Non-compete, Arbitration, and Other Typical Provisions Face Enforcement Actions

New pro-employee initiatives continue to come from the National Labor Relations Board (“NLRB”), the Federal Trade Commission (“FTC”), and federal and state legislatures, resulting in enforcement actions. Employers should consider updating their forms of employment agreements, restrictive covenants, and separations agreements to make them more ironclad.

Non-Compete Agreements
Non-compete agreements require former employees to refrain from accepting new employment opportunities in a similar line of work as the former employer or establishing a competing business, for a specified period of time, and within a specific geographic area. The purpose of the non-compete agreements are to protect employers’ legitimate business interests, shielding them from unfair competition with employees who had access to, among other things, confidential business information during their employment with the employer.

Last month, the General Counsel for the NLRB issued a memorandum titled, “Non-Compete Agreements that Violate the National Labor Relations Act [(“Act”)]” (“GC 23-08”). In GC 23-08, the General Counsel argues that – except in limited circumstanced –  the proffer, maintenance, and enforcement of non-compete agreements violate the Act. She reasoned that when employees are subject to non-compete agreements, they know that they will have greater difficulty replacing their lost income if they are discharged for exercising their rights under the Act. Accordingly, employees are less likely to engage in protected activity when they are subject to non-compete agreements and are chilled from exercising their rights. 

The NLRB is not the only federal agency with non-compete agreements in its crosshairs. As we reported on here, earlier this year, the FTC announced a proposed rule banning non-compete clauses in employment agreements. This ban would prohibit employers from entering into or enforcing non-competes with employees or independent contractors and require employers to nullify existing restrictions within six months. The FTC received so many comments on the proposed rule that it extended the comment dates into April 2023. The FTC is expected to issue a final rule in April 2024.

Non-compete agreements have also been the target of federal legislation.  Pending legislation on the issue includes: the Workforce Mobility Act of 2023 (HB 731) (SB 220) (banning non-compete agreements with limited exceptions for the sale of a business or dissolution of a partnership),  the Ensure Vaccine Mandates Eliminate Non-Competes Act (“EVEN”) (HB 731) (voiding existing non-compete agreements for employees fired for not complying with an employer’s COVID-19 vaccine mandate and other purposes); and the Freedom to Compete Act (SB 379) (banning non-compete agreements as to any employees who are not exempt under the Fair Labor Standards Act). The Workforce Mobility Act of 2023 and the Freedom to Compete Act have bipartisan support. Of note, the Workforce Mobility Act of 2023 would task the FTC and the Department of Labor (“DOL”) with enforcement of the prohibition on non-compete agreements, as well as create a private right of action in federal courts.

While the NLRB, FTC, and the proposed Workforce Mobility Act of 2023 are aggressively looking to eliminate non-compete agreements, some jurisdictions have taken softer approaches to limiting their use. A number of jurisdictions have imposed dollar amount thresholds that an employee must earn in order for an employer to obtain non-compete agreements from them.  These states include: Colorado (effective Aug. 10, 2022), Illinois (effective Jan. 1, 2022), Maine (effective Sept. 18, 2019), Maryland (effective Oct. 1, 2019), Massachusetts (effective Oct. 1, 2018), New Hampshire (effective July 10, 2019), Oregon (effective Jan. 1, 2022), Rhode Island (effective Jan. 15, 2020), Virginia (effective July 1, 2020), Washington (Jan. 1, 2020), and Washington, D.C. (effective Oct. 1, 2022). Michigan, HB 4399, and Iowa, SB 304, have pending legislation setting similar dollar threshold amounts for the use of non-compete agreements.

Not all jurisdictions have chosen this more moderate route though. Minnesota, North Dakota, Oklahoma, and California have significantly more restrictive laws already on the books. On May 24, 2023, the Minnesota Governor signed into law an act that bans the use of non-compete agreements except for those “agreed upon during the sale of a business” or “agreed upon in anticipation of the dissolution of a business.” The law is set to take effect on July 1, 2023, and will apply to agreements entered into on or after that date. The law will not have a retroactive effect on already existing non-compete agreements. North Dakota has a similar ban with narrow exceptions for the sale or dissolution of a business or partnership. In Oklahoma, non-compete agreements cannot prohibit former employees from working in the same or similar businesses as the former employer, but does tolerate restrictions regarding the former employee’s solicitation of the former employer’s established customers. In California, non-compete agreements are not enforceable against former employees. And Massachusetts has pending legislation, SB 1192, that if passed, would similarly render employment noncompetition agreements void and unenforceable.

Other Provisions in Agreements
Non-competes are not the only agreements under attack, as non-disparagement, arbitration, and other provisions in agreements have been subject to scrutiny by the NLRB as well. As we reported on here, the NLRB’s recent McLaren Macomb decision found that the inclusion of confidentiality and non-disparagement provisions in separation agreements violated the Act. Now, in a recently filed complaint against United Wholesale Mortgage LLC (“UWM”), the NLRB alleges that non-disparagement, arbitration, and other provisions in an employment agreement similarly violate the Act. 

In the UWM case, there was a standard non-disparagement clause in the employment agreement. The provision stated that the “Employee will not (nor will Employee cause or cooperate with others to) publicly criticize, ridicule, disparage or defame the Company . . . including, but not limited to, any statements made via websites, blogs, postings to the internet, or emails.” The NLRB alleges that that this provision is unlawfully calculated to cause employees and former employees to refrain from engaging in protected and concerted activity.

The UWM case also involves a challenged arbitration provision. The NLRB alleges that the terms of the arbitration provision “interfere with employees’ access [to the NLRB as well as] employees’ right to file and pursue unfair labor practice charges.” The NLRB alleges this despite the fact that the agreement clearly stated that, “[n]othing in this agreement . . . shall be interpreted to limit or interfere with your right to report good faith suspected violations of law to applicable governmental agencies, including . . . [the] National Labor Relations Board.” This is not the first instance that the General Counsel has taken issue with arbitration agreements.  In General Counsel Memorandum 21-04 (“GC 21-04”), the General Counsel identified Cordua Restaurants, Inc., 368 NLRB No. 43 (2019), as precedent that she was looking to ask the Board to overturn. In Cordua Restaurants, Inc., the Board found that the promulgation of arbitration agreements in response to employees engaging in protected concerted activity did not violate the Act. Any cases that come through involving this issue will be prosecuted in the hopes of overturning the precedent.

Additionally, in the UWM case, the NLRB alleges that the return of company property and information, media inquiries, and social media provisions are overly broad and violate the Act. These provisions are similar to the handbook rules that have been subject to scrutiny under by the Board for some time. 

As a remedy in the UWM case, the NLRB is asking the Board to order UWM to rescind all employment agreements that were executed, enforced, or in effect at any time since December 21, 2021. The NLRB is also seeking an order that UWM advise all current and former employees in writing that the agreements have been rescinded and that they are released from the agreements’ obligations.

Employer Considerations
Many standard forms of agreements are subject to increasing scrutiny under the current administration. If your business is currently using employment, non-compete, and/or separation agreements, you will want to talk to an attorney about whether they are sufficiently tailored to avoid costly enforcement litigation. If you have any questions, please feel free to connect with a Honigman Labor and Employment Attorney here.