An administrative law judge (“ALJ”) of the National Labor Relations Board (“NLRB”) in J.O. Mory, Inc. recently required an employer to rescind certain restrictive covenants in its employment agreements. The decision is yet another attack on non-competes in line with the NLRB General Counsel’s May 30, 2023 memo (“Abruzzo Memo”) (see our prior article here), and apparent coordination with the Federal Trade Commission’s Final Non-Compete Clause Rule announced on April 23, 2024 (see our prior article here). However, the J.O. Mory decision also provides insight on strategies to avoid the NLRB’s recent attempts to expand its review to non-competes and other restrictive covenants.
In J.O. Mory, the employer terminated an employee acting as a “salt”–a union-organizer who obtains non-union employment with the goal of organizing the workforce. In addition to finding the employer improperly terminated the employee for his salting activities (not analyzed here), the ALJ also found three provisions of the employment agreement unlawful: (i) a non-solicit provision; (ii) a non-competition provision; and (iii) a reporting obligation provision, requiring current employees to report any job offers received (the “Provisions”).
Taking cues from the Abruzzo Memo, the ALJ premised the NLRB’s authority to adjudicate the legality of the Provisions under Section 8(a)(1) of the National Labor Relations Act (the “Act”)–“Under Section 8(a)(1) of the Act, it is unlawful to interfere with, restrain, or coerce employees in the exercise of rights guaranteed by Section 7 of the Act.” Section 7 protects, generally, an employee’s right to unionize and efforts in further of unionizing.
In line with its claimed authority, the ALJ provided specific examples of how the Provisions might interfere with an employee’s protected Section 7 activities. For example, the ALJ found the non-solicit provision may dissuade an employee from “telling their coworkers about the wages and benefits offered by the Union.” Similarly, the NLRB found the reporting obligation had no “limitation for union or other protected activities” and thus may “require employees to report their own protected activities.” The ALJ did not provide a specific example regarding the non-compete provision, but instead, echoing the Abruzzo memo, conclusively determined that it would “deter a reasonable employee from engaging in protected activity.” In line with the Abruzzo Memo, the ALJ reasoned that non-compete provision would “cause a reasonable employee to refrain from engaging in protected activities that come with a risk of retaliation” because the employee would fear that they would be “unable to find any work in their geographic area if they are fired or forced to leave their job.”
The ALJ applied the Stericycle framework advanced by the Abruzzo Memo by examining whether a rule “has a reasonable tendency to chill employees from exercising their Section 7 rights, viewed from the perspective of an employee who is economically dependent upon the employer and who also contemplates engaging in protected concerted activity.” The ALJ found that the Provisions met this first step of the Stericyle framework and are thus presumed to be unlawful. The ALJ also found that the employer failed to rebut this presumption by failing to show that the Provisions advance “a legitimate and substantial business interest that it is unable to advance with a more narrowly tailored rule”. The ALJ determined that the stated justifications for the Provisions (e.g., to prevent ‘pirating” of employees, protect employer’s rights under the employment agreement, and to protect confidential or trade-secret information) were more appropriately addressed by other provisions in the employment agreement “requiring employees to turn over confidential and proprietary information and prohibiting them from trying to divert [employer’s] customers.”
The ALJ ultimately ordered the employer to, among other things, pay damages to the employee, to rescind the Provisions and
any other policies or work rules prohibiting employees from (1) being engaged in, interested in, or employed by any business similar or competitive with Respondent’s business, (2) inducing other employees to leave Respondent’s employ, and (3) requiring employees to inform Respondent of any offers or solicitations of employment they receive from third parties, and send each of its current and former employees who have been subject to the same or similar agreement that those provisions have been rescinded and they are released from any obligations pursuant to them.
Interestingly, the ALJ’s order to address the overbroad Provisions, appears itself to be overbroad in its requirement to rescind all similar provisions without determining whether such provisions are appropriately narrow to protect legitimate business interests and avoid interfering with employees’ rights under Section 7. The employer still has an opportunity to file exceptions with the NLRB.
Key Takeaways and Practice Tips
The NLRB’s General Counsel’s office is moving forward with the Abruzzo Memo in pursuing complaints related to restrictive covenants. This enforcement is not limited to non-competes and includes, at least, non-solicits as well. This new area of enforcement for the NLRB is premised on the NLRB’s asserted authority under Section 7 and 8(a)(1) of the Act. Broad restrictive covenants, like those in the employer’s employment agreement, are apparently now potentially ripe for challenge before the NLRB.
It is paramount in attempting to avoid the NLRB’s claimed authority to include in agreements expressed exceptions that covenants are not meant to interfere with protected activities, reporting wrongdoing and other statutory, rule, and court recognized exceptions such as the Defend Trade Secrets Act, for example. Further, it is worth speaking to appropriate counsel to make sure covenants are surgically tailored, but also explain why the covenant is warranted; such as to protect legitimate business interests, long term customers, training, and a stable work force.
One should also consider the use of examples in agreements and policies to illustrate how a covenant may be applied. Well drafted restrictive covenants should avoid adverse determination by the NLRB (see for example here). Employers should review not only their restrictive covenants, but also any employee handbooks, workplace rules, etc. Because the NLRB is relying on its authority to analyze restrictive covenants under Sections 7 and 8(a)(1), employers should consider drafting such provisions narrowly to avoid, and even expressly carve out, protected activities under Section 7. This task is more difficult if ALJs begin to adopt the reasoning that any non-compete tends to chill employees Section 7 protected activities set forth in the Abruzzo Memo.
