On June 13, 2024, an Administrative Law Judge (ALJ) with the National Labor Relations Board (NLRB) issued a decision that further muddies the landscape of restrictive covenant law. In J.O. Mory Inc., an ALJ held that overly broad non-compete and non-solicitation clauses unduly restrict employees’ rights and therefore violate Section 7 of the National Labor Relations Act (NLRA). Specifically, Section 7 of the NLRA guarantees employees the right to engage in concerted activities for collective bargaining or other mutual aid or protection. The NLRA applies to private-sector employees whether or not they are represented by a union, but excludes supervisors and managers, agricultural and domestic workers, and independent contractors, among select others.

Background
In J.O. Mory Inc., a non-unionized contracting business unknowingly hired a “salt,” an individual who is paid by a union to apply for a job with the sole purpose of organizing the company’s employees to join the union. At the time he was hired, the salt signed an employment agreement, which contained non-compete and non-solicitation clauses. Shortly after the salt informed the company that he was actually a union organizer, the company fired him for lying on his job application, in which he said he had previously worked at a non-union company. 

Thereafter, the Indiana State Pipe Trades Association, which had paid the salt to apply, filed two charges of unfair labor practices against the company, alleging, among other things, the employment agreement violated the employee’s Section 7 rights of the NLRA.

Holding
The ALJ applied the standard from Stericycle, 372 NLRB No. 113 (2023), where the NLRB established a two-step test to determine when a facially neutral work rule unlawfully restricts employees from engaging in protected activity. The first step is to determine whether the rule chills employees’ rights by looking at the rule from the viewpoint of an employee who is subject to the rule and economically dependent on the employer, and who also contemplates engaging in protected activity. If the rule chills employees’ rights, the second step allows the employer to prevail by showing the rule advances a legitimate and substantial business interest that cannot be advanced a more narrowly tailored rule.  

Applying the above test, the ALJ held that the non-compete and non-solicit clauses were overly broad and therefore unlawful. Specifically, she found the following three provisions problematic:

1. The non-solicitation clause prohibiting employees from encouraging colleagues to leave the company during and after employment.
2. A post-employment non-compete clause restricting former employees from working for any “similar or competitive” companies in any manner .
3. A requirement for employees to report all outside job offers.

The ALJ agreed with the NLRB’s General Counsel (the “prosecutor” of the unfair labor practice charges) that these provisions unlawfully constrained employees’ protected concerted activities, potentially influencing their behavior even after leaving employment. For example, the non-compete clause was so “ridiculously broad” that it would have theoretically barred an employee from encouraging a family member to patronize the employer’s competitor. Likewise, the non-solicitation clause was so overly broad that it required employees to report on their own protected activities as the clause required employees to report “any and all offers or solicitations of employment that employee may receive from third-parties.” 

Under the NLRA, an ALJ’s decision is binding only on the specific parties to the case. The ALJ decision can be appealed to the NLRB Board, however, and the Board’s rulings are binding on all parties who are subject to the NLRA. It remains to be seen whether the employer in this case will appeal the ALJ’s ruling. For now, however, the ruling underscores the increased scrutiny of restrictive covenant agreements by various federal agencies including the NLRB’s General Counsel and, potentially, the Board of the NLRB itself.

Next Steps for Employers
The J.O. Mory Inc. ruling continues a trend of increased agency scrutiny on restrictive covenants and other personnel policies. With the Federal Trade Commission’s ban on non-compete agreements tentatively scheduled to take effect in a few months, employers should be especially mindful to review the language of their employment agreements and other personnel documents to avoid potentially unlawful restrictions on employees’ rights.