NLRB General Counsel Says Non-Compete Agreements Usually Violate U.S. Labor Law

The increasingly loud anti-non-compete chorus gained another voice last week. On May 30, 2023, the General Counsel of the National Labor Relations Board issued (“Memo”), in which she posits that the National Labor Relations Act (the “Act”) prohibits most non-compete clauses between employers and employees covered by the Act. While the Act applies to almost all private sector employers, only non-supervisory employees receive its protections.

The Act Does Not Specifically Mention Non-Compete Clauses

As we frequently report here, in recent years a number of state laws have outright banned or significantly restricted the enforceability of non-competes. (Washington, D.C., Massachusetts, California, Colorado, and Illinois, just to name a few.) And the FTC recently proposed a new regulation that would, if finalized, largely ban such provisions nationwide. So, you’d be forgiven for wondering what the Act — a federal law dating to 1935 and dealing with the right to unionize — says about non-competes.

Technically, nothing.

Rather, the Memo invokes Section 8 of the Act, which prohibits employers from restraining covered employees’ so-called Section 7 rights. Section 7 protects 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.”

The Memo Finds that Non-Compete Clauses Have a “Chilling Effect” on Protected Activity

The Memo asserts that non-competes restrain Section 7 rights by denying access to future employment opportunities. For example, the Memo says that non-competes chill the exercise of Section 7 rights because employees will have a harder time getting a new job if terminated for acting together to improve working conditions. In another inferential leap, the Memo finds that non-competes render it unlikely that former coworkers will reunite at a new workplace where they could engage in such protected activity.

According to the Memo, non-competes put five specific Section 7 rights at particular risk:

• The right to concertedly threaten to quit to demand better working conditions, in that employees could deem such threats futile or fear retaliation for making them;
• The right to actually concertedly quit to obtain better working conditions (even though the Board has not historically recognized such a right, the Memo urges the Board to do so);
• The right to concertedly seek or accept employment with a local competitor to obtain better working conditions, which the Memo says could include a sole employee working for a competitor as a “logical outgrowth” of prior concerted activity;
• The right to solicit co-workers to go work for a local competitor as part of a broader course of protected concerted activity; or
• The right to seek employment at least in part to engage in protected activity with other workers at an employer’s workplace, such as may be the case in union organizing efforts.

The Memo concludes that non-competes have a chilling effect on these rights, and thus violate the Act, absent very limited “special circumstances.” Avoiding competition, retaining employees, or protecting investments in training them are not special circumstances. On the other hand, restricting individuals’ managerial or ownership interests in a competitor might suffice.

The Memo Is Not Legally Binding Board Precedent — Yet

To be sure, the Memo reflects the General Counsel’s aggressive prosecutorial priority. But it is not “the law.” It’s the General Counsel’s interpretation of the law, which the Memo directs the Board’s Regional Directors when investigating claims filed by employees that involve non-compete provisions. Ultimately, decisions by the Board will bear out whether and in what circumstances non-competes might violate the Act. Stay tuned. (If the Board follows the General Counsel’s view of the law, we can also expect to see legal challenges in the courts.)

The Memo Does Not Implicate Supervisors or Non-Disclosure Agreements

Importantly, the Act does not apply to “supervisors” — generally defined in the Act as those who have authority to hire, fire, transfer, suspend, layoff, promote, discipline, and the like, or to recommend such actions. Thus, even if the General Counsel’s position is ultimately upheld, it will not apply to many senior-level employees and officers.

Nor does the Memo seek to curtail employers’ legitimate business interests in protecting proprietary or trade secret information, which it acknowledges “can be addressed by narrowly tailored workplace agreements.” (That said, don’t forget that Board precedent recently invalidated broad confidentiality and non-disparagement provisions as contrary to the Section 7 right to talk about working conditions.)

Bottom Line: Proceed with (Even More) Caution If Entering Non-Competes with Non-Supervisors

Employers were already wise to carefully scrutinize non-compete agreements — particularly with lower-level workers — given the increasing state law trend disfavoring them, not to mention a possible future ban coming from the FTC. Given the Memo’s federal take on non-competes with non-supervisors, employers should consult with legal counsel to address enforceability issues in these agreements.