On October 7, 2024, the National Labor Relations Board’s (NLRB) General Counsel issued new guidance detailing the following: 1) employers’ potential liability for non-competition agreements found to be unlawful, and 2) the unenforceability of so-called “stay or pay” agreements between employers and employees. Although the NLRB’s guidance does not carry the force of law like a federal or state statute or regulation, this guidance further evidences the NLRB’s steps to limit employers’ rights to contract with employees regarding certain terms and conditions of employment. With this in mind, employers must continue to review their employment agreements and determine whether they are susceptible to potential liability moving forward.
A. Employer Liabilities for Unlawful Non-Competition Agreements
In May 2023, the NLRB’s General Counsel issued guidance that she would instruct NLRB hearing officers to find non-competition agreements unenforceable, unless they were narrowly tailored to protect specific employer interests. Namely, the General Counsel stated that that non-competition agreements harmed an employee’s ability to improve their financial standing, and unlawfully restricted an employee’s ability to exercise their rights pursuant to the National Labor Relations Act (NLRA). However, until now, the NLRB did not provide an opinion regarding available damages if they found a non-competition agreement to be unenforceable.
With its new guidance, the NLRB advises that an employer’s decision to rescind a non-competition agreement is not enough to make an employee whole. For example, the new guidance permits employees to recover certain damages incurred because they could not obtain a “better” job opportunity as a result of their non-competition agreement. This may now mean that employees who establish that 1) job vacancies with better wages and benefits were available; 2) they were qualified for that vacancy; and 3) they were discouraged from applying for or accepting that vacancy because of the non-competition agreement may recover the difference between their existing pay and benefits and the potential pay and benefits lost because of the non-competition agreement.
Further, the same employees may also recover lost wages and re-training expenses if they can establish that they were out of work for a “longer” period of time or if they accepted a “lesser” position outside of their industry because of their non-competition agreement. Employees who establish that they had to take a position outside of their geographic area set forth in a non-competition agreement may also be entitled to recover moving and re-location costs and cost of living differences.
The NLRB’s guidance provides employees with the potential to recover significant damages arising from non-competition agreements unless those agreements are narrowly tailored to protect an employer’s confidential information, trade secrets, and goodwill. Employers bear the burden to establish that their agreements are narrowly tailored and, therefore, should take the time to closely evaluate their risks. Employers should also consider whether other restrictive covenants such as non-solicitation and non-disclosure agreements may protect their business interests since the NLRB has not limited the enforceability of these agreements to the same extent. Where employers require non-competition agreements, employers should closely consider the duration and geographic limitation restrictions as well as the definition of competitive businesses so that the non-competition provisions are as least restrictive as possible.
Not only are non-competition agreements trending toward complete unenforceability, but until that time arrives, employers’ liability is also increasing.
B. “Stay or Pay” Agreements Will Now Be Closely Scrutinized
For the first time, the NLRB issued guidance limiting the enforceability of so-called “stay or pay” agreements. A “stay or pay” agreement includes, for example, education assistance, training and certification “tuition,” relocation stipends, sign-on bonuses, or other compensation that are conditioned upon an employee’s remaining employed with the employer for a set period of time. Under these agreements, if the employee fails to stay with the employer for the agreed upon period, regardless of the reason for leaving, then the employee is required to return the tuition assistance, stipend, sign-on bonus, or other conditional compensation.
The new guidance provides that these “stay or pay” agreements have a tendency to interfere with or restrain an employee’s rights under the NLRA because employees may hesitate to question the terms and conditions of their employment or leave their employer for a “better” job opportunity for fear of losing the tuition assistance or sign-on bonus. Therefore, moving forward, the NLRB advises that “stay or pay” agreements will be unlawful where they 1) are not voluntarily entered into by the employee for a benefit; 2) are not reasonable with a specific re-payment amount; 3) do not include a reasonable stay period; and 4) do require re-payment if an employee is terminated without cause.
Employers who use offer “stay or pay” agreements will want to consider the following as they review their policies and agreements:
- Do employees have the option to reject the “stay or pay” agreement and still keep their job? If no, the agreement is likely to be found invalid.
- Do employers require employees to reimburse employers for any payments above and beyond the costs to the employer? If yes, the agreement is likely to be found invalid.
- Do employees have advanced notice of the specific amount to be re-paid? If no, the agreement is likely to be found invalid.
- Is the “stay” period reasonable? The NLRB does not define “reasonable,” but the longer the period that the employee must remain with the employer after the completion of the activity for which the employer paid, then the less reasonable the “stay” period will be.
- Do employers expect reimbursement where employees are terminated without cause or if they resign? If yes, then the agreement is likely to be found invalid.
Many employers rely upon “stay or pay” provisions to attract and maintain their investments in talent. However, these once non-controversial agreements may now become subject to stricter scrutiny. As a result, employers who offer these arrangements should evaluate whether they have legitimate business reasons to support them and review the scope of these agreements to ensure that they are narrowly and appropriately tailored. Overly broad “stay or pay” agreements will likely be unenforceable and may subject employers to damages similar to those available under the NLRB’s guidance related to non-competition agreements.
We will continue to monitor developments relating to this guidance to provide additional updates. Employers with questions are encouraged to contact an employment attorney at Kenney & Sams.
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