NLRB Joins the Fray in Crackdown on Restrictive Covenants

Last year, NLRB General Counsel Jennifer Abruzzo issued a memo expressing her view that non-competes and non-solicits could interfere with non-supervisor employees’ exercise of their Section 7 rights. And, last week, in J.O. Mory, Inc., (June 13, 2023), an administrative law judge (ALJ) agreed, finding that the non-competition and non-solicitation provisions in the company’s agreements chilled non-supervisor employees’ rights to engage in protected concerted activity under Section 7 of the National Labor Relations Act (NLRA). The ALJ ordered the employer to rescind these provisions and notify current and former employees who were subject to them that they were no longer in effect.  

In J.O. Mory, employees had agreed that during their employment and for 24 months after termination for any reason, they will not, either directly or indirectly, for themselves or others, solicit, encourage, or attempt to persuade any other employee of their employer to leave the company’s employ. They also agreed to a 12-month non-compete, which barred them from working for a company in the same or similar business as their employer in the county where they worked, as well as in contiguous counties. 

Section 7 of the NLRA gives non-supervisory employees, including those in non-union workplaces: (i) the right to discuss and/or act together to improve terms and conditions of employment, such as salary, bonus, benefits and working conditions, including safety and harassment or discrimination, or to disclose their own contact information or compensation and (ii) the right to decide for themselves if they want to be represented by a union. On their face, the challenged non-compete and non-solicit provisions do not impact Section 7 rights. However, in Stericycle, Inc., 372 NLRB No. 113 (2023), the NLRB adopted a worker rights-friendly standard for determining if neutral polices or rules chill employees’ exercise of their Section 7 rights.  Now, if an economically dependent non-supervisory employee contemplating engaging in Section 7 activity could reasonably interpret the rule or policy to have a coercive meaning, then the rule or policy will be presumptively unlawful, even if a contrary, non-coercive interpretation of the rule is equally reasonable. This is a very low threshold, which means many policies and rules will be deemed presumptively unlawful. The only way for an employer to rebut that presumption is “by proving that the rule advances a legitimate and substantial business interest, and that the employer is unable to advance that interest with a more narrowly tailored rule.”   

Here, applying the Stericycle framework, the ALJ ruled that the restrictive covenants were presumptively unlawful.  With respect to the non-compete, the ALJ determined that the restriction would make an employee more fearful of being fired and less willing to rock the boat because they face the possibility of being unable to work in their geographic area. Turning to the non-solicit, the ALJ found that it would dissuade a reasonable employee from engaging in protected concerted activity, such as telling their coworkers about union wages and benefits out of a reasonable fear that their employer might accuse them of inducing other employees to quit. 

According to the ALJ, J.O. Mory provided no evidence that the non-compete and non-solicit advanced a legitimate business interest making it unnecessary to conduct the second part of the Stericycle analysis. Nevertheless, the ALJ stated that other unchallenged terms of the agreement, including provisions requiring employees to turn over confidential and proprietary information and prohibiting them from trying to divert customers, show that the company’s legitimate business interest could be protected with more narrowly tailored restrictions. 

It is unclear if J.O. Mory will appeal this ALJ decision to the NLRB, but the case demonstrates the expansion of efforts to restrict the use of restrictive covenants entered into by non-supervisor employees. Stay tuned.