June 2, 2023
Stroock Client Alert
By: Howard S. Lavin, Elizabeth E. DiMichele
As previously reported in this Stroock Client Alert earlier this year, the National Labor Relations Board (NLRB or the Board) reversed earlier Board decisions and ruled in McLaren Macomb (the McLaren Decision) that employers violate Sections 7 and 8(a)(1) of the National Labor Relations Act (NLRA or the Act) simply by proffering a severance agreement containing non-disparagement and confidentiality provisions that restrict the exercise of employees’ rights under Section 7 of the NLRA.[1] Jennifer A. Abruzzo, NLRB General Counsel, subsequently issued a memorandum to all field offices broadly interpreting the implications of the McLaren Decision (the McLaren Memo)[2]. The McLaren Memo sets forth the General Counsel’s view that it is not just confidentiality, non-disclosure and non-disparagement provisions, but other relatively standard separation agreement provisions that may be unlawful under the McLaren Decision, including restrictive covenants, broad liability releases and covenants not to sue, as well as certain cooperation provisions.
Building on that premise, on May 30, 2023, the General Counsel issued a memorandum with the subject “Non-Compete Agreements that Violate the National Labor Relations Act” (the Non-Compete Memo) in which she expressed her opinion that “[e]xcept in limited circumstances . . . the proffer, maintenance, and enforcement of [non-compete agreements] violate Section 8(a)(1) of the Act.”[3] The Non-Compete Memo analyzes non-compete provisions under the standard the General Counsel has argued the Board should apply to terms of employment agreements: if a provision reasonably tends to chill employees in the exercise of their Section 7 rights, it violates the NLRA unless it is narrowly tailored to address special circumstances justifying such infringement. The Non-Compete Memo reasons that a non-compete provision could reasonably be construed by employees to prevent them from quitting or changing jobs by cutting off access to other job opportunities. Denial of access to job opportunities, in turn, has a chilling effect on the exercise of an employee’s Section 7 rights to act concertedly to obtain better working conditions, including the right to: (i) threaten to resign, (ii) carry out threats to resign, (iii) seek or accept employment with a competitor, (iv) solicit co-workers to resign and join a competitor, and (v) seek employment to engage in protected activity such as union organizing.
Having identified the Section 7 rights at issue and the potential chilling effect, the General Counsel turns to – and rejects – some common reasons articulated by employers for requiring employees to sign non-compete agreements as a condition of employment. In this regard, the Non-Compete Memo notes that a desire to avoid competition from a former employee cannot support a “special circumstances defense” justifying enforcement of the non-compete provision. It goes on to dismiss employee retention, protecting special investments in training employees, and protection of trade secrets as interests sufficient to justify a non-compete because each could be accomplished through less restrictive means. For example, an employer could offer longevity bonuses to address employee retention concerns, and narrowly tailored confidentiality agreements could be entered into with employees that have access to the employer’s trade secrets. Low-wage workers who do not have access to trade secrets, however, cannot be required to enter into such agreements. Although the Non-Compete Memo states that not all non-compete agreements necessarily violate the NLRA, it identifies only a narrow set of circumstances under which they would potentially survive scrutiny – ones that clearly limit only managerial or ownership interests in competing businesses and true independent contractor agreements.
Non-compete agreements have long been the subject of scrutiny by courts, legislatures and agencies, both federal and state. In fact, as noted in the Non-Compete Memo, the Board entered into a Memorandum of Understanding with the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice, each of which has taken on non-compete agreements in some fashion – the FTC having proposed a rule that would ban post-employment non-compete agreements, with limited exceptions. A significant number of states have passed legislation impacting the ability of employers to require and/or enforce such provisions as well – from outlawing them almost completely, to limiting them based upon the employees’ compensation level, or requiring advance notice or payment of compensation during any non-competition period.
Takeaway
Plainly, the Non-Compete Memo has broad implications for employers. Nevertheless, it is important to remember that managers and supervisors do not have Section 7 rights and are not protected by the NLRA. Under Section 7 of the NLRA, employees within the meaning of Section 2(3) of the Act—statutory employees—have the right to join a union, bargain collectively through representatives of their own choosing, and engage in other protected concerted activities, such as discussing or participating in group activities to address issues of workplace concern, and publicize workplace disputes. Section 7 rights apply to all statutory employees—whether or not unionized.
Although the Non-Compete Memo is not binding, it sets forth the legal analysis the General Counsel and field offices will use when investigating whether non-competes violate the Act and is an important part of a trend to limit – or eliminate – the use of non-compete agreements in the United States. This trend includes various state legislatures, attorneys general, and federal and state agencies taking steps to narrow their application or enforceability. Given this climate, employers that use or are contemplating the use of such agreements should give careful consideration to the particular interests they are seeking to protect, which employees should be subject to a non-compete, and whether a less restrictive non-solicitation and/or confidentiality agreement would serve the employer’s interests just as well, the scope and duration of any such agreements, and enforceability based upon the law in the jurisdiction in which the agreement is to be enforced, including the locations at which employees perform work as laws vary from state to state.
[1] 372 NLRB No. 58 (2023).
[2] Memorandum GC 23-05, March 22, 2023.
[3] Memorandum GC 23-08, March 30, 2023.
June 2, 2023
Stroock Client Alert
By: Howard S. Lavin, Elizabeth E. DiMichele
As previously reported in this Stroock Client Alert earlier this year, the National Labor Relations Board (NLRB or the Board) reversed earlier Board decisions and ruled in McLaren Macomb (the McLaren Decision) that employers violate Sections 7 and 8(a)(1) of the National Labor Relations Act (NLRA or the Act) simply by proffering a severance agreement containing non-disparagement and confidentiality provisions that restrict the exercise of employees’ rights under Section 7 of the NLRA.[1] Jennifer A. Abruzzo, NLRB General Counsel, subsequently issued a memorandum to all field offices broadly interpreting the implications of the McLaren Decision (the McLaren Memo)[2]. The McLaren Memo sets forth the General Counsel’s view that it is not just confidentiality, non-disclosure and non-disparagement provisions, but other relatively standard separation agreement provisions that may be unlawful under the McLaren Decision, including restrictive covenants, broad liability releases and covenants not to sue, as well as certain cooperation provisions.
Building on that premise, on May 30, 2023, the General Counsel issued a memorandum with the subject “Non-Compete Agreements that Violate the National Labor Relations Act” (the Non-Compete Memo) in which she expressed her opinion that “[e]xcept in limited circumstances . . . the proffer, maintenance, and enforcement of [non-compete agreements] violate Section 8(a)(1) of the Act.”[3] The Non-Compete Memo analyzes non-compete provisions under the standard the General Counsel has argued the Board should apply to terms of employment agreements: if a provision reasonably tends to chill employees in the exercise of their Section 7 rights, it violates the NLRA unless it is narrowly tailored to address special circumstances justifying such infringement. The Non-Compete Memo reasons that a non-compete provision could reasonably be construed by employees to prevent them from quitting or changing jobs by cutting off access to other job opportunities. Denial of access to job opportunities, in turn, has a chilling effect on the exercise of an employee’s Section 7 rights to act concertedly to obtain better working conditions, including the right to: (i) threaten to resign, (ii) carry out threats to resign, (iii) seek or accept employment with a competitor, (iv) solicit co-workers to resign and join a competitor, and (v) seek employment to engage in protected activity such as union organizing.
Having identified the Section 7 rights at issue and the potential chilling effect, the General Counsel turns to – and rejects – some common reasons articulated by employers for requiring employees to sign non-compete agreements as a condition of employment. In this regard, the Non-Compete Memo notes that a desire to avoid competition from a former employee cannot support a “special circumstances defense” justifying enforcement of the non-compete provision. It goes on to dismiss employee retention, protecting special investments in training employees, and protection of trade secrets as interests sufficient to justify a non-compete because each could be accomplished through less restrictive means. For example, an employer could offer longevity bonuses to address employee retention concerns, and narrowly tailored confidentiality agreements could be entered into with employees that have access to the employer’s trade secrets. Low-wage workers who do not have access to trade secrets, however, cannot be required to enter into such agreements. Although the Non-Compete Memo states that not all non-compete agreements necessarily violate the NLRA, it identifies only a narrow set of circumstances under which they would potentially survive scrutiny – ones that clearly limit only managerial or ownership interests in competing businesses and true independent contractor agreements.
Non-compete agreements have long been the subject of scrutiny by courts, legislatures and agencies, both federal and state. In fact, as noted in the Non-Compete Memo, the Board entered into a Memorandum of Understanding with the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice, each of which has taken on non-compete agreements in some fashion – the FTC having proposed a rule that would ban post-employment non-compete agreements, with limited exceptions. A significant number of states have passed legislation impacting the ability of employers to require and/or enforce such provisions as well – from outlawing them almost completely, to limiting them based upon the employees’ compensation level, or requiring advance notice or payment of compensation during any non-competition period.
Takeaway
Plainly, the Non-Compete Memo has broad implications for employers. Nevertheless, it is important to remember that managers and supervisors do not have Section 7 rights and are not protected by the NLRA. Under Section 7 of the NLRA, employees within the meaning of Section 2(3) of the Act—statutory employees—have the right to join a union, bargain collectively through representatives of their own choosing, and engage in other protected concerted activities, such as discussing or participating in group activities to address issues of workplace concern, and publicize workplace disputes. Section 7 rights apply to all statutory employees—whether or not unionized.
Although the Non-Compete Memo is not binding, it sets forth the legal analysis the General Counsel and field offices will use when investigating whether non-competes violate the Act and is an important part of a trend to limit – or eliminate – the use of non-compete agreements in the United States. This trend includes various state legislatures, attorneys general, and federal and state agencies taking steps to narrow their application or enforceability. Given this climate, employers that use or are contemplating the use of such agreements should give careful consideration to the particular interests they are seeking to protect, which employees should be subject to a non-compete, and whether a less restrictive non-solicitation and/or confidentiality agreement would serve the employer’s interests just as well, the scope and duration of any such agreements, and enforceability based upon the law in the jurisdiction in which the agreement is to be enforced, including the locations at which employees perform work as laws vary from state to state.
[1] 372 NLRB No. 58 (2023).
[2] Memorandum GC 23-05, March 22, 2023.
[3] Memorandum GC 23-08, March 30, 2023.
