precedential law (although can be further challenged in federal appeals court).

Conclusion

While the NLRB memo isn’t binding law, it does illustrate how the NLRB intends to proceed with these types of enforcement actions. The NLRB general counsel notes that she intends to retroactively invalidate non-competes and stay-or-pay provisions. She did, however, give employers a 60-day period to “cure” unlawful arrangements, running through December 6, 2024. Employers should carefully evaluate any such arrangements to ensure they are compliant.

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