On October 7, 2024, Jennifer A. Abruzzo, General Counsel for the National Labor Relations Board (NLRB) issued a memo urging field offices to root out unlawful non-compete provisions and remedy the harmful effects.
“Whether or not an employer has attempted to enforce its unlawful non-compete provision against any employees, the additional, pernicious financial harms it has caused must also be remedied as fully as possible to make employees whole.”
“Rescission alone will fail to remedy all the harms caused by the provision,” she added, “and make-whole remedies to unwind discipline or legal enforcement actions, while also necessary, will not be sufficient.”
Remedying the Effects of Unlawful Non-Compete Provisions
According to the NLRB, financial harm caused by unlawful non-compete agreements goes beyond any discipline or legal action taken by the employer to enforce a non-compete agreement.
“Such provisions are, in fact, often ‘self-enforcing’,” argues General Counsel Abruzzo, “in that employees may forgo certain opportunities out of fear of breaching their contractual obligations.”
The memo includes three examples of additional financial burdens to employees trying to avoid violating a non-compete:
- The employee may need to relocate;
- Take a lower-paying job outside their field of expertise; or
- Pay for training to qualify for a position not covered by the provision.
Where the NLRB finds an employer has maintained an unlawful non-compete provision, it claims authority to “take measures designed to recreate the conditions and relations that would have been had there been no unfair labor practice,” citing Supreme Court case Franks v. Bowman Transportation Co., Inc., 424 U.S. 747 (1976). In that case, the Supreme Court ruled that “the task of the NLRB … is ‘to take measures designed to recreate the conditions and relationships that would have been had there been no unfair labor practice.’”
The NLRB may order an employer to compensate employees for financial harm if the employee can demonstrate that:
- The employee was deprived of a better job opportunity because of a non-compete provision. In this case, the employer must compensate the employee for the difference (in terms of pay or benefits) between what they would have received and what they did receive during the same period.
- The employee was out of work for a longer period than would otherwise have been as a result of the non-compete, entitling them to payment for those lost wages.
- The employee accepted a job providing lesser compensation (in terms of pay or benefits) outside of their industry (but within the geographic scope of the non-compete provision). In this event, the employee should be entitled to the difference between what they would have received and what they did receive because they were prevented from pursuing other job opportunities.
- The employee had to move outside of the geographic region to obtain employment within the industry, entitling them to be compensated for moving-related costs.
- The employee should be compensated for the costs of any retraining efforts undertaken to be eligible for a position in a different industry not covered by the provision.
The NLRB is encouraging employees to come forward with evidence showing such financial harm.
When Does the NLRB Consider a Non-Compete Unlawful?
In a similar memo issued in May, General Counsel Abruzzo maintains that a non-compete provision is unlawful under the National Labor Relations Act (NLRA) if:
- It reasonably tends to chill employees from engaging in protected concerted activities “when the provisions 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, a non-compete provision violates the NLRA if it discourages employees from organizing and acting together to improve working conditions, because they believe it would be difficult to replace lost income if they are fired over those activities.
- It is not narrowly tailored to address special circumstances that justify the infringement on employee rights. Avoiding competition from former employees is not considered a legitimate business interest that can justify an overbroad non-compete.
Which “Special Circumstances” Justify a Non-Compete Agreement, Per the NLRB?
According to Abruzzo, special circumstances that may justify a non-compete agreement include:
- Protecting proprietary or trade information
- Provisions that clearly restrict only individuals’ managerial or ownership interests in a competing business
- True independent-contractor relationships (although the memo warns that a non-compete provision may still be unlawful within industries that commonly misclassify employees as independent contractors)
Isn’t The NLRB Just For Unions?
Most employers believe the NLRB only has jurisdiction and enforcement power over union activity, collective action, or unionized labor forces, but that it not accurate.
The NLRB has broad authority to investigate unfair labor practice charges filed by employees, unions, or employers. It also has authority to order employers to cease unfair labor practices, reinstate wrongfully terminated employees, and order back pay or other compensation for workers whose rights were violated.
Is General Counsel Abruzzo’s Memo an Official Law or Regulation?
Not yet. A memo like this one from the NLRB’s General Counsel is a recommendation to the five-person Board that helps govern the National Labor Relations Board. The memo also acts as guidance to the regional offices investigating and prosecuting charges against employers.
The General Counsel’s recommendations will not become binding until the Board rules on a case brought by one of the regional offices. In its ruling, the Board may accept, modify, or reject the General Counsel's position.
Even before formal Board adoption, employers will likely see regional offices pursuing cases using the framework outlined in the General Counsel’s memo. Expect a new round of investigations as employees come forward with proof of financial harm caused by the existence of a non-compete provision.
Can Employees Sue for Compensation As Described by the NLRB Memo?
No, employees cannot directly sue for compensation based on this NLRB memo. Only NLRB can seek the remedies described in the October 7 memo
Employees can, however, file unfair labor practice charges with their NLRB regional office, which may then investigate and prosecute the case.
What Happens If A Non-Compete Is Enforced By State Court, But Found Unlawful In An NLRB Investigation?
If an employer successfully sues a former employee for violating a non-compete agreement under Texas law, the NLRB may still find the agreement unlawful under federal labor laws. Federal law generally preempts conflicting state law.
The NLRB can then order the employer to “unwind discipline or legal enforcement actions” brought under state law, as well as pay additional compensation to “remedy all the harms caused by the [non-compete] provision.”
NLRB decisions can be appealed to federal court.
What Should Texas Employers Do in Response to NLRB Scrutiny?
Review your existing non-compete agreements with a Texas lawyer experienced with non-compete agreements and NLRB enforcement actions.
The attorneys of Hendershot Cowart P.C. can advise you on reasonable limitations for your specific industry and employment relationships and warn you about terms that may be overly restrictive or difficult to enforce, especially with non-competes for low and middle-wage workers who don't have access to trade secrets.
Violating NLRB guidelines could result in employee complaints and the enforcement of make-whole remedies for affected employees. Instead, contact the non-compete attorneys at Hendershot Cowart P.C. today to schedule a contract review and consultation.
