On October 7, 2024, the General Counsel of the National Labor Relations Board (“NLRB”) issued a memorandum (the “Memorandum”) to all NLRB Regional Directors, Officers-in-Charge, and Resident Officers (i) expanding upon the General Counsel’s previous conclusion in a May 30, 2023 memorandum (See NLRB Non-Compete Alert dated June 13, 2023) that most non-compete provisions contained in employment agreements and severance agreements violate the National Labor Relations Act (the “Act”), (ii) concluding that so called “stay-or-pay” provisions, under which an employee is obligated to pay their employer if they separate from their employment, also violate the Act, and (iii) outlining the framework that the General Counsel will use to assess the lawfulness of stay-or-pay provisions.

Non-Compete Provisions:

The General Counsel instructed NLRB regional offices that “where an employer has maintained an unlawful non-compete provision, the harmful financial effects caused by current employees’ and former employees’ attempts to comply with the provision must be remedied.” As such, NLRB regional offices are instructed to seek monetary make-whole remedies when employees demonstrate that they did not pursue or accept a better job opportunity because of an unlawful non-compete provision. The General Counsel states that, to be entitled to this make-whole relief, an employee must show 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 non-compete provision.”

The General Counsel also instructed NLRB regional offices that former employees may also be entitled to make-whole relief if they can demonstrate that, in an effort to comply with an unlawful non-compete provision, the former employee forewent employment, took a position with lower pay, relocated outside of the restricted geographic area, or incurred costs associated with retraining to move into a different industry.

If the employer attempts to enforce an overbroad non-compete provision, either through discipline or legal action, the General Counsel urges the NLRB to dismiss the enforcement action and order the employee made whole, “including by reimbursing employees for legal fees and costs expended in defending against such actions.”

The Memorandum also recommends that the NLRB amend its standard notice posting to solicit information from employees to include:

(1) alerting 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 non-compete provision;

(2) notifying employees that they may be entitled to other compensation if they separated from employment and had difficulty securing comparable employment due to the non-compete 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 jobs in a different industry; and

(3) including language directing individuals to contact the Regional office during the notice-posting period if they have evidence related to (1) or (2).

Stay-or-Pay Provisions:

Next, the Memorandum addresses stay-or-pay provisions and the General Counsel’s position that many commonly used stay-or-pay provisions are unlawful. The Memorandum defines stay-or-pay provisions as agreements under which employees must pay their employer if they voluntarily or involuntarily separate from employment. Examples of such provisions include training repayment agreement provisions (but excluding repayment agreements associated with Registered Apprenticeship Programs subject to regulation under the National Apprenticeship Act of 1937), educational repayment contracts, quit fees, damages clauses, sign-on bonuses or other types of cash payments tied to a mandatory stay period. The General Counsel’s position is that, like non-compete agreements, stay-or-pay provisions effectively reduce or restrict employee mobility and increase employee fear of termination for engaging in activities protected by the Act.

The Memorandum states 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.” Employers may then rebut this presumption by demonstrating that the stay-or-pay provision advances a legitimate business interest and is narrowly tailored to minimize infringing upon an employee’s Section 7 rights by showing that the provision:

(1) is voluntarily entered into in exchange for a benefit;

(2) has a reasonable and specific repayment amount;

(3) has a reasonable “stay” period; and

(4) does not require repayment if the employee is terminated without cause.

Based on the Memorandum, all four requirements must be met for the stay-or-pay provision to be lawful under the Act. Critically, even where the employee voluntarily enters into the stay-or-pay agreement, the General Counsel argues that if the provision violates the Act because it is not otherwise narrowly tailored in one or more ways discussed above, the NLRB should still rescind and replace the offending language and assess make-whole remedies like those discussed above in the non-compete section.

With respect to stay-or-pay provisions entered after October 6, 2024, the above framework for analyzing the legality of the provision under the Act is effective immediately. With respect to existing stay-or-pay provisions, the Memorandum provides employers with 60 days to cure (through December 6, 2024), and following the cure period, the General Counsel’s framework will apply retroactively to all stay-or-pay provisions and may be subject to prosecution.

Although the Memorandum does not have the force of NLRB law, it strongly signals the General Counsel’s interpretation of it and the position the NLRB will likely adopt in future decisions. Furthermore, the Memorandum is intended to inform regional offices with respect to enforcement actions, meaning that complaints can and will be issued on stay-or-pay provisions as discussed herein. We recommend reviewing all employment or other agreements containing non-compete clauses and/or stay-or-pay provisions. We also recommend consulting with legal counsel to understand the potential risks and liabilities that may be associated with both non-compete clauses and stay-or-pay provisions moving forward.

If you have any questions regarding this proposed rule, please contact your Labor and Employment counsel at Smith, Gambrell & Russell, LLP.