NLRB General Counsel Expands Attack on Non-Competes, Including Stay-or-Pay Provisions

Continuing in the vein of earlier attempts to crack down on non-competition agreements for employees who are covered under the National Labor Relations Act (the "Act"), the General Counsel of the National Labor Relations Board, Jennifer Abruzzo, has issued a new memorandum advancing the view that "stay-or-pay" provisions—employment terms that require an employee to pay back certain benefits (i.e., signing bonuses, relocation expenses, tuition and educational reimbursements, among others) in the event they do not stay with the company for an agreed period of time—are also presumptively unlawful and violate the National Labor Relations Act.

As previously reported, in May 2023, Abruzzo issued Memorandum GC 23-08, setting forth her view that non-compete provisions in employment contracts and severance agreements violate the National Labor Relations Act. On October 7, 2024, Abruzzo issued Memorandum GC 25-01, which confirms her intent to prosecute employers that maintain overbroad non-compete agreements.

Abruzzo's new memo also purports to create, out of whole cloth, new limits for stay-or-pay provisions, and lays out an aggressive framework for forcing covered employers to compensate employees for potential harms flowing from such agreements and gives employers 60 days—or until sometime between now and December 7—to either rescind or modify their practices or suffer potential enforcement actions.

While the memo leaves many questions unanswered, one key takeaway is that the general counsel's analysis applies only to "employees" as defined by the Act. Because managers and executives are excluded from that definition, neither of the general counsel's memoranda (GC 23-08 and 25-01) apply to them and the board does not have any authority to regulate non-compete or stay-or-pay agreements with such key personnel.

Why Is the General Counsel Attacking Non-Compete Agreements?

As with the Federal Trade Commission's efforts to ban non-compete agreements (an effort that was halted in August by a federal district court judge in Dallas), the NLRB general counsel is similarly attempting to displace decades of state law to broadly invalidate non-compete agreements that have traditionally been subject to more individualized and variable scrutiny depending on the jurisdiction.

While Section 7 of the Act protects efforts employees might take to improve their terms and conditions of work, Abruzzo argues non-compete agreements chill that protected activity in two ways.[1] First, according to her, they cut off access to other, better job opportunities, impeding job mobility. Second, non-compete agreements raise the stakes of employment separation. Employees worried about securing another job in their chosen field because of a non-compete agreement may decide not to engage in other protected concerted activity for fear that their employer may terminate them in retaliation, leaving them with few job prospects in their chosen geographic area.

Furthermore, non-compete agreements are, in the general counsel's view, "self-enforcing," meaning unlawful provisions have a harmful financial impact on employee wages and benefits even without employer enforcement. Canceling or repealing such clauses is thus a necessary albeit insufficient remedy for the financial harms experienced by employees who choose not to seek better employment opportunities due to a non-compete agreement. The general counsel has indicated that she will take additional steps to urge the NLRB to adopt a new standard for make-whole remedies after finding that an employer maintained an unlawful non-compete agreement.

What Do Employers Need To Know About the Proposed Financial Remedies for Unlawful Non-Compete Agreements?

An employer's financial exposure for maintaining an unlawful non-compete agreement can be substantial under the general counsel's proposed framework, even if the employer never seeks to enforce an unlawful provision. See GC Memo 25-01 at 2 ("Whether or not an employer has attempted to enforce its unlawful non-compete provision against any employees, the additional, pernicious financial harms it has caused must also be remedied as fully as possible to make employees whole.")

The general counsel will ask the NLRB to allow employees to provide evidence that a vacancy with a "better compensation package" existed. If the employee proves that they were qualified for the other position and that their signed non-compete agreement prevented them from pursuing it, then the general counsel will ask that the board order the employer to pay the difference in wages and benefits. See id. at 3.

Employees need not provide proof of a vacancy to recover financially either. When an employee cannot point to comparator job opportunities because they opted not to pursue them as a result of the non-compete agreement, the general counsel will urge the NLRB to look to other evidence to establish a within-industry earnings estimate for calculating economic damages. See id. at 4, n. 13.

Former employees subject to non-competes may also be able to recover financially under the general counsel's framework. For example, former employees who show they were out of work for longer than expected may be able to recover lost wages, as will individuals who accept lesser compensation outside of their chosen field. Employees who relocate to avoid breaching a non-compete obligation may also be able to recover their relocation costs and related moving expenses. Even employees who voluntarily resign or are lawfully terminated may still be entitled to monetary relief for facing added difficulties in securing new employment. According to the general counsel, such costs are incurred directly as a result of the non-compete provision and have little to do with the circumstances surrounding separation of employment. See id. at 4.

Is the NLRB Likely To Adopt This Approach?

The general counsel's memo is not law. The short answer is we don't know if it will be adopted by the NLRB and there are several questions that the general counsel's memorandum raises but does not answer. For instance:

• Where compensation packages include wages, retirement benefits, and healthcare coverage, all of which can vary from one job to the next, how is the board to do an apples-to-apples comparison for purposes of determining whether another employment opportunity is "better" than the current one?
• Pay transparency rules in several states, including Washington, require job postings to identify pay ranges, and the minimum rate could be less than what the individual employee currently makes. Will the individual have to prove that the other employer would have paid them more than their current earnings if hired, or is that to be presumed based on the published range alone?
• How are employers to defend themselves if an employee leaves their chosen field for other reasons, like improved schedule flexibility, but, due to the financial windfall they stand to receive, claim they would have remained in their chosen field had they not signed a non-compete agreement?
• Will employers be entitled to offsets when an existing benefit is more generous than the one offered by the other employer?

The memorandum is silent on these and other key questions. Time will tell if the NLRB embraces the general counsel's new approach, and if so, whether the board will flesh out or address these issues in subsequent litigation.

What Should Employers Do Now To Protect Proprietary and Trade Secret Information?

While the general counsel acknowledges that there may be "special circumstances" in which a narrowly tailored non-compete agreement's infringement on employee rights may be justified, she provides little practical guidance for employers who rely on non-compete agreements to protect their legitimate business interests.

That said, employers should consider whether non-compete provisions are, in fact, necessary when dealing with employees covered by the Act, as they should do anyway given the changes in state law that have made these agreements harder to enforce for lower-wage workers. As the general counsel's memoranda indicate, merely maintaining an overly broad non-complete could result in significant financial liability for an employer.

Even if it makes sense to continue having non-competes with certain employees who have access to certain kinds of key company information or to protect other legitimate company interests, it is probably wise to evaluate whether other measures apart from non-compete agreements can be used to protect competition-sensitive information, including trade secrets and other proprietary business data.

In addition, employers should create policies and procedures that clearly define the scope of the company's proprietary information, trade secrets, and data security policies, and reference such policies in employment contracts, offers of employment, and employee handbooks.

For additional information, please see our previous advisory.

What Is the Proposed Framework For Prosecuting Stay-or-Pay Agreements?

Stay-or-pay provisions are contractual provisions which require employees to pay their employer if they separate from employment within a specified timeframe. Examples of stay-or-pay provisions mentioned in the memo include training repayment agreement provisions, educational repayment contracts, quit fees and damages clauses, and provisions requiring repayment of sign-on bonuses and relocation stipends.

As explained in the memorandum, the general counsel takes aim at these provisions for the same reasons that the general counsel attacks non-compete agreements. That is, stay-or-pay provisions, the general counsel says, unfairly lock employees into their jobs by imposing a financial barrier to separation. Thus, like non-compete agreements, stay-or-play provisions significantly restrict employee mobility and increase fear of termination for engaging in protected activity.

Not all stay-or-pay provisions are unlawful in the general counsel's view, however. But to pass muster, the provision must pass a completely new four-part test engineered out of whole cloth by the general counsel:

• The agreement must be voluntary and in exchange for a benefit: To avoid prosecution, stay-or-pay provisions must be optional, and employees must be allowed to freely enter into the agreement without any undue financial loss or adverse employment consequences for opting out. Using training repayment agreements as an example, the general counsel explained that such agreements are considered voluntary if employees are not required to participate in the program as a condition of continued employment. Employees can then choose to opt out of the program in favor of engaging in other protected activities as freely as any other employee.

  Examples of permissible voluntary stay-or-pay training programs include making arrangements to finance a credential that is necessary for a promotion. Likewise, an agreement to cover the cost of a class necessary to maintain a mandatory credential may also be permissible, provided classes are selected at the employee's discretion from any third-party vendor, employees are not forced to take the classes through the employer, the employee could otherwise pay out of pocket instead of entering into a stay-or-pay arrangement with their employer, and the credential is portable to other jobs within the industry.

  For cash payments like relocation stipends or sign-on bonuses, the general counsel explained that a stay-or-pay provision can only be considered voluntary if employees have the option to defer receipt of the payment until the end of the stay period. This allows employees who anticipate engaging in protected concerted activity to avoid becoming indebted to their employer.

• The repayment amount must be reasonable: This prong focuses on informed consent. For employees' consent to be meaningful, the repayment amount must not exceed the cost to the employer and the amount must be specified up front. The general counsel reasoned that in cases where the repayment amount exceeds the cost, the true purpose of the provision is no longer a legitimate recoupment of funds but a coercive restriction of employee mobility. And where the amount owed in repayment is not specified up front, any consent cannot be fully informed.
• The stay period must also be reasonable: The stay period must be proportional to the benefit's cost and value to the employee. In evaluating the reasonableness of the stay period, the general counsel directed NLRB regional offices to consider the cost of the benefit, its value to the employee, and the employee's income. For example, when the cost of the benefit is great, the stay period can be longer. Conversely, low-cost benefits should be paired with short stay period.
• Repayment cannot be required if the employee is terminated without cause: According to the general counsel, a stay-or-pay provision that allows the employer to recoup a debt when an employee is terminated for any reason whatsoever before the stay period expires is unlawfully coercive. Thus, for stay-or-pay provisions to pass muster, they must also state that repayment is not required if the employer terminates the employment relationship without cause. The general counsel explained this limitation is essential to ensuring stay-or-pay provisions are narrowly tailored to minimize interference with Section 7 rights.

Will Employers Be Provided a Compliance Window?

Yes; employers have a 60-day window to cure preexisting stay-or-pay provisions that advance a legitimate business interest. New unlawful provisions entered into after the memorandum will, however, be prosecuted, according to the general counsel. The general counsel suggests several means for employers to cure existing agreements:

• Repayment Amount: If the repayment amount exceeds the cost of the benefit provided, employers can reduce the repayment amount to a level no higher than the actual cost and notify affected employees of the new repayment amount.
• Stay Period: If the stay period is unreasonably long, employers must shorten it to a reasonable length and inform impacted employees of the new stay period. Employers should also consider prorating the debt obligation such that it decreases over time.
• Termination Without Cause: If the provision requires repayment in the event of termination without cause, employers must amend the provision to clarify that it does not cover no-cause termination and notify employees accordingly.
• Convert Debts to Incentives: Employers should consider, when feasible, making pro rata payment or delaying payment until the stay period is achieved rather than making payment and then demanding reimbursement. An agreement to pay a signing bonus only after a certain period of time has passed should avoid the unlawful coercive effects of a signing bonus subject to recoupment if the employee leaves too soon.

For debt collection enforcement actions related to stay-or-pay arrangements that are still pending as of the date of the memo, employers are required to:

• Modify Repayment Demands: Reduce the repayment demand to no higher than the cost of the benefits.
• Dismiss Claims: Seek dismissal of claims if the stay period is unreasonably long and the employee stayed for a reasonable period.
• Clarify Termination Provisions: Seek dismissal if the provision did not have a carve-out for discharges without cause and the employee was terminated without cause.

What Remedies Will the General Counsel Seek If a Stay-or-Pay Provision Is Deemed To Violate the Act?

The general counsel laid out distinct remedies, depending on whether the stay-or-pay provision is: 1) voluntarily entered into with informed consent but unlawful due a lack of narrow tailoring or 2) nonvoluntary and lacking in informed consent.

When a stay-or-pay provision is voluntary but violates the employee's rights due to a lack of narrow tailoring, the general counsel will ask that the employer rescind and replace the offending provisions to comply with the law, and remedy any specific violations that occur. As an example, if the employer requires repayment even if an employee is terminated without cause, the employer must modify that aspect of the agreement to avoid chilling Section 7 activity.

For nonvoluntary stay-or-pay arrangements deemed to violate the Act, the employer must rescind the provision and notify employees that the "stay" obligation has been eliminated and any debt nullified. Erasing the debt is in the general counsel's view necessary to restore employees to the position they were in before the unfair labor practice.

Similarly, if an employee was not given a choice to defer payout of a bonus or relocation subsidy, the repayment obligation must be eliminated without unwinding the cash payment.

Will the NLRB Go Along With the General Counsel?

This remains an open question. General counsel memoranda do not reflect the position of the National Labor Relations Board and are not law. They do, however, serve as guidance to NLRB regional offices investigating unfair labor practice charges against employers and telegraph the general counsel's enforcement priorities.

There are certainly concerns with respect to the general counsel's framework, which is often opaque and undefined. As employers craft new stay-or-pay arrangements, how does an employer determine what constitutes a reasonable repayment period for the benefit conferred upon the employee? Similarly, for employers seeking to cure existing stay-or-pay provisions, how does an employer know that the present repayment period is or is not reasonable? The board will have to fill these gaps, likely on a case-by-case basis, leaving employers to guess the rules in the interim.

Given that stay-or-pay provisions are very common, we expect the NLRB regional offices will be flooded with unfair labor practice filings and for this to be a subject of much litigation if the board adopts the general counsel's approach.

Finally, the general counsel is not content stopping with her attacks on non-compete agreements and stay-or-pay provisions. In a footnote, and without offering any analysis, she signals that the mere maintenance of any anti-moonlighting provisions discouraging employees from pursuing or accepting a second job may also warrant similar relief. See id. at 3, n. 12. Employers should continue to watch this space as it appears the general counsel is not yet through aggressively pursuing her agenda.

As these developments indicate, this continues to be an evolving area of law. DWT will continue to monitor these and other labor law developments. Please reach out to the authors if you have questions about how the board's decision might impact your organization.