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Could non compete clauses be going out the window?

Noncompete Clauses Violate Labor Law, NLRB Lawyer Says

Memo giving regional offices guidance follows the FTC’s proposal to ban most noncompete agreements

By Lauren Weber, WSJ

May 30, 2023 6:09 pm ET

The Federal Trade Commission proposed a new ban on noncompete clauses, which the agency says hurts workers and competition. Companies argue they protect trade secrets. WSJ breaks down what a federal ban could mean for workers and businesses. Photo illustration: Jacob Reynolds

Noncompete clauses violate the federal law that governs union organizing and workers’ rights to collective action, according to a memo released Tuesday by the top lawyer for the National Labor Relations Board.

The memo by Jennifer Abruzzo, the agency’s general counsel, was sent Tuesday to field staff and regional directors whose job is to enforce the National Labor Relations Act by, among other things, investigating workers’ and unions’ complaints regarding unfair labor practices.

Noncompete clauses, which typically bar workers from taking jobs with rival companies for a period, interfere with workers’ ability to retain their bargaining power in labor disputes and with their right to collectively change jobs or threaten to change jobs in search of better working conditions, among other things, Abruzzo wrote.

The change aligns with actions from other agencies, most notably the Federal Trade Commission, which will soon release a final rule based on its January proposal to ban all or most noncompete clauses. Such clauses affect nearly one in five American workers, according to the agency.

Many companies say noncompete agreements are necessary to protect trade secrets, which can include confidential information such as customer data as well as intellectual property such as technical formulas and processes. The U.S. Chamber of Commerce has said that courts provide an adequate avenue for determining when noncompete clauses are abusive.

Long associated with higher-paid managers, the clauses also have been imposed on lower-wage workers such as security guards, baristas, hairstylists and others who lack access to trade secrets, confidential information or strategic plans. The FTC estimates that getting rid of noncompetes would increase employee earnings annually by as much as $296 billion.

Abruzzo’s memo suggests that noncompete clauses should be prohibited in most circumstances because they violate or chill workers’ right to act collectively. For example, workers subject to noncompete clauses would see a threat to resign collectively as futile given their inability to accept new jobs in their chosen fields.

The memo itself doesn’t create a binding rule for employers. But staff members in NLRB offices around the country can submit cases to Abruzzo’s office challenging noncompete clauses, she wrote, and if a case comes before the five-member board and a majority agrees with her interpretation, the case will become binding precedent. Board decisions can be appealed to U.S. Court of Appeals, and ultimately to the U.S. Supreme Court.

Tuesday’s development continues a drive toward expansion of employee rights under Abruzzo, the current board and other agencies that have a say in labor issues, said Mike Lotito, a management-side lawyer with Littler Mendelson and co-chair of the firm’s Workplace Policy Institute.

“It’s an all-out assault by this administration on noncompetition clauses, and further evidence that Ms. Abruzzo will continue to push the boundaries of what the NLRA was designed to cover,” he said.

There are rare circumstances when noncompete clauses should be allowed, Abruzzo said in the memo, including when they apply to independent contractors or to individuals’ ownership interests in a competing business.

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