The National Labor Relations Board Issues a Second Memo Yet Again Focused on Non-Competition Agreements

Just two months ago, the U.S. District Court for the Northern District of Texas struck down the Federal Trade Commission’s “(FTC”) attempt to ban the enforcement of non-competition agreements on a national scale. Based on every bit of precedent we have, that should have been the end of that conversation for at least as long as it took for a new, wide-eyed, naive FTC Chair to be appointed. But – as we’re sure you’re sick of hearing – these are indeed unprecedented times, because instead of quietly slinking back to D.C., the FTC gets an assist from the minor leagues in the form of the National Labor Relations Board (“NLRB”).

The NLRB is in charge of interpreting and enforcing the National Labor Relations Act, NLRA, which governs any form of “collective action” in the workplace, from something as trivial as two employees coordinating their lunch hours to ensure they both receive a full, hour-long break, all the way up to full-blown unionization efforts. Employers are often surprised to hear that the NLRA has any impact on their non-unionized workplace at all, but the NLRA governs literally every step of collective action, including “pre-collective action.” It's considerably more complicated than that, but for our purposes, employers need to understand that the NLRB’s rulings and opinions apply to EVERY workplace regardless of union (or non-union) status.

“Abide by this policy or we’ll see to it that you’re fired” is one thing; “Abide by this policy or we’ll see to it that you’re broke and homeless” is quite another.  Per the NLRA’s latest Memorandum, that’s the practical effect that non-competition agreements can have. After all, if an employee knows that should they aggravate their current employer – say, by engaging in collective action, asking for a raise, or even attempting to leverage their current position into a higher-salaried position elsewhere – they could be locked out of their profession for two (2) years or compelled to uproot their entire life to another state, that employee will be extremely reluctant to advocate for better working conditions for themselves, let alone for their coworkers.

To remedy this, the NLRB is now pushing to expand penalties against employers for attempting to enforce over-restrictive non-competition agreements, which penalties shall include, without limitation: lost wages, moving-related costs, retraining costs, and backpay.  For most of you, this is the portion you want to pay close attention to:  the NLRB also took aim at “stay-or-pay” provisions, which include any clause that imposes a financial penalty upon an employee for terminating their employment under any circumstance. Such provisions include, without limitation: training repayment agreement provisions (sometimes referred to as “TRAPs”), educational repayment contracts, quit fees, damages clauses, sign-on bonuses or other types of cash payments tied to a mandatory stay period, and “other contracts under which employees must pay their employer in the event that they voluntarily or involuntarily separate from employment.”

Now, with all of this said, the NLRB is still towing the line of “legitimate business interests,” meaning that –  notwithstanding any of the NLRB’s aforementioned arguments – non-competition agreements, even those with stay-or-pay provisions, shall remain enforceable to the extent they advance an employer’s legitimate business interests or, in the case of stay-or-pay agreements, that they are truly “voluntary,” and that repayment only covers the actual costs of the training or other costs incurred by the employer, not any additional punitive damages. So, what exactly constitutes a “legitimate business interest?” Oceans of ink have been spilt over this question, but to over-simplify almost beyond the point of usefulness, legitimate business interests include retaining existing clients, fulfilling valid and enforceable orders or agreements, and protecting confidential and trade secret-protected information. Contrary to popular misinterpretation, legitimate business interest does not include monopolizing potential clients or regions, fulfilling invalid or unenforceable hypothetical future order or agreements, or protecting publicly available information. 

To be clear, the NLRB’s efforts in this arena are still in their infancy. As of right now, all we have is a Memorandum from the NLRB’s General Counsel advising the NLRB to adopt the rules, policies, and procedures outlined above. Serious conversations surrounding enactment, let alone enforcement, of any of the above-suggested policies is at least a year away. This is a warning shot of what’s to come if the United States of Texas continues to frustrate federal administrative agencies’ efforts to perform their intended purposes. Time will tell how the courts will respond to this recent NLRB Memorandum but rest assured that we’ll keep you posted with updates.