Is There Room to Maneuver?: The NLRB Challenges Most Non-Compete Agreements

In a prior piece, I wrote about the National Labor Relations Board Decision and Order in McLaren Macomb and Local 40 RN Staff Council, Office and Professional Employees, International Union (OPEIU), AFL-CIO, Case 07-CA-263041, 372 NLRB No. 58, February 21, 2023 ( "McLaren Macomb"). In that case, the Board determined that proffering to employees a severance agreement with certain non-disclosure and confidentiality provisions amounted to an unfair labor practice under the National Labor Relations Act (“NLRA” or the “Act”). On March 22, 2023, NLRB General Counsel Jennifer A. Abruzzo issued  Memorandum GC 23-05 “Guidance in Response to Inquiries about the McLaren Macomb Decision" (the “Abruzzo Memorandum”) addressing several questions about the Board’s action. The McLaren Macomb decision, which is retroactive and could render unlawful existing severance agreements, has broad implications for employers and employees. McLaren Macomb challenges the permissibility of restrictive covenants commonly included in severance agreements, even when they do not arise in the context of an NLRB proceeding, such as in discrimination cases.  If there was any uncertainty of the NLRB’s position after the Abruzzo Memorandum, there is an important update. 

On May 30, 2023,  NLRB General Counsel Jennifer A. Abruzzo issued Memorandum GC 23-08 “Non-Compete Agreements that Violate the National Labor Relations Act” (the “ Abruzzo Non-Compete Memorandum”) opining that with limited exceptions, “the proffering, maintenance, and enforcement of [non-compete] agreements violate Section 8(a)(1) of the NLRA by “interfer[ing] with employees’ exercise of rights under Section 7” of the NLRA. Section 7 of the Act protects employees’ “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.” NLRB GC Abruzzo asserts several grounds for concluding that most non-compete agreements between employers and employees are impermissible because of their chilling effect on exercise of Section 7 rights and on employee mobility from one job to another for better working conditions. The Abruzzo Non-Compete Memorandum leaves open a small window of potentially permissible non-compete agreements, such as provisions “that clearly restrict only individuals’ managerial or ownership interests in competing business, or true independent contractor relationships” as opposed to those where employees are misclassified as independent contractors. The current NLRB position also recognizes that “there may be circumstances in which a narrowly tailored non-compete agreement’s infringement on employee rights is justified in special circumstances.” This suggests that it may be permissible for the protection of trade secrets or sensitive proprietary information.  NLRB GC Abruzzo finally notes that the NLRB previously entered a memoranda of understanding with the Federal Trade Commission and the Department of Justice’s Antitrust Division regarding enforcement of laws addressing, among other things, the anticompetitive effects of non-compete agreements.

Given the increasing restraints imposed by federal and state agencies on an employer even presenting an employee with a non-compete agreement for consideration and the enforceability of such provisions, employers need to review their existing agreements and evaluate the form of employment and severance agreements they use in the future.  Failure to do so could lead to serious sanctions.