NLRB: Noncompete and Employee Nonsolicitation Agreements Violate Covered Employees’ Section 7 Rights Under NLRA

At a Glance

• The decision held that a noncompete and a separate employee nonsolicitation provision in an employment contract unlawfully chilled employees’ Section 7 rights under the National Labor Relations Act.
• The decision rejected any argument that the noncompete and employee nonsolicitation provisions advanced a legitimate business interest, because other provisions of the employment agreement, such as a customer nonsolicitation provision and a confidentiality provision, were sufficient to protect the employer’s interests.

On June 13, 2024, an administrative law judge (ALJ) of the National Labor Relations Board (the Board) joined the growing chorus of federal and state agencies condemning the use of restrictive covenants, in J.O. Mory, Inc., 25-CA-309577, 25-CA-336995, JD-36-24 (ALJ Decision 2024). This decision suggests that the Board is continuing to take a broader view of how noncompete agreements and employee nonsolicitation agreements specifically may infringe on employees’ rights under the National Labor Relations Act (the Act), including in response to the NLRB General Counsel’s memo guidance requesting the same.

The Act applies to most private-sector employees, but it does not apply to supervisors, managers and executive personnel; agricultural and domestic workers; independent contractors; and some other classes of employees. Accordingly, employers should review the language of their employment policies, employment or restrictive-covenant agreements, and separation and severance agreements with employees that fall under the Act to ensure that those agreements are not likely to be construed to unlawfully chill employees’ — and former employees’ — engagement in protected activity.

Analysis

Case Background

J.O. Mory, Inc. involved the company’s hire of a “salt,” a person who obtains employment at a nonorganized workplace with the covert intention of organizing a union there. The salt in this case, David McClure, submitted an application that falsified aspects of his work history — omitting his employment at unionized companies — so that J.O. Mory, Inc., would hire him. He was indeed hired, and he signed an employee agreement containing a noncompete and nonsolicitation clause. When McClure revealed to management that he was a union organizer, he was terminated the next day for falsifying his application materials. The complaint against the company alleges that it had “overly broad and unlawful rules in its employment agreement” and unlawfully “fired David McClure because of his union affiliation and activities.”

The ALJ Decision

The ALJ concluded that the evidence in this case supported the allegations against the company.

In addition to finding that McClure was in fact terminated because of his union affiliation and activities rather than for his dishonesty, the ALJ concluded that terms in the company’s employment agreement — specifically, the agreement’s noncompetition and employee nonsolicitation provisions, along with a requirement to report attempted solicitation of employees to management — were unlawful under the test articulated in Stericycle, 372 NLRB No. 113 (2023). The first step in the Stericycle test is determining whether a rule or policy chills employees’ exercise of Section 7 rights, creating a presumption that the policy is unlawful. The second step gives the employer an opportunity to rebut that presumption by showing that the policy advances “a legitimate and substantial business interest” that a narrower rule will not cover.

Under the first step, the ALJ concluded that the noncompete and nonsolicitation provisions were presumptively unlawful. According to the ALJ, the noncompete provision will “logically” make an employee “more fearful of being fired and less willing to rock the boat because they face the prospect of being unable to find any work in their geographic area if they are fired or forced to leave their job.”

Moreover, the ALJ reasoned that the employee nonsolicitation clause “would dissuade a reasonable employee from engaging in protected activity like telling their coworkers about wages and benefits offered by the Union out of a reasonable fear that Respondents might accuse them of inducing other employees to quit.” In addition, the employee nonsolicitation clause may “deter employees from asking their coworkers to make a concerted threat to quit unless their working conditions improve.” Finally, the ALJ concluded that the reporting requirement “may require employees to report their own protected activities (and potentially those of other employees).”

As for the second step of the Stericycle test, the ALJ concluded that the company had not provided sufficient evidence that the noncompete and nonsolicitation provisions in its employment agreement advanced a legitimate business interest because “other, unchallenged, portions of the agreement . . . address these concerns,” such as “provisions requiring employees to turn over confidential and proprietary information and prohibiting them from trying to divert Respondent’s customers.”

Conclusion

J.O. Mory, Inc. represents a notable shift in the Board’s view of noncompete and, in particular, employee nonsolicitation covenants. While it is unclear whether this decision will be appealed or followed in due course with similar decisions by other ALJs or the Board as a whole, employers should take particular care to review the language of employee nonsolicitation agreements with covered employees to ensure that they are not likely to be construed to chill employees’ — and former employees’ — engagement in protected activity. Based on the broad language in this decision, employers should review the language they use in employee nonsolicitation agreements and discuss with legal counsel whether that language should be modified. Employers should also strategically consider with legal counsel whether they will seek to enforce employee nonsolicitation agreements in light of this decision.

We will continue to monitor these and other important developments and address questions raised by new decisions, and the business and legal implications for employers.