NLRB: Use of Non-Compete and “Stay-or-Pay” Clauses May Trigger Significant Monetary Consequences for Employers

On October 7, National Labor Relations Board (NLRB) General Counsel Jennifer A. Abruzzo issued Memorandum GC 25-01, reinforcing and expanding previous positions on how certain restrictive covenants may violate the National Labor Relations Act (NLRA). According to a prior memorandum from Abruzzo’s office in May of 2023, non-compete clauses — except in limited circumstances — often violate Section 7 of the NLRA, regardless of whether a unionized workforce is present in the workplace.

Many employers choose to utilize non-compete restrictions in agreements with key employees in order to protect their company’s trade secrets and proprietary information. According to the general counsel (GC), these agreements, which restrict employees from seeking work with competitors after leaving their current employer, can significantly harm workers by preventing them from securing higher-paying jobs or leveraging job opportunities to negotiate better working conditions.

Opponents of non-compete restrictions claim that even when not legally enforced, non-compete provisions often have a “self-enforcing” effect, causing employees to avoid exploring job options out of fear of breaching their contracts. Notably, a similar attempt by another federal agency, the Federal Trade Commission, to ban most non-compete agreements outright was recently struck down by a federal court in Texas.

The latest memorandum announces that the NLRB will be seeking substantial “make-whole” remedies in enforcement actions against employers that maintain what the GC’s office considers to be unlawful non-compete restrictions. These remedies can include compensating current and former employees for wages and benefits allegedly lost due to restrictions on their job mobility, even if they did not apply for a job as a result of the non-compete restriction, as well as their costs for any retraining efforts to become eligible for a position in a different industry, relocation costs to avoid a restrictive area, and even legal fees.

In addition to addressing non-compete agreements, this latest memorandum also targets what it calls “stay-or-pay” provisions, which require employees to pay their employer if they leave their job voluntarily or involuntarily within a certain time frame. Examples include training repayment agreement provisions (TRAPs), sign-on bonuses, and penalties for early resignation. The GC has now proclaimed that, like non-compete agreements, “stay-or-pay” provisions limit employee mobility and discourage workers from exercising their rights under the NLRA, such as organizing or seeking better working conditions, and thus violate the NLRA.

Only programs that 1) offer optional and voluntary benefits, 2) have reasonable and narrow terms for repayment, and 3) are not enforced against employees terminated without cause will escape scrutiny.

The GC has also stated that employers with existing “stay-or-pay” programs have a 60-day window from the date of this memorandum to “cure” their programs in order to meet this test.

For assistance or questions about this alert, please contact the authors or a member of the Labor & Employment Team.

Thank you to Steptoe & Johnson first-year Associate, Julian Pamplin, for his contribution to this alert.