KMK Law Management Rights Blog

This summer, eyes were focused on the Federal Trade Commission and its announced rule seeking to invalidate millions of non-compete agreements across the country. That rule was ultimately struck down in the Court, but federal efforts to invalidate non-compete agreements have continued. As previously covered by this blog, the General Counsel of the National Labor Relations Board (“NLRB”) took aim at non-compete agreements in May of 2023, announcing her opinion that such agreements could restrict employees’ Section 7 rights under the National Labor Relations Act (“NLRA”). At that time, the General Counsel directed NLRB field offices to submit cases involving non-compete agreements for further investigation.

Since then, the NLRB has pursued several complaints involving non-compete agreements, obtaining a settlement in one instance, and in June 2024 receiving a ruling by an NLRB Administrative Law Judge finding that an employer had violated its employees’ Section 7 rights by, among other charges, maintaining non-compete agreements. To date, however, the issue of whether non-compete agreements infringe on employees’ Section 7 rights has not been considered by the full National Labor Relations Board, nor by any court. 

Nevertheless, on October 7, 2024 the NLRB’s General Counsel issued a memorandum detailing types of remedying effects she would pursue against companies who, in her opinion, have non-compete agreements that violate Section 7. Arguing that non-compete provisions can have harmful financial impacts on employees by restricting their job opportunities and ability to obtain better wages and benefits, the General Counsel recommends that the Board order employers to compensate employees who were discouraged from pursuing better job opportunities due to the non-compete provision. Thus, even existing employees who do not seek to violate their non-compete agreements could be entitled to compensation if they are able to show (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. Additionally, former employees who incurred costs or suffered financial harm while complying with the unlawful provision should be compensated for lost wages, moving expenses, retraining costs, and other foreseeable damages.

In addition to her focus on non-compete agreements, the NLRB’s General Counsel turned to “stay-or-pay” agreements, which require employees to pay their employer if they separate from employment within a certain timeframe. These types of agreements are often tied to retention or sign-on bonuses, training costs, or tuition reimbursement where employees agree to repay employers if they leave employment within a certain period of time. In her memorandum, the General Counsel states that such provisions can interfere with employees' rights under Section 7 of the NLRA by deterring them from engaging in protected activities or seeking better employment opportunities. Accordingly, the General Counsel has urged the Board to find that any provision under which an employee must pay their employer if they separate from employment, whether voluntarily or involuntarily, within a certain timeframe is presumptively unlawful. The employer may rebut that presumption by proving that the stay-or-pay provision advances a legitimate business interest and is narrowly tailored to minimize any infringement on Section 7 rights. To do so, the General Counsel states that the employer must show that the provision: (1) is voluntarily entered into in exchange for a benefit; (2) has a reasonable and specific repayment amount; (3) has a reasonable “stay” period; and (4) does not require repayment if the employee is terminated without cause.

For non-voluntary stay-or-pay arrangements or those without proper disclosure, the General Counsel recommends rescinding the provision, nullifying any debt, and compensating employees for financial harm. Where employers attempted to enforce unlawful provisions, affected employees should be made whole, including compensation for legal fees and credit rating impacts. Additionally, employees discouraged from pursuing better job opportunities due to the stay-or-pay provision should be compensated for the wage or benefit differential.

In her memo, the General Counsel announced her intent to exercise prosecutorial discretion by declining to issue complaints against certain preexisting stay-or-pay arrangements if the employer cures defects within 60 days. However, new arrangements entered into after the issuance of this memorandum will be subject to prosecution without a grace period.

Again, at this point, the General Counsel’s opinion that non-compete agreements and stay-or-pay agreements violate Section 7 of the NLRA has not been before the courts. Nevertheless, that will not stop the NLRB from pursuing administrative action, potentially derailing attempts to enforce these agreements.  Supervisory employees are generally exempt from Section 7, and so such agreements with supervisors may still be valid. However, given the NLRB’s aggressive interpretation of its authority, employers should act with caution. Employers should consult with counsel before any attempts to enforce a non-compete agreement, or enter into new non-compete agreements with their employees.   

If you have any questions, please consult with a member of our Labor and Employment Group.