NLRB GC to Seek Broad Remedies for Non-Compete and Stay-or-Pay Provisions

National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo issued an important policy memorandum this week. In GC Memorandum 25-01, Abruzzo asserts that most “stay-or-pay” provisions, where workers agree to repay their employer for certain benefits if the employee prematurely leaves employment, should be found unlawful unless narrowly tailored. The memo also sets forth broad remedies Ms. Abruzzo intends to seek if such provisions are held unlawful.

In addition, following up on her memo that most non-compete agreements are unlawful, Abruzzo laid out the remedies she will seek from the Board where it holds that an employer has unlawfully enforced or applied a non-compete agreement.

Before we proceed, employers should keep in mind the following caveats. This memorandum does not carry with it the force of law or otherwise change Board law. Rather, it merely sets forth the GC’s legal position. But, employers can expect the GC to advance her legal position against employers who proffer and maintain non-compete and stay-or-pay provisions that the Board may ultimately find unlawful. Additionally, there is a rather significant election next month, the result of which will dictate whether Abruzzo will have sufficient time to effectuate her legal position – if Donald Trump is elected, Abruzzo will almost certainly be terminated, absent resignation, upon his inauguration. Last, the positions set forth in this memo are not applicable to supervisors, whether or not they are subject to non-compete and/or stay-or-pay provisions.

Remedies for Unlawful Non-Compete Agreements

Abruzzo contends that non-compete provisions are often “self-enforcing,” causing employees to forego better opportunities or leverage outside options to obtain better working conditions in their current job due to fear of violating the non-compete. Additionally, the GC believes that non-compete provisions create additional financial harms to employees during the post-employment period that warrant make-whole relief.

Abruzzo asserted that she will seek the below remedies irrespective of whether the employee remains employed with the employer, was subject to an action taken to enforce the non-compete, resigned from employment, or was terminated for cause. Put simply, if an employee was subject to a non-compete found unlawful by the Board, Abruzzo will seek the following remedies:

1. Loss of Prospective Higher Wages

Employees subject to non-compete provisions may obtain the difference in their current salary or wage rate and what they would have earned in a higher-paying position they claim to have passed upon due to the non-compete. If the employee demonstrates that (1) there was a vacancy available for a job with better compensation, (2) they were qualified for the position, and (3) they were discouraged from applying for or accepting the job because of the unlawful non-compete provision, the GC will seek the difference in the respective salaries for the entire remedial period. (Note: The remedial period would begin six months prior to the filing of the underlying unfair labor practice charge. In cases that span years before the NLRB, this remedial period could be lengthy, resulting in substantial employer liability.)

It appears that an employee’s word that they were “discouraged from applying for” a higher-paying job for which they were qualified would suffice for the employee to be eligible for this remedy. Moreover, the memo does not address how the GC would address a scenario where several employees of the same employer may have been discouraged from applying for the same higher-paying position. Thus, it is unclear whether the GC would assert each employee was eligible for the entire difference in the respective salaries, or if the difference would have to be split among eligible employees if, for instance, there was only one available position.

2. Lost Salary as a Result of Extended Time Out of Work

Abruzzo contends that employees who can prove that “they were out of work for a longer period than they otherwise would have been,” should be awarded lost wages. Such employees would have to satisfy the above test and establish that there was a vacancy for which they were qualified, but did not pursue or accept due to an effective non-compete provision.

This remedy could result in even greater employer liability. In cases where employees remain employed with the employer subjecting them to a non-compete, employees would be entitled to only the difference in wages between their existing job and the prospective job. Here, however, an out-of-work employee has no such current income. Consequently, back pay liability could quickly add up for an employee who, say, claims that while out of work they did not apply for a $100,000/year job due to a non-compete with their former employer.

3. Compensation for Lower-Paying Job in Different Field

Similarly, the GC will seek compensation for employees who take lower-paying jobs in a different industry within the geographic scope of the non-compete. In such cases, the GC will pursue the difference between what the individual would have received in a job they passed upon in their industry and what they are earning in the new job, for the duration that the non-compete is effective.

4. Moving Costs

The GC will also seek costs associated with an individual’s relocation to an area outside the geographic scope of the non-compete. Where an employee felt compelled to move outside of the geographic region to obtain employment within their industry, the GC will ask the Board that the employee be compensated for moving-related costs.

5. Retraining Costs

Some employees subject to a non-compete may decide to work in a different field for which they are not yet qualified. Where an employee subject to a non-compete must complete training or obtain certification or licensure in a different industry, the GC will ask the Board to award such costs to the employees.

6. Costs for Enforcement Actions

Employers sometimes seek to enforce non-compete provisions against former employees believed to have violated such agreements (e.g., a breach-of-contract claim). If an employer seeks enforcement of a non-compete provision found unlawful by the Board, the GC will seek reimbursement for legal fees and costs associated with defending such actions, as well as retraction of the underlying legal action.

To ensure that all employees subject to non-competes are notified of these proposed remedies, the GC will ask the Board to make changes to its standard Notice to Employees. Abruzzo will propose notice language alerting employees that they may be entitled to compensation if they were discouraged from pursuing or unable to accept other opportunities due to a non-compete provision. In addition, Abruzzo will seek language notifying employees that they may be entitled to other compensation if they separated from employee and had difficulty securing comparable employment due to the non-compete provision. Last, Abruzzo will ask the Board for notice language soliciting individuals to contact their Regional office if they have evidence of harm caused by a non-compete provision. To ensure that even former employees know these rights, the GC will ask the Board to require that the notice be mailed to all current and former employees who have worked for the employer up to six months prior to the filing of the underlying charge.

Stay-or-Pay Provisions To Be Targeted by NLRB GC

Abruzzo also argued that most “stay-or-pay” provisions are unlawful unless they are narrowly tailored. Asserting that such provisions are “increasingly common,” Abruzzo asserted that stay-or-pay provisions are unlawful for two primary reasons. First, like non-compete provisions, they restrict employee mobility by making resignation, in her words, financially difficult or untenable.” Second, Abruzzo believes that stay-or-pay provisions increase employee fear of termination if they were to engage in conduct protected by the National Labor Relations Act (NLRA).

Accordingly, Abruzzo will consider all stay-or-pay provisions to be presumptively unlawful. To rebut that presumption, an employer must demonstrate (1) a legitimate business interest advanced by the provision, and (2) that the provision is narrowly tailored to meet that interest. According to Abruzzo, stay-or-pay provisions such as quit fees, damages clauses, and other provisions forcing employees to remain employed by imposing fees solely to retain employees will never be supported by a legitimate business interest.

But where a stay-or-pay provision is meant to recoup an employer’s payment towards an employee benefit if the employee does not remain employed long enough for the employer to reap the return on that benefit, the provision may have a legitimate business interest but must be narrowly tailored. To be considered “narrowly tailored,” the employer must establish all of the following elements:

1. The Provision was Voluntarily Entered Into in Exchange for a Benefit

To pass muster here, the stay-or-pay provision must be “fully voluntary.” Put simply, the employee should choose whether to accept the benefit subject to the stay-or-pay provision, and there should be no financial loss or adverse employment action if they choose to decline. Abruzzo considers it “advisable” – hint, hint employers – to make the voluntary nature of the benefit explicit in any stay-or pay provision.

Abruzzo provided examples of when she would and would not find a provision to be “fully voluntary.” For example, an employer could make the cost of a training necessary to obtain a promotion subject to a stay-or-pay provision. Additionally, an employer could subject an employee to a stay-or-pay provision for a necessary training credential if the employee had options to obtain the training or credential from a third party. In contrast, mandatory training provided by or arranged by the employer cannot be fully voluntary – and telling an employee that they can pay out-of-pocket in lieu of a stay-or-pay provision will not suffice, according to the GC.

Abruzzo also addressed when more common forms of stay-or-pay provisions, such as sign-on bonuses and relocation stipends, would be considered fully voluntary. In such cases, the employer must give the employee the option of (1) taking the benefit upfront subject to a stay-or-pay provision, or (2) deferring receipt of the benefit until the end of the “stay period.”

2. Reasonable and Specific Payment Amount

Next, the stay-or-provision must provide a reasonable repayment amount and that amount must be specifically stated within the provision. To be “reasonable,” the repayment amount may not exceed the cost to the employer of the benefit provided to the employee. To meet the “specific” prong, the employee must be informed of the repayment amount at the time they enter into the stay-or-pay provision.

3. The Stay Period Must Be Reasonable

Abruzzo asserted that this inquiry will be performed on a case-by-case basis. The cost of the benefit will be considered, with longer stay periods being permissible for costlier benefits. The GC will also consider whether the provision provides for a decreasing repayment amount as the stay period progresses – another hint for employers – the employee’s income, and the value of the benefit to the employee.

4. No Repayment Requirement if Employee is Terminated Without Cause

The stay-or-pay provision must not call for repayment if an employee is not terminated for cause, including if they are terminated unlawfully. Abruzzo was clear that stay-or-pay provisions “must effectively state that the debt will not come due if the employee is terminated without cause.” Thus, the GC will not find that the provision is narrowly tailored absent such language.

As she did with non-compete provisions, Abruzzo laid out the remedies she intends to seek where the Board finds a stay-or-pay provision to be unlawful. If the provision was entered into voluntarily, Abruzzo will require an employer to rescind the provision and replace the unlawful elements with appropriate language.

Where, however, the provision was not entered into voluntarily, Abruzzo will seek rescission of the provision and notification to the employee that (1) the stay period obligation is terminated, and (2) any debt that would be incurred pursuant to the provision is nullified and will not be enforced. For example, an employee subject to a stay-or-pay provision for mandatory training will be notified that the provision is nullified and any debt that may be incurred is erased. Moreover, a sign-on bonus that did not include an option of deferring payout until the end of the stay period must eliminate the repayment requirement without unwinding the previous payment.

In addition, an employer must retract any enforcement action taken to collect payment from the employee, and make the employee whole for any financial losses as a result of the enforcement action. The GC will pursue repayment to the employee any amount paid to an employer in response to an employer demand pursuant to an unlawful stay-or-pay. If the employer initiates a collection or other legal action, Abruzzo will pursue compensation for legal and associated fees incurred by the employee. The GC will also require that an employer take steps to correct the negative impact a collection may have on the employee’s credit rating.

Last, as with non-competes found unlawful, the GC will ask the Board for compensation where employees were (allegedly) deprived of better employment opportunities because they remained in their jobs for fear of violating the stay-or-pay provision. Once again, the employee will have to establish that they were qualified for a vacant position with another employer, and that they were discouraged from applying or did not accept the position.

While there are few silver linings from this memo for employers, Abruzzo assured employers she would exercise “prosecutorial discretion” and not initiate legal action against employees for certain pre-existing stay-or-pay provisions in certain circumstances. Specifically, employers will have 60 days to cure elements in stay-or-pay provisions that Abruzzo has advised she considers unlawful. Among other examples, if a repayment amount exceeded the cost of the benefit, an employer could cure that element by reducing the amount to no more than the cost of the benefit to the employer and amend the agreement accordingly.

Conclusion

 Employers should expect Abruzzo to target non-compete and stay-or-provisions for the remainder of her term as GC. Whether the duration of that term is three months or much longer will be dictated by the results of this November’s election. But employers would be wise to review their non-compete and stay-or-pay provisions to ensure that they avoid scrutiny from the NLRB. As described in this memo, employer liability could be substantial if the Board finds a provision to violate the NLRA.