In recent years, non-compete agreements have been a subject of scrutiny in the United States, with concerns raised over their potential impact on employee mobility and labor market competitiveness. In 2021, President Joe Biden directed the Federal Trade Commission to ban or limit non-compete agreements. Historically, non-compete agreements have been regulated by the states, not the federal government. Prior to COVID-19, only three states outright banned non-compete agreements. Today, Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington have recently added themselves to the growing list of states prohibiting the use of non-competes with limited exceptions. In addressing these concerns, on May 30, 2023, the General Counsel (“GC”) of the National Labor Relations Board (“NLRB”) took key steps toward increasing federal regulation of non-competition agreements. In this article, we will examine the NLRB General Counsel Memorandum on covenants not to compete, exploring its significance, implications, and potential impact on both employers and employees.
Understanding Non-Compete Agreements
A covenant not to compete, also known as a non-compete agreement or restrictive covenant, is a contractual arrangement in which an employee agrees not to enter into or start a similar business or work for a competitor for a specified period of time after leaving their current employment. Proponents hold that non-compete agreements have traditionally been utilized by employers to protect trade secrets, customer relationships, and investments in specialized training. However, opponents, including the NLRB, have raised concerns regarding their potential to limit employees' job opportunities and restrict labor market competition.
Key Points Highlighted in the GC Memo
The memo contends that while non-competes may not necessarily violate Section 7 of the National Labor Relations Act (“NLRA”), its effects may be “chilling”. The memorandum emphasizes that Section 7 of the NLRA grants employees the right to engage in "concerted activities for the purpose of collective bargaining or other mutual aid or protection." It further asserts that non-compete agreements can potentially interfere with these protected rights and, as a result, may be subject to scrutiny under the NLRA.
According to the GC’s memo, non-compete agreements have a chilling effect on the following key rights under Section 7: