NLRB’s General Counsel Urges Stricter Guidelines on Non-Competes and “Stay-or-Pay” Provisions

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^{By: Erin S. Johnson | Law Clerk}

On October 7, 2024, National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo released Memorandum GC 25-1 titled "Remedying the Harmful Effects of Non-Compete and 'Stay-or-Pay' Provisions that Violate the National Labor Relations Act" (“Memo”). In the Memo, Abruzzo expressed her intention to push the NLRB to not only declare some non-compete and "stay-or-pay" clauses illegal, but also to “remedy the harmful effects to employees when employers use and apply them.” The Memo serves as a reminder that though the FTC’s final rule banning non-competes will not go into effect, the heightened scrutiny and shifting legal landscape surrounding these agreements is far from over. 

Abruzzo has argued most non-compete agreements breach Section 7 of the National Labor Relations Act (NLRA), and she is committed to challenging nearly all post-employment non-compete agreements moving forward. Section 7 of the NLRA guarantees employees "the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection," as well as the right "to refrain from any or all such activities." The Memo argues that non-compete clauses prevent workers from exercising their rights to improve their working conditions, such as by seeking better employment or negotiating for a pay raise. Abruzzo claims that non-competes are often “self-enforcing,” meaning employees may forgo certain opportunities out of fear of breaching their contractual obligations to their employer. 

Significantly, the NLRB’s jurisdiction covers only employees who can be part of a bargaining unit, thus the Memo does not address agreements with upper-level staff and only applies to non-managerial employees. However, a misconception employer’s often hold is that the NLRA does not apply to them because they are not unionized. The NLRA applies to most private sector employers, whether unionized or not, including manufacturers, retailers, private universities, and health care facilities.  The NLRA does not apply to federal, state, or local governments, employers who employ only agricultural workers, and employers subject to the Railway Labor Act (interstate railroads and airlines). 

The Memo equally criticizes "stay-or-pay" provisions, which are contracts requiring employees to pay their employer if they leave the job, either voluntarily or involuntarily, within a certain time period. These provisions often include agreements like training repayment agreements (sometimes referred to as TRAPs), education reimbursement clauses, or sign-on bonuses that are tied to a required period of employment. Abruzzo contends these provisions also violate Section 7 rights, as they limit workers’ ability to move freely between jobs and may discourage them from participating in protected group actions.

Abruzzo will push for the NLRB to treat any agreement requiring an employee to pay their employer upon leaving the job within a specific timeframe as presumed illegal. Employers may rebut that presumption by proving the stay-or-pay provision “advances a legitimate business interest and is narrowly tailored to minimize any infringement on Section 7 rights.” 

In order to do that, the provision must: 

(1) be voluntarily entered into in exchange for a benefit; 

(2) have a reasonable and specific repayment amount; 

(3) have a reasonable “stay” period; and

(4) not require repayment if the employee is fired without cause.

Abruzzo's Memo also recommends that employers not only cancel any current unlawful non-compete or stay-or-pay agreements, but also compensate employees for any financial harm caused by these clauses, such as lost wages or travel expenses.

Lastly, Abruzzo has proposed a 60-day grace period starting on October 7, 2024, for employers to “cure any preexisting stay-or-pay provisions that advance a legitimate business interest” to include the required factors as listed in the Memo.  

While this Memo does not reflect the NLRB’s official stance, it is certainly influential and reflects where attitudes are trending. Employers should carefully review any existing contracts that might be affected by this guidance, as the NLRB is expected to increase investigations into these agreements. Employers are encouraged to consult with employment lawyers to ensure non-compete agreements and stay-or-pay provisions are carefully and intentionally tailored to protect valid business interests.

Employers with questions or concerns about non-competes and other restrictive covenants may contact any member of the Maynard Nexsen Employment and Labor Law team.