NLRB GC Issues More Guidance on Non-Competes and Stay-or-Pay Clauses
The new memo is good but flawed.
The General Counsel (“GC”) of the National Labor Relations Board (“NLRB”) issued GC 25-01, a memorandum providing additional guidance on remedying the damage done by illegal non-compete clauses and new guidance on the legality of various stay-or-pay provisions.
Remedies for Illegal Non-Compete Clauses
In May of 2023, the GC issued a memo (GC 23-08) in which she took the position that subjecting employees to non-compete clauses generally violates the National Labor Relations Act (“NLRA”). The reasoning in that memo is that the existence of such clauses prohibits or chills certain protected activities, including collectively threatening to resign to secure better working conditions, actually collectively resigning to secure better working conditions, soliciting coworkers to work for a competitor as part of a broader course of protected activity, and salting.
The memo released today elaborates on the prior memo by further explaining the GC’s position on what kinds of remedies should be ordered for individuals subjected to illegal non-compete clauses.
Normally, when an employer maintains illegal rules, e.g. a rule prohibiting workers from posting about their job on social media, the NLRB orders the employer to rescind the rule and post a notice informing employees that the rule has been rescinded. In today’s memo, the GC indicates that, in addition to these rescission and notice-posting remedies, she intends to pursue financial remedies to compensate employees for foregone wages due to lost job opportunities and for post-employment costs incurred by complying with a non-compete clause.
In order to receive relief for lost job opportunities, an employee must show that (1) there was a vacancy for a better-paying job, (2) they were qualified, and (3) they were discouraged from applying or accepting the job due to the non-compete clause. If they can show such a thing, the employer must compensate for the difference in pay or benefits.
Post-employment costs someone might incur by complying with a non-compete clause include longer periods of unemployment, accepting lower-paying jobs outside their industry, relocation costs, or retraining costs.
Stay-or-Pay Rules
The bulk of today’s memo is dedicated to outlining a framework for assessing the lawfulness of various kinds of “stay-or-pay” provisions. A brief summary of this part of the memo is below:
Stay-or-pay provisions require employees to pay their employer if they separate from employment within a certain timeframe. These can take various forms like training repayment agreements, educational repayment contracts, quit fees, damages clauses, and sign-on bonuses tied to mandatory stay periods.
The memo argues that stay-or-pay provisions can interfere with employees' Section 7 rights under the NLRA by discouraging union organizing and other protected concerted activities.
Stay-or-pay provisions are presumed unlawful unless they meet specific criteria: a) They must be voluntarily entered into in exchange for a benefit. b) They must have a reasonable and specific repayment amount. c) They must have a reasonable "stay" period. d) They must not require repayment if the employee is terminated without cause.
Types of stay-or-pay provisions that likely violate the NLRA:
Provisions tied to mandatory training
Quit fees or damages clauses solely aimed at employee retention
Provisions with repayment amounts greater than the cost of the benefit provided
Provisions with unreasonably long stay periods
Provisions requiring repayment even if the employee is terminated without cause
Provisions that are not voluntary or do not specify the repayment amount upfront
Types of stay-or-pay provisions that may be lawful if they meet all criteria:
Provisions for optional training or educational opportunities
Provisions for cash payments like relocation stipends or sign-on bonuses, if employees have the option to defer receipt until the end of the stay period
Provisions for subsidies covering the cost of classes necessary to obtain or maintain mandatory credentials, if the classes can be taken from any third-party vendor
The General Counsel provides a 60-day window for employers to cure existing stay-or-pay provisions that don't meet the new criteria, and outlines circumstances where they will decline to issue complaints for certain preexisting arrangements.
The GC’s Stay-or-Pay Analysis is Flawed
Although the GC’s continued crackdown on these coercive clauses is welcome, her approach to stay-on-pay provisions is conceptually mistaken and does not go far enough.
As indicated in the summary above, the GC has decided to create a framework that distinguishes between certain “voluntary” stay-or-pay provisions, which she says are legal, and other kinds of stay-or-pay provisions, which she says are illegal. Her reasoning for allowing these “voluntary” stay-or-pay provisions is as follows:
In order to minimize any infringement on employee rights, entering into a stay-or-pay provision must be fully voluntary—meaning that employees must be permitted to freely choose whether to do so and may not suffer an undue financial loss or adverse employment consequence if they decline—and must be in exchange for a benefit conferred on the employee. Ensuring that employees choose, of their own free will, to enter into such provisions is essential to minimizing any interference with Section 7 rights. If a stay-or-pay arrangement is optional, employees who are worried about retaliation for engaging in protected activity may opt not to enter into such an arrangement, thereby allowing them to exercise their statutory rights as freely as any other employee. In contrast, if employment is conditioned on a stay-or-pay arrangement, employees have no ability to preserve their Section 7 rights in this manner.
The problem with this reasoning is that it is in tension with the point that workers may not waive their right to engage in protected activity. Metro Networks, 336 NLRB 63, 66 (2001); Mandel Security Bureau, Inc., 202 NLRB 117, 119 (1973) (The “future rights of employees as well as the rights of the public may not be traded away in this manner.”). These “voluntary” stay-or-pay provisions do not directly waive the right to engage in protected activity but they do create financial coercion that can and will prevent people from engaging in protected activity.
The bolded part of the quote above is where the GC’s reasoning goes off the rails. Sure, a worker who is currently “worried about retaliation for engaging in protected activity” may refrain from entering into one of these agreements. But what about workers who are not currently worried about such retaliation but will become worried about it in the future? Most workers who sign these stay-or-pay agreements will do so without ever contemplating whether they will subsequently want to engage in protected activity and what effect the stay-or-pay provision will have on their ability to do so. Only later will they find themselves thinking about participating in protected activity, at which point they will already be bound by a “voluntary” stay-or-pay agreement that coerces them from doing so.
Even if the GC were unconcerned about the effect these “voluntary” stay-or-pay agreements have on the future rights of the workers who enter into them, she should still be concerned about the effect they have on the rights of other workers who do not enter into these agreements. For these other workers to engage in protected activity, they need to be able to concert with their coworkers. But if their coworkers are subject to “voluntary” stay-or-pay agreements that are coercing them away from participating in collective worker action, then that makes it more difficult or even impossible for these other workers to achieve the necessary concertedness. This, of course, is what is meant by trading away “public rights” and it’s why it is generally not allowed.