NLRB strengthens its position against (most) non-compete clauses

There’s nothing new under the non-compete sun… unless you’re the U.S. National Labor Relations Board. After decades of use by employers across industries, non-compete provisions in employment contracts have become a major target of the NLRB’s efforts to enforce its current interpretation of the National Labor Relations Act.

More specifically, on May 30, 2023, NLRB General Counsel Jennifer Abruzzo made public an agency-wide memo announcing her position that—except under very limited circumstances—most non-compete provisions in employment contracts and severance agreements are in violation of Section 7 of the National Labor Relations Act. 

Section 7 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." In her May 30 memo, Abruzzo wrote that non-compete provisions “interfere with, restrain, or coerce employees” in the exercise of these rights.

Recent NLRB Action

This memo is just the latest salvo in the Board’s multi-year effort to limit the use of non-competes in employment contracts. In its February 21, 2023, opinion in McLaren Macomb, the NLRB determined that severance agreements with non-management employees that include common confidentiality and non-disparagement provisions were overbroad and therefore violated the NLRA.

In July 2022, the NLRB signed two memoranda of understanding with fellow regulators and law-enforcement. The first, with the Federal Trade Commission, announced that the agencies were combining their efforts to “root out practices that harm workers in the ‘gig economy’ and other labor markets, to enhance the enforcement of federal laws and regulations administered by the agencies, and to promote interagency collaboration through information sharing, cross-agency training, and coordinated outreach.” 

The second MOU, signed with the Antitrust Division of the Department of Justice, outlined the organizations’ coordinated efforts to ensure that workers are able to exercise their rights and to protect competitive labor markets. In particular, the agencies pledged to “share information on potential violations of the antitrust and labor laws, collaborate on new policies and ensure that workers are protected from collusion and unlawful employer behavior.”

All three agencies also agreed to refer potential violations, discovered during their respective investigations, to each other for further scrutiny.

What Does This Mean for Hotels? 

As compared to other private-sector industries, unionization rates in the leisure and hospitality industry are relatively low. According to 2022 Bureau of Labor Statistics data, 6.8 percent of private sector employees are represented by unions. However, just 3.4 percent of leisure and hospitality workers—and only 2.4 percent of accommodation and food services employees—are represented by unions.

However, in contrast to overall private-sector unionization rates (which are generally on the decline, despite recent, high-profile organizing efforts within some large companies), the rates of union representation in the leisure and hospitality industry in general, and in the accommodation and food services sector in particular, are on the rise. (Increasing, between 2021 and 2022, from 2.7 percent to 3.4 percent and from 2.1 percent to 2.4 percent, respectively). 

With this in mind, the May 30 memo signifies—loudly and clearly—that NLRB leadership considers non-compete provisions to have a chilling effect on employment markets and thus should be unenforceable. For hotel employers who incorporate non-compete agreements in employment contracts as standard practice, continued use of such provisions may risk investigations and potential enforcement action by regulatory officials.

Employer Advocates Respond

Many businesses and employer advocates argue that the NLRB is taking an extreme position and pursuing its own, overly broad interpretation of the law. Chiefly, they claim that non-compete clauses have a limited effect on unionization or collective bargaining efforts. They stress that such provisions are focused on preventing employees from unfairly working for competitors and from illegal sharing of proprietary information, trade secrets and other intellectual property.

In her May 30 memo, Abruzzo acknowledges that “not all non-compete agreements necessarily violate the NLRA.” She suggested somewhat vague exceptions, including:

•    Provisions that clearly restrict only individuals’ managerial or ownership interests in a competing business.
•    True independent contractor relationships. 
•    Situations in which a narrowly tailored non-compete agreement’s infringement on employee rights is justified by special circumstances. 

To date, the NLRB guidance has not been enshrined into law. Should the NLRB, however, in a forthcoming case involving an unfair labor practice charge against a specific employer, rule in a manner that supports this guidance, the new rule will take broad effect. The NLRB is likely seeking to identify and pursue just such a test case. 

Protective Actions

Hotel employers should review all standard documents that might include non-compete and related provisions. These include standard offer letters; handbooks; employment, severance and related agreements; agreements that contain confidentiality, non-disclosure, non-compete, non-disparagement, non-solicitation, and no-poaching clauses; and liability releases, covenants not to sue and cooperation requirements with respect to investigations or proceedings. Where such terms are identified, the relevant documents should be updated to limit potential exposure.

Employers should keep an eye out for additional NLRB guidance and potential, relevant lawsuits from the various government agencies. Experienced legal counsel can assist with these and other prophylactic efforts. As evidenced by the Board’s recent MOUs with the FTC and DOJ, their “all hands on deck” mission to curb the use of non-competes is likely to remain a priority for the foreseeable future. 

Tom Hubert and Joe Lavigne are partners in the Labor & Employment Practice Group and lead trial attorneys for the trade secret non-compete team at Jones Walker LLP in New Orleans.