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We <a href="https://www.bakerlaw.com/insights/a-new-front-in-the-noncompete-wars-nlrbs-general-counsel-claims-noncompete-agreements-violate-the-labor-act/" target="_blank" rel="noreferrer noopener">previously reported</a> on a May 2023 memorandum issued by the general counsel of the National Labor Relations Board (NLRB or Board), Jennifer A. Abruzzo, stating her view that “the proffer, maintenance, and enforcement” of noncompete provisions in employment contracts and severance agreements generally violated the National Labor Relations Act (NLRA or Act). Abruzzo has now followed up on her prior pronouncement with a memorandum to regional directors and other employees of the Board (<a href="https://admin.bakerlaw.com/wp-content/uploads/2024/10/GC-25-01-Remedying-the-Harmful-Effects-of-Non-Compete-and-Stay-or-Pay-Provisions-that-Violate-the-National-Labor-Relations-Act.pdf" target="_blank" rel="noreferrer noopener">GC Memorandum 25-01</a>) setting out expansive remedies in the event a Board administrative law judge finds that a noncompete provision is illegal. Abruzzo also sets forth her proposed framework for assessing the legality of so-called stay-or-pay provisions and remedying unfair labor practices related to such provisions.

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Proposed Remedies for Unlawful Noncompete Agreements

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In her new memorandum, Abruzzo notes that to the extent a noncompete provision violated the Act, simply requiring an employer to rescind the provision failed to address what she claims is the impact of the provision on employees forgoing more-beneficial employment opportunities. Accordingly, in the interest of providing “make-whole” relief, Abruzzo asserts that employees should be permitted to come forward during the period an employer is required to post a notice concerning the unfair labor practice finding and demonstrate that they were deprived of a better job opportunity as a result of the noncompete provision. If such an employee demonstrates that during the NLRB’s six-month statute of limitations period (1) there was a vacancy available for a job with a better compensation package, (2) the employee was qualified for the job and (3) the employee was discouraged from applying for or accepting the job because of the noncompete provision, the employer must compensate the employee for the difference (in terms of pay or benefits) between what they would have received and what they did receive during the same period. Similarly, individuals who separated from the employer during the limitations period may also be entitled to make-whole relief such as backpay damages and other costs associated with complying with the unlawful noncompete provision during the postemployment period (e.g., unemployment or accepting a less-lucrative job during the restricted period due to the existence of the noncompete, moving outside the provision’s geographic scope, or incurring retraining costs to become qualified for a job in a different industry).

To assist the NLRB’s regional offices in fashioning the above-described remedies, Abruzzo recommends in her memorandum that the Board amend its standard notice posted in workplaces in connection with unfair labor practices related to noncompete provisions so as to solicit relevant information from employees. Specifically, Abruzzo states that the notices should (1) alert employees that they may be entitled to a differential (in terms of wages or benefits) if they were discouraged from pursuing or were unable to accept other job opportunities due to the noncompete provision, (2) notify employees that they may be entitled to other compensation if they separated from employment and had difficulty securing comparable employment due to the noncompete provision, and (3) include language directing individuals to contact their regional office during the notice-posting period if they have evidence related to (1) or (2). Abruzzo also recommends that the Board should require employers to mail the notice to ensure that current employees, as well as former employees who were subject to the noncompete provision since the start of the limitations period, have an opportunity to read the notice and take steps during the notice-posting period to obtain relief, if appropriate.

The Legality of Stay-or-Pay Provisions

Many employers have requirements that employees who leave within a certain period of time must repay monies expended by the employer in training the employees, as well as sign-on bonuses and relocation stipends. Abruzzo claims that such provisions “have a tendency to interfere with, restrain, or coerce employees in the exercise of rights guaranteed in Section 7 of the Act” by restricting their ability to resign or engage in concerted activity that might prompt employer retaliation. Based on her analysis, Abruzzo “urges” the Board to adopt a presumption that any stay-or-pay provision is unlawful, which presumption an employer can rebut by proving that the provision (1) is voluntarily entered into in exchange for a benefit, (2) has a reasonable and specific repayment amount, (3) has a reasonable “stay” period, and (4) does not require repayment if the employee is terminated without cause.

Abruzzo goes on to discuss in detail each of the above factors. As for the voluntary nature of the provision, Abruzzo makes it clear that training repayment provisions would only be lawful if the training is optional (which would include training related to credentials to be eligible for promotion or classes or courses necessary to obtain or maintain a mandatory credential for the employee’s current job) and not tied to a mandatory job training program. With respect to cash payments, such as a relocation stipend or sign-on bonus, Abruzzo states that the only way such payments could be considered fully voluntary is if employees are given the option of taking payment up front subject to a stay-or-pay provision or deferring receipt of the same bonus until the end of the same time period. As for the amount of any repayment, Abruzzo states that the impacted employee must be notified up front of the amount to be repaid and that such amount can be no more than the actual cost to the employer. Determination of the reasonableness of the stay period should be, according to Abruzzo, “not unduly long and … proportional to the benefit bestowed.” Lastly, Abruzzo believes that requiring repayment when the employer terminates employment for any reason whatsoever (i.e., without cause) is “unlawfully coercive” and could inhibit employees from engaging in concerted activity.

Abruzzo goes on to outline the remedies associated with a finding that an employer had an illegal stay-or-pay provision. Such remedies would include: (1) rescinding the provision and replacing it with a lawful one; (2) requiring the employer to notify employees that the existing provision had been invalidated and any debt resulting therefrom was nullified; (3) requiring an employer to cease engaging in any effort to collect the debt and reimburse the impacted employee for legal fees and costs associated with defending against such action; and (4) awarding damages to employees who can prove that they had to forgo other employment because of fear that they would be subject to having to pay back the debt. To assist in such enforcement efforts, Abruzzo recommends that the Board amend its notice in ways similar to what she recommended in connection with noncompete provisions.

Abruzzo concludes her memorandum by stating that she would execute “prosecutorial discretion” in certain circumstances, which are set forth in the memorandum. For instance, she states she would grant employers until December 6 to conform their existing stay-or-pay provisions to her memorandum.

Since Abruzzo’s last memorandum, an NLRB administrative law judge has ruled that one employer’s noncompete and nonsolicitation provisions violate the NLRA (J.O. Mory, Inc., Case 25-CA-309577 (Jun. 13, 2024)). Moreover, NLRB Region 9 in Cincinnati obtained a settlement involving noncompete and training repayment provisions that allegedly restricted employee mobility (Harper Holdings, LLC d/b/a Juvly Aesthetics, Case 09-CA-300239 (Jan. 29, 2024)). In light of those developments, it is even more important for employers to review their noncompetes – and now, their stay-or-pay provisions – for their nonsupervisory employees to determine whether they comport with the general counsel’s directives.

Should you need to discuss this memorandum and its effect on your organization in greater detail, the BakerHostetler Labor Relations and Noncompete and Trade Secrets practice teams are available to assist.

Adding Injury to Insult: The NLRB’S General Counsel Lays Out Expanded Remedies For Unlawful Noncompete and Stay-or-Pay Agreements