The National Labor Relations Board’s (NLRB) latest memo reaffirms a hard line that General Counsel, Jennifer Abruzzo, will not allow employers to cross when it comes to restrictive employment provisions. The memo reiterates Abruzzo’s position that, “except in limited circumstances, the proffer, maintenance, or enforcement of non-compete provisions violates the National Labor Relations Act (NLRA).” Additionally, she stated her position on “stay or pay” provisions, believing they, like many non-compete provisions, infringe on employees’ section 7 rights. Abruzzo argues that these kinds of provisions violate the NLRA by limiting employees’ freedom to leave for better employment opportunities.
Abruzzo urged the Board to “find certain non-compete provisions unlawful but also, as fully as possible, to remedy the harmful effects on employees when employers use and apply them,” and aims to address these harmful effects by outlining a path for employees to receive compensation. In the memo, Abruzzo emphasizes that rescission and traditional make-whole remedies will not be enough, noting their regional offices will seek compensation for lost wages and benefits, legal and collection fees, repayments, among other financial avenues. By targeting these restrictive provisions, Abruzzo intends to protect workers’ rights to freely seek employment without fear of retribution.
Earlier this year, the NLRB acted on its intentions when Administrative Law Judge Sarah Karpinen ruled that J.O. Mory, Inc., violated the NLRA by maintaining unlawful non-compete policies. The ruling stemmed from the alleged termination of an employee for engaging in protected union activity. As part of the make-whole remedy, the employer was ordered to cease and desist from all unlawful activity, offer the terminated employee reinstatement and make the employee whole for any lost wages.
Background
The NLRB’s primary function is to enforce the NLRA, ensuring fair labor practices by both employers and unions. The NLRB’s effort to challenge these provisions aligns with a broader push to ensure fair competition in the labor market.
In May 2023, General Counsel Abruzzo issued the first of two memorandums addressing the legality of non-compete provisions. Clearly stating that unless the non-compete provision is “narrowly tailored to address special circumstances justifying the infringement on employee rights”, it is a violation of section 8(a)(1) under the NLRA. Section 8(a)(1) regulates unfair labor practices such as employers interfering with, or coercing employees in the exercise of their section 7 rights. Section 7 of the NLRA protects employees’ rights to self-organization, to form or join labor organizations, and bargain collectively.
NLRB’s Newest Target: “Stay or Pay” Provisions
On October 7th, Abruzzo issued a second memorandum, reiterating her focus to remedy the negative effects of these unlawful employment provisions. She emphasized the similarity between non-competes and stay or pay provisions, highlighting that both provisions restrict employee mobility and tend to chill employees from exercising their Section 7 rights under the National Labor Relations Act.
“Stay or pay” provisions are clauses that require employees to reimburse their employers for benefits received (sign-on bonus, relocation assistance, training, or educational costs, etc.) if they separate from the employer before a specified period. The General Counsel recommends that “stay or pay” provisions be considered presumptively unlawful unless the employer can demonstrate a legitimate business interest justifying the agreement. Abruzzo emphasizes that “stay or pay” provisions limit employees’ job mobility by creating a substantial financial burden, deterring them from seeking better opportunities and reducing their bargaining power. By imposing financial penalties for leaving, employers may effectively deter employees from exercising their rights to improve working conditions or pursue other opportunities, thereby violating the NLRA.
Although General Counsel Abruzzo is urging the Board to find any “stay or pay” provision presumptively unlawful, there is a way for employers to demonstrate that their provisions are legitimate and specifically tailored to minimize infringement. According to Abruzzo, for the provision to be legally compliant, the provision must have the following criteria:
- Voluntarily entered into in exchange for a benefit;
- A reasonable and specific repayment amount;
- A reasonable stay period;
- Does not require repayment if the employee is terminated without cause.
To have a lawful provision, employees must be able to freely choose whether to participate, have clear and upfront payment terms, a reasonable duration, and the provision must state that if an employee is terminated without cause, repayment is not required. Any provisions missing the above criteria should be rescinded and replaced. Abruzzo is granting employers a 60-day period, from the date of the issued memorandum, to amend all non-compliant “stay or pay” provisions. For employers who remain non-compliant, the NLRB will begin to pursue their enforcement options.
Remedying the Effects
With a make-whole approach, Abruzzo aims to restore employees to their prior financial standing before the unlawful non-compete or “stay or pay” provision took effect. Employees can receive compensation if they can demonstrate that because of their non-compete or “stay or pay” provision, they were deprived of better job opportunities. Employees would have to show:
- There was an open position with a better compensation package;
- They were qualified for the position; and
- They were discouraged from applying or accepting the position because of their non-compete provision.
Upon such a showing, employers would be required to compensate the employee for the difference between the compensation they received and what they would have received during the same period. Abruzzo recommends employees should be compensated for moving-related costs, if they had to relocate to obtain employment within the same industry. Under this approach, former employees may also be entitled to lost wages if they can demonstrate that, due to their non-compete provision, they were unemployed for a longer period. Former employees must meet the same criteria mentioned above to qualify for compensation.
Abruzzo is urging the Board to amend its standard posting notice to alert employees that they may be entitled to a differential in wages due to their non-compete or “stay or pay” provisions. The notice must include language guiding employees to contact their respective regional NLRB office, if they have evidence pertaining to the unlawful maintenance of a non-compete or “stay or pay” provision. During the notice posting period, employees will be permitted to submit their evidence and demonstrate that they were denied a better job opportunity.
Considerations for Employers
Abruzzo’s 60-day window for employers to cure any pre-existing “stay or pay” provisions expires December 6, 2024. This latest memo is not binding law but clearly states the intentions of NLRB’s top prosecutor. Employers should review their existing “stay or pay” provisions and consult with experienced employment and labor counsel to ensure compliance with NLRB’s position on non-competes and “stay or pay” provisions.
Click here to learn more about the status of the FTC’S non-compete rule. For more information, please contact Mark Russell, staff attorney at NAA.