National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo has issued a memorandum (GC 25-01) that calls for monetary remedies in cases where noncompete covenants or “stay-or-pay” provisions are deemed to violate the National Labor Relations Act (NLRA). The October 7 memo is just the latest in a series of actions Abruzzo has taken to increase the cost of failing to comply with the NLRA.
It remains to be seen whether the NLRB will adopt Abruzzo’s position, but employers that breathed a sigh of relief recently when a federal court threw out the Federal Trade Commission’s broad prohibition against noncompetes must now reckon with the looming threat from the NLRB with regard to noncompetes and “stay-or-pay” agreements imposed upon nonsupervisory employees. Abruzzo continues to take a hard line with respect to noncompete provisions. Employers are at risk of costly penalties for noncompliance should the Board embrace her theory and should consult with legal counsel before entering into any contracts with employees covered by the NLRA.
How We Got Here
In May 2023, Abruzzo issued a groundbreaking memorandum in which she advanced her belief that noncompetes and other restrictive covenants commonly used by employers violate Section 7 of the NLRA, as we reported in our prior alert. According to Abruzzo, restrictions on employees’ right to leave their employment deprive them of certain tools they may use to exert pressure upon their employer to improve wages, benefits and working conditions. For example, Abruzzo argues employees have a Section 7 right to concertedly threaten their employer with mass resignation as a way to apply pressure, and this right would be infringed upon by a contractual restriction on their ability to actually leave. Abruzzo also pointed to the practice of union “salting,” in which a union organizer accepts employment with a nonunion employer for the purpose of organizing that employer. Noting that union salts frequently jump from one company to another, Abruzzo contends that restrictions on such activity are impermissible under the NLRA.
The October 7 Memo
In her latest memo, Abruzzo expands upon this idea by proposing a remedial scheme to apply when employers use noncompete covenants in violation of the NLRA. Specifically, Abruzzo proposes that the NLRB award “make-whole relief” upon finding that an employer maintained an unlawful noncompete. Abruzzo rationalizes that such relief is appropriate because a noncompete provision has a harmful impact on employees by restricting their job opportunities and thus, a mere rescission of the provision would be insufficient.
Under the remedial scheme proposed in the memo, both current and former employees could be entitled to monetary relief. Such relief could include lost wages and benefits resulting from being “deprived of a better job opportunity,” back pay, moving costs and training costs. Abruzzo also recommends that the Board amend its standard notice posting to notify current and former employees that they may be entitled to monetary relief and urges the Board to mail such notice to both current and former employees “in every case.”
In Part II of the memo, Abruzzo discusses the legality of “stay-or-pay” provisions and the remedial structure to be applied to such provisions. “Stay-or-pay” provisions are agreements in which employees must pay their employer for the cost of a benefit if they voluntarily or involuntarily separate from their employment. Examples of benefits that typically have these provisions are educational or training payment benefits and sign-on bonuses. Abruzzo argues that such provisions violate the NLRA because they restrict employees’ mobility by making it more financially difficult for them to separate from the employer and chill employees’ Section 7 rights by making them more fearful of termination for engaging in protected activity.
Abruzzo calls on the Board to establish a burden-shifting framework with respect to “stay-or-pay” provisions. Under this proposal, “stay-or-pay” provisions would be presumptively unlawful under the NLRA. The burden would then shift to the employer to rebut such presumption by showing that the provision advances a legitimate business interest and demonstrating that the provision is narrowly tailored as defined by a four-factor test. In respect to remedies, Abruzzo again proposes a “make-whole” remedial scheme, which would include monetary relief in the form of back pay, nullification of any debt to the employer, retraction of any enforcement action, and the payment of any attorneys’ fees incurred as a result of an enforcement action.
Effect On Future Proceedings
Initially, employers should note that the restriction on noncompete and “stay-or-pay” agreements would only apply to employees covered by the NLRA and would not apply to those excluded from coverage, such as supervisors and confidential employees. Accordingly, the memo has no impact such agreements imposed upon senior executives or anyone else with managerial authority or supervisory authority over other employees.
Although neither the NLRB nor any courts have yet embraced Abruzzo’s novel, unprecedented interpretation that noncompete and “stay-or-pay” provisions violate employees’ rights under the NLRA, Abruzzo is forging ahead and is making an impact. Earlier this year, NLRB Region 9 secured a settlement resolving, inter alia, the legality of the employer’s noncompete and nonsolicitation covenants and its training repayment provision. The employer agreed to rescind the provisions, nullify the training repayment debt, and pay more than $25,000 in monetary relief to two employees. Additionally, Administrative Law Judges (ALJs) are beginning to implement Abruzzo’s interpretation of contractual covenants. In a recent decision, an ALJ found that an employer’s nonsolicitation provision in an employment agreement violated the NLRA. The ALJ found that, like a noncompete provision, a nonsolicitation provision violates the NLRA by restricting employees’ means to exert pressure on their employer to improve wages or working conditions. For more information on this decision, please see our prior alert.
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