On October 7, 2024, National Labor Relation Board (NLRB) General Counsel (GC), Jennifer Abruzzo, issued a memorandum to NLRB field offices adding additional substance to the position on non-competes she outlined in her May 30, 2024, Memo, chiefly that “overbroad non-compete 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.” 

What the October 7, 2024, Memorandum Said

The October 7 Memo provides Abruzzo’s framework for assessing the lawfulness of so-called “stay-or-pay” provisions, a particular sub-set of non-competes that includes training repayment agreements (also known as TRAPs), educational repayment contracts, quit fees, damages clauses, sign-on bonuses, and other cash payments arrangements that require an employee to pay their employer in the event that they voluntarily or involuntarily separate from employment.  Employer use of stay-or-pay provisions has become increasingly common in U.S. workplaces in recent years, affecting millions of workers and negatively impacting employees’ Section 7 rights in many of the same ways that non-compete agreements do. In Abruzzo’s view, stay-or-pay provisions violate the NLRA unless they are narrowly tailored to minimize that infringement of employee rights.

Abruzzo pointed to what she believes are similarities between non-competes and stay-or-pay provisions and the pernicious harms they cause to employees. Both are often “self-enforcing” in that employees may be coerced to pass up certain opportunities to change jobs, leverage outside options to obtain a raise, or forego other options that would otherwise be available to them to improve their income or employment terms out of fear of breaching their contractual obligations.

Business Justifications for the Use of Stay-or-Pay Provisions

To justify the use of stay-or-pay agreements, employers often advance two distinct business interests to protect. The first is to lock employees into their jobs by imposing a financial barrier to separation, in the case of certain forms of stay-or pay-provisions such as quit fees or damages clauses, which Abruzzo finds understandable but still problematic. Employers do not have a legitimate business interest in “forcing employees to remain employed in a given workplace against their will through the use of coercive contractual arrangements.”  She alternatively suggests that employers should positively encourage employee retention through longevity bonuses or improved terms and conditions of employment.

A second interest proffered by employers to justify the use of stay-or-pay provisions is to recoup payments toward employee benefits where an employee does not remain employed long enough for the business to recoup its financial outlays. Abruzzo offers that this “may reflect a legitimate business interest . . .” and be justifiable under the NLRA, but only if the recoupment terms are narrowly tailored to minimize any interference to employees’ Section 7 rights.

New Four-Factor Test for Assessing the Legality of Stay-or-Pay Provisions

With the above in mind, Abruzzo offered a new four-factor framework for testing whether stay-or-pay provisions are lawful under the NLRA. Moving forward she will urge the NLRB to “find that any provision under which an employee must pay their employer if they separate from employment, whether voluntarily or involuntarily, within a certain timeframe is presumptively unlawful.”  Employers will then be provided with an opportunity to “rebut the presumption” by proving that the stay-or-pay provision advances a legitimate business interest and is narrowly tailored to minimize interference with employees’ Section 7 rights by providing evidence that the provision: (1) is voluntarily entered into in exchange for a benefit (employee is free to accept or reject the provision); (2) has a reasonable and specific repayment amount (no more than the cost of the benefit provided); (3) has a reasonable “stay” period (weighing cost of the benefit and value to the employee); and (4) does not require repayment if the employee is terminated without cause (to avoid undue coercion by employer).  Abruzzo stated that she intends to seek “retroactive application” of the four-factor test.

Make-Whole Relief for Employees Harmed by Unlawful Stay-or-Pay Provisions

In addition, Abruzzo stated that she would be encouraging the Board, where it finds an employer has maintained an unlawful non-compete agreement or a stay-or-pay provision, to “remedy all the harms caused by the provision . . .” by penalizing the employer and awarding “make-whole relief,” i.e., placing the employee in the same position, as nearly as possible, in which they would have been had the employer not maintained the unlawful provision.  Make-whole relief may include the following:

• Compensation to the employee for the difference (in terms of pay or benefits) between what they would have received and what they did receive during the non-compete period.
• Lost wages for those employees who can demonstrate that they were out of work for a longer period than they would otherwise have been as a result of the non-compete.
• Compensation for “moving-related costs,” if the employee had to move outside of the geographic region to obtain employment within the industry; and
• Reimbursement for the costs of any retraining efforts undertaken by the employee to be eligible for a position in a different industry not covered by the non-compete provision.

Retroactive Applicability of the New Standard and 60-Day Opportunity to Cure

Abruzzo noted that she intends to seek retroactive application of the four-factor test outlined above, meaning that stay-or-pay provisions previously entered into by employers will be deemed unlawful, in violation of the NLRA, if they are not fully compliant with the new requirements. Employers are provided with a “sixty-day window” – until December 7, 2024, to cure any preexisting non-competes or stay-or-pay provisions that “do not advance a legitimate business interest.”  Employers can expect immediate enforcement by the NLRB for any stay-or-pay provision entered into after October 7, 2024, that does not comply with the new restrictions outlined in Abruzzo’s Memo.

What does Abruzzo’s Latest Memo Mean for Employers?

While Abruzzo’s October 7, 2024, Memo is not binding law, it reflects the current animosity of the NLRB GC’s office toward employer use of non-competes, including stay-or-pay provisions, that are not narrowly tailored to promote a legitimate business interest, or that could arguably generate uncertainty or cause employees to question whether they are able to exercise their rights to engage in collective activity protected by Section 7 of the NLRA.  Employers should take advantage of the 60-day window provided by Abruzzo to review their current non-competes and stay-or-pay provisions to bring all such documents into compliance with the GC’s Memo.

Bean, Kinney & Korman’s employment law practice group works proactively with union and non-union employers of all sizes, to craft a full range of employment policies and documents, including severance agreements, to meet the compliance challenges of the NLRA and all applicable federal, state, and local laws.

If you have questions about the NLRB GC’s Memo or need assistance with your non-compete agreements or other employee policies or practices, please contact Doug Taylor at (703) 525-4000 or rdougtaylor@beankinney.com, or your current Bean, Kinney & Korman attorney.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.