NLRB General Counsel Steps Up Remedies for Unlawful Noncompetes and Targets “Stay-or-Pay” Agreements

On October 7, 2024, the National Labor Relations Board’s (NLRB) top prosecutor issued a memo to NLRB regional offices, solidifying the hard line her office will take on noncompete and “stay-or-pay” agreements and calling for greater remedies for employees who may have lost out on a job opportunity for fear of violating an unlawful restrictive covenant agreement. 

New Remedies for Unlawful Noncompete Agreements

In GC Memorandum 25-01, NLRB General Counsel Jennifer Abruzzo reiterated that private sector employers falling under the Act’s jurisdiction who proffer, maintain, or enforce noncompete provisions for their non-managerial workforce violate federal labor law. As detailed in an earlier memo, GC Memorandum 23-08, Abruzzo explained that overbroad noncompete agreements generally violate employees’ rights to engage in lawful activity under Section 7 of the National Labor Relations Act (“the Act”) because these agreements deny workers the ability to change employers by cutting off access to other employment opportunities, unless the noncompetition provision is narrowly tailored to special circumstances justifying the infringement on employee rights, such as legitimate business interests in protecting proprietary or trade secret information. 

In the latest memo, Abruzzo instructed regional offices to permit employees to demonstrate that they were deprived of a better job opportunity as a result of the noncompete provision by showing:

• There was a vacancy available for a job with a better compensation package;
• They were qualified for the job; and
• They were discouraged from applying for or accepting the job because of the noncompete provision.

If an employee can demonstrate these things, Abruzzo will order employers to compensate the employee for the difference between the compensation they did receive and what they would have received during the relevant time period. Likewise, if an employee must relocate to obtain employment in the same industry because of a noncompete agreement, Abruzzo argues that the employee should be compensated for moving-related costs. And, if a former employee can demonstrate that they were out of work for a longer period than they would otherwise have been as a result of a noncompete, they would be entitled to lost wages for that period.

The General Counsel wants to obtain these remedies, not just for the charging party in a particular case, but for any employees or former employees who may have missed an employment opportunity as a result of an unlawful noncompete. In order to obtain this information, Abruzzo recommends that the NLRB amend its standard notice posting – the document employers are required to post in the workplace and/or mail to employees after the NLRB has determined that an employer violated the Act – to reflect the following:

• 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;
• 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, such as by being unemployed longer, accepting a job with a lower compensation package, moving outside the provision’s geographic scope, or incurring retraining costs to become qualified for positions in a different industry; and
• Include language directing individuals to contact the Regional office during the notice-posting period if they have evidence related to (1) or (2).

Abruzzo wants employers to mail the notice to all current and former employees to ensure that anyone subject to the unlawful provision since the beginning of the statute of limitations period (which, under the Act, is generally six months before the service of the charge) will have an opportunity to come forward and seek a remedy from their employer. 

Stay-or-Pay Agreements That Violate the Act

In GC 25-01, Abruzzo targeted “stay-or-pay” agreements – that is, contracts under which an employee must pay their employer if they separate from employment (voluntarily or involuntarily) within a certain timeframe. Abruzzo explained that, like noncompete agreements, stay-or-pay provisions are unlawful because they restrict employee mobility by making resigning from employment financially difficult or untenable, and increase employee fear of termination for engaging in Section 7 activity. Examples of stay-or-pay agreements include:

• Training repayment provisions (often called TRAPs)
• Educational repayment contracts
• Relocation repayment requirements
• Quit fees
• Damages clauses
• Sign-on bonuses or other types of cash payments tied to a mandatory stay period.

The General Counsel said she will urge the Board to find that such agreements are presumptively unlawful. An employer may rebut that presumption by proving that the stay-or-pay agreement advances a legitimate business interest and is narrowly tailored to minimize any infringement on Section 7 rights. Specifically, the provision:

1. Must be voluntarily entered into in exchange for a benefit;
2. Have a reasonable and specific repayment amount, which must not be above the benefit’s cost to the employer and must be disclosed to the employee;
3. Have a reasonable “stay” period (e.g., where the cost of the benefit is larger, the stay period may be longer, and vice versa); and
4. May not require repayment if the employee is terminated without cause.

On the issue of voluntariness, training repayment agreements with a stay-or-pay provision would be lawful only if the training is optional. For example, if an employee needs a certain credential to be eligible for promotion, a stay-or-pay arrangement to finance that undertaking is permissible. Likewise, subsidies to cover the cost of classes or courses necessary to obtain or maintain mandatory credentials for an employee’s current job, such as a degree, license or certification, may be conditioned on a stay-or-pay provision if the classes are selected at the employee’s discretion from a third-party vendor. However, trainings, orientation sessions and other specific instruction mandated by an employer may not be subject to a stay-or-pay agreement.

As it relates to sign-on bonuses or relocation stipends, the General Counsel said that such stay-or-pay provisions can only be considered fully voluntary if employees are given the option between taking an up-front payment subject to a stay-or-pay or deferring receipt of the same bonus until the end of the same period.

Employers Have 60 Days to Comply

Employers will have 60 days from the issuance of the memo – until December 6, 2024 – to bring existing stay-or-pay agreements into compliance with the requirements of GC 25-01. 

Employer Takeaways

Although General Counsel memoranda are not Board law, they give employers a good idea of how the NLRB’s regional offices will handle charges they receive. Abruzzo is clear that she will be looking for cases to use as a vehicle to urge the Democratically-controlled Board to adopt her view on noncompetes and stay-or-pay provisions. Employers should expect noncompete agreements and stay-or-pay contracts to be closely scrutinized if a charging party shares them with the NLRB, and, as a result, employers should consider reviewing existing employment agreements to ensure compliance with GC 25-01.

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Ballard Spahr’s Labor and Employment Group routinely assists employers in ensuring compliance with the National Labor Relations Act, and other state, federal, and local statutes and regulations.

The authors are grateful for the assistance of law clerk Ryan Ricketts in the drafting of this advisory.

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