NLRB General Counsel’s Memo Attacks Employee Repayment Agreements and Expands Remedies

At a Glance

• The Memo establishes “make-whole relief” for unlawful noncompete and “stay-or-pay” provisions.
• The Memo deems stay-or-pay provisions as potentially unlawful under the National Labor Relations Act (NLRA) and not only restrict employee mobility but also could infringe on workers’ rights to improve working conditions by finding new employment.
• The General Counsel intends to exercise prosecutorial discretion by providing employers until December 6, 2024, to cure preestablished stay-or-pay provisions. Any stay-or-pay provisions entered into after October 7, 2024, are not subject to the safe harbor.

On October 7, 2024, National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo issued Memorandum GC 25-01 (Memo), setting forth aggressive new remedies for unlawful noncompete and “stay-or-pay” provisions as well as a framework for analyzing “stay-or-pay” provisions, which builds on her May 2023 Memorandum that opined that the proffer, maintenance and enforcement of noncompete provisions violate the National Labor Relations Act (NLRA). The publication of this Memo comes less than two months after the U.S. District Court for the Northern District of Texas enjoined the Federal Trade Commission’s (FTC) Rule banning noncompete agreements.

Key takeaways from the Memo are detailed below.

Stay-or-Pay Provisions Generally

As explained in the Memo, stay-or-pay provisions are agreements wherein an employee must make a payment to their employer if the employee separates from employment within a specified period. The Memo notes that “[t]hese provisions take a variety of forms, including 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[.]” 

The Memo urges the NLRB to find stay-or-pay provisions unlawful unless employers demonstrate that:

1. The agreements advance a legitimate business interest.
2. The agreements were voluntarily entered into in exchange for a benefit conferred on the employees.
3. The repayment amount is no more than the cost to the employer of the benefit bestowed and is specified up front.
4. The stay period is reasonable “based on factors such as the cost of the benefit bestowed, its value to the employee, whether the repayment amount decreases over the course of the stay period, and the employee’s income.”
5. No repayment is required if employees are terminated without cause.

Recission Alone Insufficient

Breaking from the NLRB’s standard practice of rescinding employer policies which violate the NLRA, the Memo contends that “make-whole” relief should, in certain circumstances, be awarded to employees to remedy the harms caused by unlawful noncompete or stay-or-pay provisions. Rescission of the unlawful provisions alone may be insufficient because employee attempts to comply with the provisions may result in financial burdens. By way of example, the Memo explains that unlawful noncompete provisions can (a) restrict an employee’s ability to “leverage one’s outside options to obtain a raise,” or (b) cause former employees to “relocate” or “take a lower-paying job” resulting in potential negative financial impacts.

Required Evidence for “Make-Whole” Relief

The Memo provides that current and former employees may obtain monetary relief by illustrating financial harms caused by unlawful noncompete or stay-or-pay provisions during the notice-posting period. Specifically, current employees must demonstrate “that they were deprived of a better job opportunity[,]” including evidence 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 [noncompete or stay-or-pay] provision.” 

Employees separated during the notice period may be entitled to relief for costs related to complying with noncompetes during the post-employment period by demonstrating “that they were out of work for a longer period than they would otherwise have been as a result of the [provision],” that they “accepted a job providing lesser compensation (in terms of pay or benefits) outside of their industry (but within the geographic scope of the non-compete provision),” or that they “had to move outside of the geographic region to obtain employment within [their] industry[.]”

If the above criteria are met, the employer will be required to “compensate the [affected individuals] for the difference (in terms of pay or benefits) between what they would have received and what they did receive during the same period.” Employers may also be required to compensate former employees for costs related to moving or retraining.

Safe Harbor

The Memo indicates that the General Counsel intends to exercise prosecutorial discretion by providing employers 60 days from the date of the Memo to cure preestablished “stay-or-pay” provisions that advance a legitimate business interest. To be effective, such revised provisions must, inter alia, not include “a repayment amount that is more than the cost of the benefit bestowed,” be a “reasonable length[,] and) not require repayment in the case of no-cause terminations. Employers must inform impacted employees if changes are made to stay-or-pay provisions. Under this “safe harbor,” employers must address these provisions by December 6, 2024. Any stay-or-pay provisions entered into after October 7, 2024, are not subject to the safe harbor.

Revisions to Standard Notice

The Memo recommends that the NLRB amend its standard notice posting to “(1) alert 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” unlawful noncompete or stay-or-pay provisions; “(2) notify employees that they may be entitled to other compensation if they separated from employment and had difficulty securing comparable employment due to” unlawful noncompete or stay-or-pay provisions; “and (3) include language directing individuals to contact the [r]egional office during the notice-posting period if they have evidence related to (1) or (2).”

Employer Attempts to Enforce

The Memo urges the NLRB to punish employers that attempt to enforce their rights under unlawful noncompete and/or stay-or-pay agreements by reimbursing employees for legal fees and costs expended in defending against such actions.

What Does This Mean for Employers?

While the Memo is not binding, employers should expect that the NLRB will carefully scrutinize any noncompete and/or stay-or-pay provisions before it and may be willing to hand down hefty remedies to affected employees. Accordingly, employers seeking to impose post-employment restrictive covenants should seek guidance from counsel. If you have any questions about the potential implications of the Memo or any other regulation of noncompete agreements, please contact an attorney on Faegre Drinker’s labor management relations or employment mobility and restrictive covenants teams.

We will continue to monitor these important developments and, like our prior alerts on this topic, address questions raised by the Memo and the business and legal implications for employers.