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NLRB GC Calls for Scrutiny of Non-Competes Violating Employees’ Rights

July 2023 Legal Intelligencer article by Lamb McErlane Health Law attorneys Vasilios J. (Bill) Kalogredis and Artyom (Art) Sharbatyan.

In a recent memorandum[1], the National Labor Relations Board (NLRB) General Counsel, Jennifer A. Abruzzo, addressed her concerns regarding non-compete agreements and their potential violation of employees’ rights under the National Labor Relations Act (Act). Abruzzo asserts that, in most cases, the imposition, maintenance, and enforcement of such agreements contradict Section 7 of the Act, which safeguards employees’ rights to self-organization and collective bargaining.

In today’s business landscape, companies are increasingly turning to employment non-compete agreements to safeguard their assets and maintain a competitive edge. A non-compete agreement we are addressing here is a contractual provision commonly included in employment agreements. It is designed to restrict an employee’s ability to compete with his/her employer during or after the employment period. The purpose of a non-compete agreement is to protect the employer’s business interests, such as investments toward new employee training, trade secrets, confidential information, customer relationships, goodwill, or specialized knowledge, from being exploited by a departing employee and/or an entity he/she may join.

In a typical non-compete agreement, an employee agrees not to engage in certain activities that would directly compete with the employer’s business for a specified period of time and within a defined geographic area. The specific restrictions and limitations, as well as remedies for violating, can vary widely depending on the nature of the employment, the industry, and the jurisdiction. Nevertheless, non-compete provisions have become increasingly prevalent in US workplaces, with employers requiring employees to sign them as a condition of employment or as part of severance agreements.

In her memorandum, Abruzzo argues that these provisions interfere with employees’ exercise of their Section 7 rights and potentially violate Section 8(a)(1) of the Act. Under Section 7 of the Act, employees have the right to self-organize, join labor organizations, engage in collective bargaining, and participate in other concerted activities for mutual aid or protection. Furthermore, Section 8(a)(1) makes it an unfair labor practice for employers to interfere with, restrain, or coerce employees in the exercise of these rights.

Abruzzo highlights that non-compete provisions are overbroad when they unreasonably discourage employees from engaging in Section 7 activity. Such agreements limit employees’ access to employment opportunities they are qualified for based on their skills, experience, and preferences. This denial of access to job opportunities has a chilling effect on employees’ willingness to participate in activities aimed at improving their working conditions.

The General Counsel outlines several ways in which non-compete agreements restrict employees’ rights, in her opinion. First, non-compete provisions discourage employees from threatening to resign collectively to demand better working conditions. Abruzzo points out that employees might consider such threats futile due to limited alternative job opportunities and fear potential legal retaliation, although such legal action would likely violate the Act.

Second, employees are deterred from resigning or threatening to resign collectively to secure improved working conditions. While the current Board law does not explicitly recognize this right, it logically follows from established Board law, Section 7 principles, the Act’s purposes, and is consistent with the U.S. Constitution and other federal laws.

Third, non-compete provisions prevent employees from seeking or accepting employment with a local competitor to obtain better working conditions. Abruzzo asserts that such actions should be protected as they stem from earlier concerted activities and are a logical progression of employees’ rights.

Fourth, employees are inhibited from soliciting their co-workers to join a local competitor as part of protected concerted activity. The provisions prevent such solicitation due to potential breaches of agreements and fear of legal retaliation, even though such legal action would likely violate the Act.

Lastly, non-compete provisions hinder employees from seeking employment to engage in protected activity with other workers at an employer’s workplace. This restricts employees’ mobility and limits their ability to engage in specific forms of activity, such as union organizing.

Abruzzo asserts that non-compete provisions that deter employees from engaging in Section 7 activity violate Section 8(a)(1) of the Act unless they are narrowly tailored to special circumstances justifying the infringement on employee rights. The desire to avoid competition or protect training investments is not considered legitimate business interests that could support such provisions. Instead, employers can protect proprietary and valuable trade information through narrowly tailored workplace agreements.

Certain non-compete agreements may not be in violation of the Act if employees cannot reasonably interpret them as prohibiting their acceptance of employment protected under the Act. For instance, agreements that explicitly restrict only managerial or ownership interests in a competing business or true independent contractor relationships may be permissible. However, in industries where employees are commonly misclassified as independent contractors, a non-compete provision prohibiting such relationships may violate Section 8(a)(1).

According to a study conducted by the Economic Policy Institute (EPI) and published in its 2019 article, non-compete agreements are pervasive, with somewhere between 36 million and 60 million out of 129.3 million private-sector American workers being subject to such noncompete agreements.[2] The study found that these agreements disproportionately affect low-wage workers, who often lack bargaining power and alternative job options. It further revealed that non-compete agreements are not limited to high-skill industries but are prevalent across various sectors, including retail, construction, and healthcare.

Research by Professor Evan Starr at the University of Maryland highlights the adverse effects of non-compete agreements on employee mobility and wages.[3] Starr is one of the country’s leading experts on labor market competition, specifically on the use of noncompete clauses. Starr’s study found that non-compete agreements reduce job switching and decrease overall wage growth. The restrictive nature of these agreements hinders workers from pursuing better job opportunities and negotiating higher salaries, ultimately leading to wage stagnation.

Moreover, a 2016 report published by the Treasury Department sheds light on the negative consequences of non-compete agreements on entrepreneurship and innovation.[4] The report suggests that non-compete agreements limit workers’ ability to start their own businesses, stifling competition and hindering economic growth. It argues that reducing the enforceability of non-compete agreements could encourage entrepreneurship and foster a more dynamic economy.

Several states have taken steps to address the negative consequences of non-compete agreements. For instance, California has enacted a law that significantly restricts the use of non-compete agreements, with limited exceptions for specific circumstances such as the sale of a business. Other states, such as Massachusetts, have also enacted legislation to limit the enforceability of non-compete agreements, particularly for low-wage workers.

Low-wage or middle-wage workers who lack access to trade secrets or other protectible interests are particularly susceptible to non-compete agreements that violate the Act. Recent cases have shown that provisions prohibiting low-wage employees from entering the employment of any business engaged in similar activities, without evidence of a legitimate business interest, are unlawful.

Given the potential harm caused by overbroad non-compete agreements, Abruzzo emphasizes the need for scrutiny and intervention. She advises regional directors, officers-in-charge, and resident officers to submit cases involving potentially unlawful non-compete provisions to the NLRB for further review. In appropriate circumstances, she encourages seeking make-whole relief for affected employees who have suffered adverse consequences due to the agreements.

Abruzzo’s memorandum reflects her understanding of the impact of non-compete agreements on workers’ rights. This represents her views on the subject.  The memorandum was shared with Regional Directors, Officers in Charge and Resident Officers.

As the conversation surrounding non-compete agreements continues, it is essential to strike a balance between protecting legitimate business interests and safeguarding workers’ rights, fostering an environment that promotes economic mobility, innovation, and fair labor practices.

In conclusion, the General Counsel’s memorandum serves as a call to action, urging employers and policymakers to reevaluate the use and enforceability of non-compete agreements. It emphasizes the need to uphold employees’ rights under the Act and challenges the use of overbroad non-compete agreements. By recognizing their potential infringement on employees’ rights under the Act, this takes a critical stance in advocating for fair and equitable workplaces, where employees have the freedom to pursue their professional aspirations without undue restrictions. As discussions and debates on non-compete agreements continue, the memorandum emphasizes the importance of prioritizing the rights and well-being of workers as a key factor in creating an environment that encourages economic mobility, fosters innovation, and promotes fair labor practices.

There are many who disagree with the views expressed by Ms. Abruzzo in this memorandum.  Those stakeholders believe that employers (many of whom are small businesses or professional practices) and how they would be damaged (including potentially going out of business) if there were a blanket disallowance of non-competes  should not be totally ignored in striking the proper balance.

It will be interesting to see how this all shakes out.

Vasilios J. (Bill) Kalogredis, Esq. has been exclusively advising physicians, dentists, and other health care professionals and their businesses as to contractual, regulatory and transactional matters for over 45 years. He is Chairman of Lamb McErlane PC’s Health Law Department. bkalogredis@lambmcerlane.com. 610-701-4402.

*Artyom (Art) Sharbatyan, Esq., contributed to this article. Art has extensive real life practical experience in the healthcare field with particular concentration in dental practice groups. He represents healthcare providers in their business and legal needs at Lamb McErlane, PC’s Health Law Department. asharbatyan@lambmcerlane.com; 610-701-4416.

[1] National Labor Relations Board. NLRB General Counsel Issues Memo on Non-competes Violating the National Labor Relations Act. May 30, 2023. https://www.nlrb.gov/news-outreach/news-story/nlrb-general-counsel-issues-memo-on-non-competes-violating-the-National

[2] Economic Policy Institute. Noncompete agreements: Ubiquitous, harmful to wages and to competition, and part of a growing trend of employers requiring workers to sign away their rights. By Alexander J.S. Colvin and Heidi Shierholz (December 10, 2019). https://www.epi.org/publication/noncompete-agreements/

[3] University of Maryland. Robert Smith School of Business. Five Things to Know About Noncompete Clauses (October 31, 2019). https://www.rhsmith.umd.edu/news/five-things-know-about-noncompete-clauses

[4] U.S. Department of the Treasury. Office of Economic Policy. Non-compete Contracts: Economic Effects and Policy Implications (March 2016). https://home.treasury.gov/system/files/226/Non_Compete_Contracts_Econimic_Effects_and_Policy_Implications_MAR2016.pdf

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