Employment Law Update

Background

On May 30, 2023, Jennifer Abruzzo, General Counsel of the National Labor Relations Board (NLRB), issued a memorandum expressing her opinion that most non-competition agreements violate Section 7 of the National Labor Relations Act (NLRA).   Click here.  On April 23, 2024, the Federal Trade Commission (FTC) joined the fray by issuing its final rule banning most non-compete agreements entered into by for-profit businesses.  However, on August 20, 2024, the US District Court for the Northern District of Texas issued an order blocking the FTC’s rule shortly before it was to take effect.  With that setback to the anti-non-compete agenda still fresh, Ms. Abruzzo issued another General Counsel Memorandum on October 7, 2024.  In the first part of the memorandum, the General Counsel reinforces her previous guidance on non-competes and recommends that the NLRB award affected employees “make whole” relief.  In the second part of the memorandum, the General Counsel expands her targets to include so-called “stay-or pay” provisions, which she claims also violate the NLRA.  

The 2023 Memorandum on Non-Competes

According to Ms. Abruzzo, non-compete agreements are overbroad and may “chill” an employee’s exercise of Section 7 rights when such provisions “could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work.”  This is so, the memorandum asserts, because, among other reasons, “employees know that they will have greater difficulty replacing their lost income if they are discharged for exercising their statutory rights to organize and act together to improve working conditions.”

The memorandum identifies five specific types of protected Section 7 activities which the General Counsel believes may be “chilled” by non-competes: 

1. “Concertedly threatening to resign to demand better working conditions;” 
2. “Carrying out concerted threats to resign or otherwise concertedly resigning to secure improved working conditions;”
3. “Concertedly seeking or accepting employment with a local competitor to obtain better working conditions”, including “a lone employee’s acceptance of a job as a logical outgrowth of earlier protected concerted activity;” 
4. “Soliciting their co-workers to go work for a local competitor as part of a broader course of protected concerted activity;” and
5. “Seeking employment, at least in part, to specifically engage in protected activity with other workers at an employer’s workplace.”

Ms. Abruzzo concludes that because of these purported ill-effects, a non-compete provision will always tend to chill an employee from engaging in Section 7 activity “unless the provision is narrowly tailored to special circumstances justifying the infringement on employee rights.”  Notably, the memorandum does not identify what conditions would constitute such “special circumstances,” but does assert that “a desire to avoid competition from a former employee is not a legitimate business interest that could support a special circumstances defense.”  Similarly, the memorandum contends that “business interests in retaining employees or protecting special investments in training employees are unlikely to ever justify an overbroad non-compete provision because U.S. law generally protects employee mobility, and employers may protect training investments by less restrictive means, for example, by offering a longevity bonus.”

The memorandum recognizes the possibility that some non-competes may be valid – but in only the narrow circumstances where an employee “could not reasonably construe the agreements to prohibit their acceptance of employment relationships subject to the [NLRA’s] protection, for example, provisions that clearly restrict only individuals’ managerial or ownership interests in a competing business, or true independent contractor relationships.”  

New Guidance on Remedying the Effects of Non-Competes

Building on her earlier memorandum, Ms. Abruzzo issued GC 25-01 on October 7, 2024.  In the first part of that memorandum, the General Counsel urges the NLRB to award employees “make whole relief” for what she views as the “pernicious harms” caused by non-compete agreements.  The memorandum proposes a three-point test employees or former employees must meet to demonstrate harm entitling them to relief:

1. There was a vacancy available for a job with a better compensation package; 
2.  They were qualified for the job; and 
3.  They were discouraged from applying for or accepting the job because of the non-compete provision.

Ms. Abruzzo adds, “[a]ny uncertainty about whether the employee would have been hired by the other company, the salary they would have earned, or their exact start date should be resolved in favor of the employee under longstanding principles.”

The memorandum also suggests that employees who have already separated may be entitled to relief for additional harms from the “costs associated with complying with the unlawful non-compete provision during the post-employment period, until those restrictions expired.”  Such harms include: 

• Lost wages resulting from being out of work as a result of the non-compete for a longer period than the employee would otherwise have been out of work.
• The difference in compensation in pay and benefits resulting from having to take a job outside of their industry (but within the geographic scope of the non-compete provision)
• Moving-related costs if an individual had to move outside of the geographic region to obtain employment within the industry.
• The costs of any retraining to be eligible for a position in a different industry not covered by the non-compete.

In a note, Ms. Abruzzo suggests that “[s]imilar relief is also warranted where maintenance of an anti-moonlighting provision discourages employees from pursuing or accepting a second job.”   She does not clarify whether all anti-moonlighting provisions are problematic, even where the second job competes or creates a conflict with the employee’s primary employment, or just provisions which advance no legitimate business interest.  

The memorandum also recommends that the NLRB amend its standard notice position to solicit information from employees and alert them that they may be entitled to such damages if they were adversely affected by a non-compete provision and provide information on how to contact the NLRB regional office.  

“Pay-or-Stay” Provisions Targeted as Presumptively Unlawful

In the second part of GC Memorandum 25-01, the General Counsel asserts that so-called “Pay-or-Stay” provisions are presumptively unlawful.  Agreements within this category include:

• Training repayment agreement provisions
• Educational repayment contracts
• Quit fees
• Damages clauses
• Sign-on bonuses and other types of cash payments tied to a mandatory stay period
• Other contracts under which employees must pay their employer in the event that they voluntarily or involuntarily separate from employment

According to the memorandum, employers typically advance two justifications for stay-or-pay arrangements.  The first is to lock employees in their jobs by imposing a financial barrier to separation, such as quit fees and damages clauses, which the General Counsel claims “are aimed solely at holding onto employees.”   The General Counsel finds that such provisions are “problematic” under most circumstances.  A second basis advanced by employers for the provisions is that they are meant to “recoup payments toward employee benefits where an employee does not remain employed long enough for the business to reap its anticipated returns.”   The memorandum notes that such agreements may “reflect a legitimate business interest,” and provides that employers may rebut the presumption of unlawfulness by demonstrating that such agreements “are narrowly tailored to minimize any interference with Section 7 rights.”  

Creating a “Pay-or-Stay” Provision That Satisfies the General Counsel

1.  Voluntary.  The stay-or-pay agreement must be voluntary.  According to the memorandum, this means that employees must be permitted to freely choose whether to enter into the agreement and may not suffer an undue financial loss or adverse employment consequence if they decline.  In addition, the agreement must be offered in exchange for a benefit conferred on the employee.  While this factor seems easy to meet, the General Counsel’s discussion suggests many traps for the unwary employer.
   
   Training repayment agreements will be considered voluntary “so long as the training is optional.”  For example, where an employee “needs a certain credential to be eligible for promotion” a stay or pay provision would be permissible to finance the credentialing.  Similarly, “courses necessary to obtain or maintain a mandatory credential for an employee’s current job, such as a degree, license, or certification” will be considered “voluntary” where “the classes are selected at the employee’s discretion from any third-party vendor” and “the employee is not forced to take the classes through the employer.”  Indeed, the memorandum condemns as non-voluntary “a stay-or-pay arrangement that is tied to mandatory training” such as “orientation sessions, on-the-job training or other specific instruction that the employer requires an employee to attend” because “[i]n practice, employees are typically given no choice as to whether to enter into stay-or-pay agreements in exchange for training their employer mandates.”  The memorandum concludes that “it would be advisable to make the voluntary nature of the arrangement explicit in the contract.” 

   Another significant exception to voluntariness can be found in common sign-on and relocation bonus arrangements.  According to the General Counsel, simply presenting employees with the option to accept or decline the bonus arrangement is not sufficient  to meet the voluntariness factor: 

   With respect to cash payments, such as a relocation stipend or sign-on bonus, in my view a stay-or-pay provision can only be considered fully voluntary if employees are given the option between taking an up-front payment subject to a stay-or-pay or deferring receipt of the same bonus until the end of the same time period. Only in this way can employees who anticipate possibly engaging in protected concerted activity avoid becoming indebted to their employer without a significant financial downside. If the only alternative was to decline the cash payment outright, that “choice” would be illusory because no reasonable employee would do so, and if they did, it would amount to paying their employer in order to safeguard their Section 7 rights by foregoing money that will remain in the employer’s account.

Such a restrictive reading of “voluntary” will likely impact most existing sign-on and relocation bonus arrangements.

1. A reasonable and specific repayment amount. The required repayment may not be any greater than “ the cost to the employer of the benefit bestowed, and the debt amount must be specified up front.”  In the General Counsel’s view, if the amount is greater than the cost to the employer “the true purpose of the provision is no longer legitimate recoupment but rather coercive restriction of employee mobility, which…  is not a legitimate business interest.”
    
2. A reasonable “stay” period. The “stay period” associated with the stay-or-pay provision must be reasonable.  The General Counsel states that reasonableness will be determined on a “fact-specific” basis  “based on factors such as the cost of the benefit bestowed, its value to the employee, whether the repayment amount decreases over the course of the stay period, and the employee’s income.”  Further, “[w]here the cost of the benefit is greater, the stay period may be longer, whereas lower-cost benefits should be associated with shorter stay periods.”  
    
3. No repayment required if terminated without cause. The “stay-or-pay” provision or agreement must provide that the repayment obligation will not be enforced if the employee is terminated without cause.  

The General Counsel’s Proposed Remedies  

Ms. Abruzzo opines that with respect to an existing stay-or-pay arrangement that was entered into voluntarily, but which contains otherwise unlawful provisions, the employer should be ordered to rescind the unlawful provisions and replace them.  For example, if the repayment obligation could be triggered even by a termination without cause, the employer would have to modify that aspect of the agreement.  The “proffer or maintenance of non-voluntary stay-or pay arrangements,” however, requires “a more robust” remedy, including recission of the offending provision, notice to employees that the provision has been eliminated and that the debt has been nullified and the provision will not be enforced.  

In cases where an employer attempts to enforce an unlawful stay-or-pay agreement, the General Counsel maintains that the employer should be “required to retract the enforcement action and make employees whole for any financial harms resulting from its attempted enforcement” including compensating the employees for any repayments made, paying the employee for legal fees incurred and other expenses associated with the enforcement action.  As with non-compete agreements, the General Counsel additionally would allow employees to demonstrate damages resulting from being deprived of better employment opportunities as a result of the stay-or pay provision.  Employers would be required to pay damages where the “employee can show that: (1) there was a vacancy available for a job with a better compensation package; (2) they were qualified for the job; and (3) they were discouraged from applying for or accepting the job because of the stay-or-pay provision.”  

Posting Requirements

The General Counsel also recommends that the Board amend its standard notice posting to solicit relevant information about stay-or-pay provisions from employees.  The amended notice would  alert employees that they may be entitled to damages if they were “discouraged from pursuing, or were unable to accept other job opportunities due to the unlawful stay-or-pay provision” or suffered other damages due to the provision, and direct employees to contact the NLRB Regional with evidence related to such harms. 

In addition, the memorandum recommends that in each case brought to contest a stay-or-pay arrangement,  the Board order mailing of the notice to current and former employees who were subject to a stay-or-pay provision since the start of the six-month filing period under NLRA Section 10(b).

60-Day Cure Window

The General Counsel gives employers 60 days from the date of her memorandum (until December 6, 2024) to cure problems with any existing pay-or-stay arrangements.  “For example, if a stay-or-pay arrangement includes a repayment amount that is more than the cost of the benefit bestowed, the employer should reduce it to a level that is no higher than that cost and notify affected employees of the new repayment amount. Likewise, if a stay period is unreasonably long, the employer should shorten it to a reasonable length and notify impacted employees of the new stay period.”  If an employer cures existing defects prior to the deadline, the General Counsel states that she will decline to issue complaint. 

 The General Counsel also recognizes that some stay-or-pay provisions, cannot be made to conform completely with her four-part test.  In particular, an arrangement that was not entered into “voluntarily”, as defined by the memorandum, or with informed consent as to the amount, as well as situations where and enforcement action by the employer is complete.  The General Counsel outlines three scenarios where she will decline to her prosecutorial discretion pursue such cases:

• Where the preexisting stay-or-pay arrangement involved such benefits—e.g., an upfront cash payment such as a bonus or relocation stipend, financial assistance towards optional training, or payment for classes to obtain or maintain a credential—so long as the other three requirements discussed above are cured by the end of the sixty day window.
   
• Where an employer has already enforced a stay-or-pay agreement entered into prior to issuance of the GC memorandum in exchange for the types of benefits contemplated in the memorandum (e.g., cash payments, payments toward optional training or any credentialing), so long as the amount being sought is reasonable.  
• If the employer cancels the debt, notifies employees that they no longer have a repayment obligation, retracts any debt collection enforcement action and, if appropriate, returns any repayments collected from employees within sixty days of this memorandum.

While the General Counsel’s memorandum is not law, it does illuminate an area of enforcement priority for her and indicate one likely direction for future NLRB enforcement while she remains in her role.  Her position on stay-or-pay provisions, in particular, represents an aggressive expansion of the NLRB’s focus on common workplace arrangements once believed unquestionably lawful by the employer community.  Undoubtedly, increased enforcement actions by the NLRB will result in litigation and, ultimately, the legality of the General Counsel’s pronouncements will be decided by the federal courts.   

For questions concerning this topic, contact Charles R. Bacharach.

Charles R. Bacharach
410-576-4169 • cbacharach@gfrlaw.com