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Many employers require employees to sign noncompete agreements before, during, or upon separation from employment in an effort to prevent direct competition and protect business interests. This long-standing practice faces increasing resistance from state legislatures, as well as federal agencies like the Federal Trade Commission. The National Labor Relations Board (NLRB) appears poised to join the effort to invalidate such agreements. According to Memorandum GC 23-08 issued by NLRB General Counsel Jennifer Abruzzo on May 30, 2023, most noncompete agreements violate employees’ rights under Section 7 of the National Labor Relations Act (NLRA) and should be deemed unlawful. The guidance applies to both union and nonunion workplaces.

Section 7 of the NLRA protects employees’ right “to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Recent NLRB decisions confirm that employees cannot waive these rights in individual contracts. (See Lake Effect’s prior blog on another NLRB decision and guidance on this issue.)

The General Counsel explains that most noncompete agreements threaten employees’ Section 7 rights because they:

• Chill employees from concertedly threatening to and/or carrying out threats to resign in order to secure better working conditions.
• Chill employees from concertedly seeking or accepting employment with a local competitor to obtain better working conditions.
• Chill employees from soliciting co-workers to go to work for a local competitor as part of a broader course of protected activity.
• Chill employees from seeking employment to specifically engage in protected activity with other workers at an employer’s workplace.

The Memorandum specifies that an employer’s desire to avoid competition does not justify infringing on a former employees’ Section 7 rights. An employer’s interests in retaining employees and/or protecting investments in employee training are likewise insufficient to excuse the chilling effects of broad noncompete provisions.

General Counsel Abruzzo does narrow the scope of her prohibition in two ways. She concedes that noncompete agreements that restrict only an individual’s managerial or ownership interests in a competing business may be lawful under the NLRA. She also notes that employers’ legitimate business interest in protecting proprietary or trade secret information can be addressed by narrowly tailored workplace confidentiality agreements that protect those interests. These specific confidentiality agreements thus continue to be lawful under federal labor law.

The NLRB General Counsel’s Memorandum is not binding law, but it directs field offices to scrutinize employee noncompete agreements and seek relief for employees subject to an “overbroad non-compete provision.” Considering this guidance, employers should anticipate increasing challenges to noncompete agreements and should carefully review employment agreements containing any noncompetition provisions. They should also review confidentiality agreements to ensure that they are narrowly tailored enough to withstand scrutiny. Your partners at Lake Effect can help you evaluate your agreements and monitor NLRB enforcement activities.

Lake Effect is here to answer all your questions about employment laws, regulations, and agency guidelines. We continue to monitor important legal and HR developments, as well as other information that could impact the workplace. Please watch our blogs and emails for these important updates, as well as discussions of how compliance meets culture. To dive into these issues, contact us at info@le-hrlaw.com or 1-844-333-5253.

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• Post-employment non-compete agreements, including customer non-solicitation agreements, are presumed void unless all of the following are established:
  • For a non-compete agreement, the employee is “highly compensated” at the time of signing and termination, with annual earnings at or above the Colorado Department of Labor and Employment’s highly compensated worker threshold (currently $101,250 per year, to be increased each year);
  • For a customer non-solicit agreement, the employee earns at least 60% of the highly compensated worker threshold (currently $60,750 per year, to increase each year);
  • The agreement is for the purpose of protecting trade secrets; and
  • The agreement is no broader than reasonably necessary to protect the employer’s interest in protecting its trade secrets.
• Employers must provide a separate written notice of the terms of a non-compete and/or customer non-solicitation agreement:
  • For a prospective employee, the notice must be given before the individual accepts a job offer.
  • For current employees, notice must be given at least 14 days prior to the effective date of the agreement or the effective date of additional compensation or other change in conditions of employment that provides consideration for the agreement, whichever is earlier.
  • Notices must be signed by prospective and current employees.
• Non-compete and/or customer non-solicitation agreement with employees who primarily work or live in Colorado at the time of termination will be governed by Colorado law, and employers may not require employees to adjudicate them outside of Colorado.
• The amendments apply to agreements entered into on or after August 10, 2022, but they do not apply retroactively to agreements signed before that date.
• Violations of the amended law can result in penalties up to $5,000 per employee or prospective employee. The amendments also provide a private right of action to individuals, who may recover actual damages, declaratory/injunctive relief, and attorneys’ fees and costs.
• The amendments do not affect employee non-solicitation agreements, restrictive covenants related to the sale of a business, agreements for the recovery of training and educational expenses, and “reasonable” confidentiality agreements, as defined by the statute.

If your organization has or plans to hire employees in Colorado, please reach out to your partners at Lake Effect to ensure you comply with the amended non-compete and customer non-solicitation agreement requirements.

Lake Effect is here to answer your questions about restrictive covenants and applicable state laws. We continue to monitor important legal and HR pments that affect employers. Please watch our blogs and emails for these important updates, as well as discussions of how compliance meets culture. To dive into these issues, contact us at info@le-hrlaw.com or 1-844-333-5253.

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