On May 30, 2023, the General Counsel of the National Labor Relations Board (“NLRB” or the “Board”) dealt the latest in a series of blows to employers’ ability to enter into and maintain non-compete and other restrictive covenant agreements with their employees.
Attempting to enforce non-compete covenants and other restrictive covenants against employees has always carried a certain measure of risk. To enforce a restrictive covenant against an employee under Florida law, the employer must be able to show it has a legitimate business interest sufficient to justify the restriction on the employee and the restriction is reasonably necessary to protect such interest. If the employer cannot make that showing, it may be responsible for the attorneys’ fees the employee accrues during the enforcement dispute. Additionally, the employer could face tortious interference or other claims brought by the former employee and even his or her new employer. Florida employers with out-of-state employees can face additional complications, as some states, like Colorado, place heavy limitations on restrictive covenants such as non-competes between employers and employees, while other states, such as California, all but prohibit certain types of restrictive covenants.
But now, as a result of recent federal agency activity by the NLRB and the Federal Trade Commission (“FTC”), the risks associated with entering into, maintaining, and attempting to enforce restrictive covenants, such as non-competes, with employees may be significantly increasing.
The NLRB administers the National Labor Relations Act (“NLRA” or the “Act”). The Act generally governs unionization and collective bargaining between employees and employers, but some provisions of the Act cover nearly all non-supervisory employees of private employers in the U.S., union- and non-union alike. Specifically, Section 7 of the NLRA protects covered employees’ rights “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, and [covered employees] shall also have the right to refrain from any or all of such activities.” The Board interprets Section 7 to protect a wide variety of employee activities, including discussing wages, hours, working conditions, and other terms and conditions of employment with coworkers and others and engaging in group actions like concertedly resigning, threatening to resign, or seeking or accepting employment with a competitor to secure or demand improved working conditions. An employer violates the NLRA when it interferes with or restricts employees’ exercise of their Section 7 rights.
On February 21, 2023, the Board issued its McLaren Macomb opinion, holding that overly broad non-disparagement and confidentiality provisions in separation agreements with covered employees violate Section 7 of the Act (see Alicia Koepke’s article here for more details). Jennifer Abruzzo, the NLRB’s General Counsel, has since issued two related memoranda. First, on March 22, 2023, she issued a memorandum that was primarily dedicated to guidance on non-disparagement and confidentiality provisions, but which briefly mentioned her opinion that non-compete and non-solicitation provisions, among other common provisions in agreements with employees, may interfere with employees’ exercise of Section 7 rights and therefore violate the NLRA. Then, in a memorandum issued on May 30, 2023, the General Counsel expanded on that brief mention, explaining her opinion that non-compete and non-solicitation provisions denying employees “the ability to quit or change jobs by cutting off their access to other employment opportunities” violate the NLRA because they interfere with employees’ ability to engage in activities that are protected by Section 7. The General Counsel indicated that the NLRA may permit some non-compete or non-solicitation agreements that are “narrowly tailored to special circumstances justifying the infringement on employee rights,” and she suggested that provisions restricting only “individuals’ managerial or ownership interests in a competing business, or true independent-contractor relationships” may be permissible under the NLRA. However, she noted that an employer’s interest in avoiding competition, retaining employees, or protecting special investments in employee training would be unlikely to justify an infringement on employee rights. Additionally, according to the General Counsel, employers are unlikely to be able to justify imposing non-compete or non-solicitation agreements on “low-wage or middle-wage workers who lack access to trade secrets or other protectible interests, or in states where non-compete provisions are unenforceable.” Although other special circumstances may exist that would justify an employer in imposing a non-compete or non-solicitation agreement on a non-supervisory employee, the General Counsel’s memo did not provide any guidance as to what she believes might constitute “special circumstances” from her perspective.
Additionally, on January 5, 2023, the FTC proposed a rule that, if adopted and published as a final rule, would make it unlawful nationwide for employers to enter into, attempt to enter into, or maintain non-compete agreements, or to falsely represent to an employee that the employee is subject to a non-compete, with a few narrow exceptions. In other words, requesting an employee to enter a non-compete would be unlawful even if the employee does not ultimately sign the non-compete agreement, and it may also become unlawful to leave existing non-competes in place even if they were signed before the effective date of the FTC rule. In fact, the proposed rule includes a requirement that most employers rescind existing a non-compete agreement with workers prior to the compliance date of the rule, which (as currently written) is 180 days from the publication of the final rule. The proposed rule states that it supersedes any state statutes (like Florida’s noncompete statute) to the extent they are inconsistent with the rule. Notably, the proposed rule provides for a “functional test” for whether a contractual term is a non-compete. In other words, the name of a provision or agreement is unlikely to be dispositive, and restrictive covenants other than a pure non-compete covenant (e.g., broad non-disclosure or non-solicitation agreements) may be covered by the rule. The FTC proposed the rule because it says non-compete agreements constitute an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act. The public comment period for the proposed rule closed on April 19, 2023, and the FTC received nearly 27,000 comments during that time. Some reports estimate that the FTC will be voting on the proposed rule in April 2024. After reviewing the public comments, the FTC may make changes to the proposed rule before publishing it as a final rule. If the FTC turns the proposed rule, or a variation of it, into a final rule, which is likely, it is nearly certain that industry groups will challenge the rule in court. Then, the court system will decide if the FTC’s final rule is enforceable.
The bottom line is that employers are entering a period of heightened uncertainty that may last for some time with regard to the enforceability of employee non-competes and other restrictive covenants. Employers should consult with employment counsel to review their existing non-competes and other restrictive covenants to evaluate whether their agreements are sufficiently supported by legitimate business interests and whether they comply with the NLRB’s newest interpretations of the NLRA. And, as for the FTC’s proposed rule, it may be some time before any final rule is published, and even after publication, there will very likely be a period of uncertainty for employers as to whether, and the extent to which, they can require or maintain employee non-competes and other restrictive covenants as challenges to the rule work their way through the courts. Employers should closely monitor the FTC’s activity on this issue and contact employment counsel to make plans for compliance in the future.
