In latest edition of The Wright Toolbox:
The Winds of Change are Blowing with Respect to Non-Compete Clauses
Non-Compete Clauses are starting to face significant headwinds. In January, 2023 the Federal Trade Commission issued a proposed new rule to ban employers from imposing non-compete clauses on employees. The proposed rule was based on a preliminary finding that noncompetes constitute an unfair method of competition and therefore violate Section 5 of the FTC Act. On May 30, 2023, General Counsel for the U.S. National Labor Relations Board (“Board”) issued a memorandum that, if adopted by the Board, could invalidate many, if not most, noncompetition restrictions in employment severance agreements as violating employee rights under Section 7 of the National Labor Relations Act (the Act). While at this point the memorandum is not binding on the Board or the courts, it can be used by complainants to support arguments and positions before the Board and by the General Counsel’s office in enforcement actions.
The memorandum takes the position that it is an unfair labor practice under Section 8(a)(1) for an employer to interfere with, restrain, or coerce employees in the exercise of their Section 7 rights – to organization, form, join, or assist labor organizations, to bargain collectively through representatives. In the General Counsel memorandum, noncompetition agreements that restrict future employment can constitute impermissible interference. The General Counsel stated that non-compete clauses “reasonably tend to chill employees in the exercise of Section 7 rights, when the provisions could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for….” The memorandum identifies five potential impermissible impacts of non-complete clauses:
- They chill employees from concertedly threatening to resign to demand better working conditions, because they know they have very limited options for alternative employment.
- They chill employees from carrying out concerted threats to resign or otherwise concertedly resigning to secure improved working conditions.
- They chill employees from concertedly seeking or accepting employment with a local competitor to obtain better working conditions.
- They chill employees from soliciting their co-workers to go work for a local competitor as part of a broader course of protected concerted activity.
- They chill employees from seeking employment, at least in part, to specifically engage in protected activity with other workers at an employer’s workplace.
The memorandum recognizes that non-compete clauses may be proper if the employer has a “legitimate business interest” or “special circumstance” to justify the restriction. But, the memorandum clarifies that “a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.” The winds of change regarding non-compete clauses are clearly changing and employers and employees must stay informed on the coming changes.
If you have any questions regarding this matter, please do not hesitate to contact any member of our Labor and Employment Law Group.