In a recent move following the McLaren Macomb case, the National Labor Relations Board (“NLRB”) general counsel (“GC”) issued guidance on October 7, 2024, indicating that “stay-or-pay” clauses may violate labor laws.
Key Points
- The GC’s memo warns employers that employment terms requiring employees to stay for a set time or repay certain expenses could be illegal.
- The GC plans to seek broader remedies for overly broad noncompete and stay-or-pay agreements.
- Employers have sixty days to align existing stay-or-pay provisions with the memo’s standards if these provisions address legitimate business needs.
The GC’s guidance includes a two-part approach: (1) remedies for overly broad noncompete clauses, and (2) a legal framework for assessing “stay-or-pay” clauses, which obligate non-supervisory employees to reimburse their employer if they leave within a specific timeframe.
Remedies for Noncompete Agreements
This memo follows one from May 2023, elaborating on acceptable remedies for noncompete agreements deemed too restrictive under the National Labor Relations Act (“NLRA”). The GC has instructed regional offices to seek monetary relief for employees who prove they lost better job opportunities due to an unlawful noncompete.
To obtain this relief, employees must show they (1) had a job opportunity with better pay, (2) were qualified for the role, and (3) were discouraged by the noncompete from applying or accepting the job. Additionally, employees who left due to such provisions may claim other losses like moving expenses or training costs.
The GC further advised updating NLRB notices in noncompete cases to notify current and former employees about potential compensation if impacted by unlawful agreements and to direct them to regional offices if their circumstances meet the GC’s criteria.
Framework for ‘Stay-or-Pay’ Clauses
Beyond noncompetes, the memo addresses stay-or-pay clauses, which the GC believes can unlawfully limit Section 7 rights unless narrowly tailored to protect legitimate business interests. These agreements typically require employees to repay bonuses or benefits if they leave prematurely. The GC’s framework suggests:
- The agreement must be voluntary, with employees having the option to decline without financial or employment repercussions.
- The repayment amount should be reasonable and only cover the employer’s costs.
- The required stay period must be justified, with potential reductions based on the benefit’s value and the employee’s earnings.
- The employee should not repay if terminated without cause.
The GC stated that any stay-or-pay agreements should allow employers to rescind and replace unlawful clauses, even if employees initially accepted them. Employers may face other remedies for employees’ missed opportunities similar to noncompete-related relief.
Employers are given until December 6, 2024, to revise any such existing clauses, but new arrangements entered after the memo date may face immediate enforcement.
Implications for Employers
The GC’s memo, while not legally binding, signals the NLRB’s enforcement approach and disapproval of restrictive covenants. This year, the NLRB has gained traction in cases involving noncompete and other restrictive provisions, with rulings on overreaching clauses.
Significant recent legal battles challenge regulatory authority in this area, such as cases in Texas questioning the NLRB’s jurisdiction and a court decision questioning the FTC’s authority over noncompetes.
Despite these challenges, the GC is expected to continue pushing the NLRB’s stance, likely leading to further judicial scrutiny. Employers should consider whether following this memo aligns with business interests, balancing compliance with potential risks to competitiveness.