NLRB Seeks to Prosecute Employers Over ‘Stay-or-Pay’ Provisions

The use and legality of noncompete agreements and related restrictive covenants has certainly been one of the more significant total rewards storylines of 2024.

Workspan Daily has published a half-dozen articles on the subject since April 23 — the date when the Federal Trade Commission (FTC) issued a final rule seeking to ban noncompetes for most U.S. employers. The rule, as you likely know, was struck down Aug. 20 by a U.S. district court judge. The FTC appealed the decision on Oct. 18. It may be several months before the U.S. Court of Appeals for the 5th District presides over the matter; however, the likelihood of the FTC winning that appellate claim is remote.

With all that said, there’s an additional warning on noncompetes and restrictive covenants. This time, it’s coming from the National Labor Relations Board (NLRB), the independent federal agency that protects the rights of private-sector employees, particularly around wage-and-hour, unionization and working-condition issues.

The NLRB’s Take on ‘Stay-or-Pay’ Provisions

Jennifer Abruzzo, the board’s general counsel (GC), recently issued a memorandum to all NLRB field offices that expanded on an earlier position that overly broad noncompete agreements are unlawful because “they chill employees from exercising their rights under Section 7 of the National Labor Relations Act (NLRA), which protects employees’ rights to take collective action to improve their working conditions.”

The memo put additional focus on what the NLRB referred to as “stay-or-pay” provisions, under which an employee must pay their employer if they separate from employment. The board said such stipulations can include training repayment agreement provisions (sometimes referred to as TRAPs), educational repayment contracts, quit fees, damages clauses, sign-on bonuses or other types of cash payments tied to a mandatory stay period, and other contracts under which employees must pay their employer in the event they voluntarily or involuntarily separate from employment.

The board’s stance is that such provisions infringe on Section 7 rights in a similar manner as noncompete agreements and, therefore, also may violate Section 8(a)(1), which makes it an unfair labor practice for an employer “to interfere with, restrain or coerce employees in the exercise of the rights guaranteed in Section 7.”

To address this, the memo from Abruzzo:

Set forth a proposed framework to determine the lawfulness of such provisions;
Outlined her intent to have the board prosecute and seek “make-whole monetary relief” in cases involving preexisting stay-or-pay provisions; and,
Explained the circumstances under which employers can cure preexisting stay-or-pay arrangements by Dec. 6 to avoid prosecution.

“Stay-or-pay provisions have serious potential for suppressing union organizing and other concerted activity for mutual aid or protection, including by impairing job mobility,” Abruzzo said in a news release posted on the NLRB website. “Employers have used these provisions as coercive restrictors of employee mobility, which is not a legitimate business interest. I believe such provisions must be narrowly tailored to minimize that infringement on Section 7 rights in order to respect the rebalance of ‘economic power between labor and management’ Congress sought in passing the [NLRA].”

The memo stated that, to be “narrowly tailored,” a stay-or-pay provision must:

Be fully voluntary;
Confer a benefit to the employee (unrelated to mandatory training) in exchange for their formal agreement;
Have a reasonable and specific repayment amount that is specified in advance;
Seek no more than the employer’s cost for the provided benefit;
Have a reasonable “stay” period; the length of this period can vary based on several factors (e.g., the benefit provided to the employee, the benefit’s cost, whether the repayment amount decreases over a defined time, the employee’s income); and
Not require repayment if the employer terminates the employee without cause.

To be deemed lawful, such provisions must also advance “a legitimate business interest,” according to Abruzzo.

The NLRB has given employers until the end of the day on Friday, Dec. 6 to cure any issues called out in the memo. Abruzzo stated the board won’t pursue cases against employers that:

Act to address preexisting issues (for stay-or-pay agreements proposed or enforced before Oct. 7),
Comply with the framework, and
Provide notice to employees of resulting changes.

In outlining cases where enforcement is warranted, Abruzzo instructed the board’s regional offices to seek monetary make-whole remedies when employees “demonstrate that they were deprived of a better job opportunity as a result of [an unlawful] noncompete provision.” To be eligible for monetary relief, an employee must show: “(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 noncompete provision.”

The memo stated employees who have separated from the employer “may also be entitled to make-whole relief for additional harms or costs associated with complying with the unlawful noncompete provision.” This may include:

Lost pay for being without a job,
The difference in pay from a job with lesser compensation,
Moving costs to relocate outside a geographic region covered by the noncompete provision, or
Retraining costs to obtain a job in another industry.

What Law Firms Are Saying

Several legal experts provided their thoughts on the NLRB’s memo and stance.

Law firm Ogletree Deakins, in a post on its website, stated, “The GC’s memo is not law because the GC does not have the authority to ‘make’ law. But the GC’s memo articulates the GC’s view of the NLRB’s enforcement position and the GC’s skepticism of the lawfulness of restrictive covenants — and now stay-or-pay provisions. Over the past year, cases regarding noncompete provisions, training repayment provisions and other restrictive covenants have been gaining traction in the NLRB.”

Law firm Jackson Lewis explained in a post, “The general counsel is the prosecutorial arm of the board, so the memo may indicate how the board will rule on these agreements in the future. The memo could represent a significant shift in how repayment agreements may soon be viewed under the [NLRA]. It is important to review your agreements to best mitigate risks.”

A post by law firm Bryan Cave Leighton Paisner LLP added, “The GC’s most recent memorandum may be subject to legal challenges; it may even face the same fate as the Federal Trade Commission’s broad rule prohibiting most noncompete agreements, which has been enjoined by a federal court. Additionally … the NLRB’s position on these and other issues could change substantially [given the results of the recent national elections]: GC Abruzzo may be replaced and the composition of the NLRB’s board could change.”

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