Non-Compete and Non-Solicitation Agreements Under Attack!
by Katherine M. Flett
Soon companies may be prohibited or severely limited from using employee non-compete and non-solicitation agreements. The Federal Trade Commission’s (FTC) January 2023 proposed Non-Compete Clause Rule would prohibit employers from using non-compete agreements with any employee or independent contractor, paid or not, with very limited exceptions. The proposed rule is retroactive requiring employers to rescind all existing non-compete agreements and notify workers that these agreements are no longer in effect.
The FTC’s proposed rule does not prohibit customer or employee non-solicitation agreements unless they are overly broad. The proposal indicates that eradicating non-compete agreements is a priority for the FTC. The vote is scheduled for April 2024 and will likely be subject to extensive litigation if passed.
In May 2023, Jennifer Abruzzo, the National Labor Relations Board (NLRB) General Counsel, issued a memorandum stating that offering, upholding, and enforcing non-compete agreements may interfere with Section 7 of the National Labor Relations Act (NLRA). Employees could interpret the agreements as creating a lack of employment mobility by denying them the ability to quit or change jobs or by blocking access to other employment opportunities. Non-compete agreements could be lawful if they are narrowly tailored and only restrict individuals’ managerial or ownership interests in competing businesses or true independent contractor relationships. According to the memorandum, the NLRB will focus on pursuing enforcement actions against employers utilizing non-compete agreements.
While the memorandum does not expressly prohibit non-solicitation agreements, a recent NLRB complaint filed against medical spa Juvly Aesthetics clarified Abruzzo’s opinion that employee and customer non-solicitation agreements violate the NLRA. The complaint alleges that Juvly Aesthetics violated the NLRA by requiring its employees to enter into an agreement prohibiting departing employees from hiring current/former employees while employed by the spa and for 24 months following the end of employment. They cannot solicit the spa’s customers, own or invest in competitive spa/medical businesses, or practice certain aesthetic services within a 20-mile radius of the spa’s locations. Any employee who breaches the agreement or leaves before one year of employment must reimburse the company for any training costs.
The NLRB alleges that the spa’s agreements and related policies violate the NLRA by interfering with, restraining, and coercing employees in the exercise of their rights guaranteed in Section 7. It also alleges that the spa unlawfully attempted to enforce its liquidated damages provision against former employees for violating the non-compete provisions. Abruzzo seeks an order requiring the spa to rescind its non-compete, non-solicitation, and other allegedly unlawful policies and agreements and make the former employees whole.
Note that the complaint only represents Abruzzo’s position on these agreements; it is not the official position of the NLRB. While the NLRB’s General Counsel can instruct Regional Directors to pursue complaints advocating for said position, it remains to be seen whether the NLRB will adopt this position, and, if so, whether the courts would uphold it.
Neither the FTC’s proposed rule nor the NLRB General Counsel’s position are law, but it is clear that these provisions are under attack. To stay ahead of the legal/regulatory trends, employers should review their current agreements with counsel.
Katherine M. Flett is a member of the litigation team whose primary focus is on assisting clients in insurance defense, business litigation, employment law, transportation and trucking law, and bankruptcy matters. Katherine can be reached at 314.889.7182 or kflett@dmfirm.com.