On October 7, 2024, the National Labor Relations Board’s (Board) General Counsel (GC), Jennifer Abruzzo, issued a sweeping memorandum that expands on her position that the use and enforcement of most non-compete provisions violate the National Labor Relations Act (Act). Building on a memorandum she issued about non-compete provisions in May 2023, the GC urges the Board to provide expansive, “make-whole relief” for any employees harmed by unlawful non-compete agreements. In a significant development, the GC also declares stay-or-pay provisions presumptively unlawful, outlines four factors a stay-or-pay provision must satisfy to overcome that presumption, grants employers until December 6, 2024, to cure any preexisting stay-or-pay provisions that do not satisfy one or more of those factors, and urges make-whole relief for those harmed by unlawful stay-or-pay provisions.
The GC’s memorandum is based on her position that most non-compete provisions and many stay-or-pay provisions are unlawful because they infringe on employees’ Section 7 rights (e.g., the right to engage in concerted activity for employees’ mutual aid or protection, organize a union, and bargain over the terms and conditions of employment). Section 7 of the Act covers most non-supervisory employees working in the private sector – whether unionized or not. Consequently, if the Board adopts the GC’s positions, it could potentially impact a variety of employment agreements, non-compete agreements, repayment plans, offer letter terms, bonus plans, and workplace policies that private sector employers may have in place.
Proposal for Remedying Unlawful Non-Compete Provisions
In the memorandum’s first section, the GC urges the Board to provide make-whole remedies to any employees who have been harmed by an employer’s unlawful non-compete provisions, even if an employer has not attempted to enforce those provisions against any employees. The GC argues that the Board’s traditional remedies in non-compete cases (such as rescission and remedies to unwind discipline or legal actions) are not sufficient to address the “self-enforcing” effect that occurs when current and former employees forego certain opportunities or incur certain costs out of fear of breaching their non-compete obligations.
To address this perceived gap, the GC urges the Board to provide make-whole relief in cases involving unlawful non-compete provisions and instructs the Board’s regional offices on the process they should follow to seek such relief. The GC’s proposals include the following:
- Where a finding is made that an employer has maintained an unlawful non-compete provision, regional offices should permit employees to come forward during the notice-posting period and establish they were deprived of a better job opportunity as a result of the non-compete provision. Employees can do so by demonstrating that during the relevant limitations period: (1) there was a vacancy available for a job with a better compensation package; (2) they were qualified for the job; and (3) they were discouraged from applying for or accepting the job because of the non-compete provision. The GC contends that if an employee satisfies these criteria, “the employer must compensate that employee for the difference (in terms of pay or benefits) between what they would have received and what they did receive.” She also takes the position that any “uncertainty” about whether the employee would have been hired by another employer, the salary they would have earned, or their exact start date should be resolved in favor of the employee.
- Former employees (even those who resigned or were lawfully terminated) should be given an opportunity to demonstrate the type of damages outlined above, as well as any “additional harms or costs” they incurred as a result of the unlawful non-compete provision. The GC’s examples of other harms or costs include recovery for lost wages if the employee was out of work for longer than necessary; recovery to make the employee whole for reduced wages and benefits if the employee was required to take a job with a lower compensation package; moving-related costs incurred due to a provision’s geographical restrictions; and retraining costs incurred due to a provision’s restrictions on working in a particular industry.
- The GC recommends that the Board amend its standard notice posting to “solicit” relevant information from current and former employees during the notice-posting period. According to the GC, the amended notice should be mailed to current and former employees and it should: (1) alert employees they may be entitled to a differential (in terms of wages or benefits) if they were discouraged from pursuing or unable to accept other job opportunities due to the non-compete provision; (2) notify former employees they may be entitled to compensation if they had difficulty securing comparable employment due to the non-compete provision or incurred other costs such as moving or retraining expenses; and (3) direct individuals to contact the regional office during the notice-posting period if they have relevant information regarding these topics.
- Where an employer brings a breach of contract or similar action against an employee based on an unlawful non-compete provision, the GC contends that employers must not only retract the legal action, but must also reimburse employees for their related legal fees and costs.
Significantly, the GC takes the position that similar make-whole relief is warranted where an employer maintains an “anti-moonlighting” provision that discourages employees from pursuing or accepting a second job.
Proposed Framework for Evaluating Stay-or-Pay Provisions
In the second part of her memorandum, the GC addresses employers’ stay-or-pay provisions. “Stay-or-pay” is a term of art associated with agreements that require an employee to pay (or reimburse) their employer if the employee separates from employment within a certain timeframe. Such provisions often are included in training repayment agreements, relocation assistance agreements, educational or tuition assistance agreements, sign-on bonus or other bonus agreements, and employment agreements that include quit fees, damages clauses, or other types of cash payments tied to a mandatory stay period.
Declaration that Stay-or-Pay Provisions Are Presumptively Unlawful. In her memorandum, the GC states her position that like non-competes, stay-or-pay provisions infringe on covered employees’ rights under the Act because they “both restrict employee mobility, by making resigning from employment financially difficult or untenable, and increase employee fear of termination for engaging in activity protected by the Act.” Accordingly, the GC urges the Board to find that “any provision under which an employee must pay their employer if they separate from employment, whether voluntarily or involuntarily, within a certain timeframe is presumptively unlawful.”
Opportunity for Employer Rebuttal. The GC explains that employers may rebut the presumption that a stay-or-pay provision is unlawful by proving that it advances a legitimate business interest and is narrowly tailored to minimize any infringement on employees’ rights. To do so, the GC takes the position that employers must establish the provision satisfies each of the four factors listed below.
1. Voluntarily entered into in exchange for a benefit. Employment or continued employment cannot be conditioned on an employee’s agreement to accept the provision and an employee may not suffer an undue financial loss or adverse employment consequence if they decline the provision. With respect to training and educational repayment agreements, the GC acknowledges that a stay-or-pay provision may be lawful if the training or education is truly optional; however, she contends this would not be the case if the repayment obligation relates to mandatory training provided by the employer (e.g., orientation sessions, on-the-job training, and other specific instruction required by the employer).
The GC also takes the position that relocation stipends, sign-on bonuses, and other cash payments tied to a stay-or-pay provision are not voluntary unless “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 time period.” Significantly, she expressly rejects the possibility of employers satisfying the “voluntary” factor by allowing employees the option to decline a cash payment outright (in lieu of deferring the payment), noting that such a “choice” for the employee would be illusory and no reasonable employee would decline the payment.
2. A reasonable and specific repayment amount. The amount must be no greater than the cost to the employer and the employee must be informed of the specific debt or repayment amount before assuming the stay requirement.
3. A reasonable stay period. Whether a stay period is reasonable is fact-specific and depends on factors such as “the cost of the benefit bestowed, its value to the employee, whether the repayment amount decreases over the course of the stay period, and the employee’s income.” The GC notes that the length of the “stay” period should be proportional to the value of the benefit.
4. No repayment required if terminated without cause. Stay-or-pay provisions are lawful only if they effectively state that an employee will not have to pay the debt or repayment amount if the employee is terminated without cause.
Proposal for Remedying Unlawful Stay-or-Pay Provisions
Similar to her proposals for remedying unlawful non-compete provisions, the GC urges the Board to provide make-whole relief in cases involving unlawful stay-or-pay provisions, including those in place before she issued her memorandum. The GC’s proposals include the following:
- Where a stay-or-pay provision was voluntarily entered into with informed consent, but it is not narrowly tailored in the ways described above (e.g., repayment is required even if the employer terminates the employee without cause), the employer will be required to rescind the unlawful provision and replace it with a lawful version. Other remedies may be required in certain cases.
- Where an employer proffers or maintains a stay-or-pay provision that is not voluntary, is offered without disclosing the repayment amount, or is offered without giving employees a deferral payment option, the Board should require the employer to rescind the provision, erase employees’ debt or repayment obligations, and notify employees that the stay obligation has been eliminated and that any debt has been nullified and will not be enforced against them.
- Where an employer attempts to enforce an unlawful stay-or-pay provision against an employee (e.g., in a legal or collection action), the employer should be required to retract the enforcement action and make employees whole (e.g., reimbursing employees for any legal fees or other fees and costs; taking steps to correct any adverse effects on employees’ credit ratings; and compensating employees for other pecuniary harms).
- As with the proposed remedies outlined above for unlawful non-compete provisions, the GC takes the position that because stay-or-pay provisions indirectly make resignation financially difficult or untenable, employees who establish they were discouraged from pursuing or accepting a better job as a result of an unlawful stay-or-pay provision should be compensated for the difference in pay or benefits. Employees can do so by demonstrating that: (1) there was a vacancy available for a job with a better compensation package; (2) they were qualified for the job; and (3) they were discouraged from applying for or accepting the job because of the stay-or-pay provision. The GC also similarly recommends amendments to the Board’s standard notice posting to solicit relevant information from current and former employees subject to an unlawful stay-or-pay provision.
Option to Cure Preexisting Stay-or-Pay Provisions By December 6, 2024
The GC explains she will grant employers a 60-day window to cure any preexisting stay-or-pay provisions that otherwise advance legitimate business interests. The GC notes that although some existing stay-or-pay provisions cannot be conformed to the standards she has proposed (e.g., the provision was not voluntary), she does not plan to pursue cases where the preexisting provision involved an upfront cash payment such as a bonus or relocation stipend or financial assistance towards optional training or education – so long as any provisions that do not satisfy the other three factors described above are cured by the end of the 60-day cure period. The GC cautions that except as outlined in her memorandum, she plans to prosecute preexisting stay-or-pay arrangements that fail to satisfy her proposed 4-factor test and seek retroactive application.
Practical Considerations for Employers
The GC’s memorandum is not binding on the Board’s consideration of non-compete or stay-or-pay provisions or the remedies the Board may fashion for provisions it deems unlawful. Nonetheless, given the GC’s scrutiny of such provisions (as well as the increased scrutiny of such provisions by other government agencies and legislatures), we recommend that private sector employers closely review their non-compete and stay-or-pay provisions and consult with their labor and employment counsel to determine if any changes are recommended. Employers who wish to take advantage of the 60-day cure period to conform any existing stay-or-pay provisions to the GC’s new proposed standards will need to act quickly to ensure those changes are made and employees are notified before the cure window expires on December 6, 2024.