NLRB Targets Noncompete and Stay-or-Pay Provisions: What Employers Need to Know
Nov 15, 2024The NLRB’s Campaign Against Noncompete Agreements
and Related Restrictions
The General Counsel also wants to crack down on “stay-or-pay” provisions
Jennifer Abruzzo, the General Counsel of the National Labor Relations Board (NLRB), is significantly impacting the regulatory landscape with a new memorandum. This document declares that “stay-or-pay” provisions in employment contracts are unlawful. These provisions require employees to repay specific benefits, such as signing bonuses, tuition reimbursements, and relocation expenses, if they do not stay with the company for a designated period. Abruzzo argues that such provisions violate the National Labor Relations Act (NLRA).
Stay-or-Pay Arrangements
In Memorandum 25-01, Abruzzo encourages the NLRB to provide “make whole” monetary relief to employees if it is determined that an employer’s noncompete provisions violate the NLRA. She explicitly targets certain “stay-or-pay” arrangements that may interfere with employees’ Section 7 rights, similar to noncompete agreements, about which she has already expressed her views in Memorandum 23-08. In her most recent communication, she argues that only voluntary stay-orpay provisions that recoup optional benefits should be considered legal. She proposes that an employer could rebut a presumption of illegality attached to stay-or-pay provisions by demonstrating that such a provision is narrowly tailored to minimize infringement on Section 7 rights and meets the following criteria:
1. It is voluntarily entered into in exchange for a benefit.
2. It has a reasonable and specific repayment amount and a “stay period.”
3. It does not require repayment if the employee is terminated without cause.
4. It does not require repayment for “Mandatory Training” programs.
Abruzzo wants employers to modify stay-or-pay provisions that do not meet this four-part test and to inform employees operating under a nonvoluntary “stay” provision that this provision has been eliminated, as well as that any debt incurred will not be enforced.
Noncompete Agreements
Regarding noncompete agreements, Abruzzo believes that “make whole” relief (i.e., monetary damages) is the appropriate remedy if the NLRB determines an employer has used an unlawful noncompete. She states that such relief would be available if the employee can demonstrate:
1. There was a vacancy for a job with a better compensation package.
2. They were qualified for the job.
3. They were discouraged from applying for or accepting the job because of the noncompete provision.
She recommends that the NLRB amend its standard posting to inform employees that they may be entitled to damages if noncompete agreements have negatively impacted their job search efforts and to encourage them to contact the NLRB.
Meanwhile, this latest general counsel memorandum marks another step in a series of actions by the federal government aimed at limiting noncompete agreements and other restrictive covenants related to employment. On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to approve a final rule banning noncompete agreements with most employees. The rule is currently being challenged in court and will take effect only once these challenges have been resolved in the federal court system.
The FTC is appealing two of these challenges. In Ryan, LLC v. FTC, Judge Ada Brown of the United States District Court for the Northern District of Texas granted an injunction preventing the FTC from enforcing the rule as scheduled. Similarly, the appeal in Properties of the Villages v. FTC seeks to overturn a preliminary ruling that barred the FTC from enforcing the ban against a single employer. These appeals will be heard by the 5th and 11th Circuit Courts of Appeals, respectively.
The outcome of the appeal process could have significant implications for the future of noncompetes in employment contracts nationwide and will play a crucial role in defining the scope of the FTC’s regulatory authority in the future.
What should employers do now?
While memoranda from the General Counsel lacks the force of law—and the NLRB has not yet officially adopted the General Counsel’s positions—employers can assume that the Board will likely follow them with respect to stay-or-pay provisions. Additionally, the FTC’s regional offices likely will soon begin closely scrutinizing noncompete agreements, looking for any potential illegalities. It’s also important to note that General Counsel Abruzzo’s memorandum states that employers have 60 days—until December 6, 2024—to amend any existing stay-or-pay provisions that serve a legitimate business interest. And the results of the recent federal election throw additional political considerations into the mix.
Amidst this political and legal uncertainty, employers should exercise caution when drafting and executing noncompete or stay-or-pay agreements with employees protected by Section 7 of the NLRA. If you have any questions about the legality of such agreements, or concerns about the role of restrictive covenants in your overall business strategy, don’t hesitate to reach out for assistance.
Steven L. Winer and Emily Bensadoun
