NLRB GC Contends “Stay Or Pay” Arrangements Are Presumptively Unlawful and Calls for “Make Whole” Remedies for Unlawful Non Competes

October 17, 2024

On October 7, 2024, Jennifer Abruzzo, the General Counsel of the National Labor Relations Board ("NLRB"), issued a new memorandum alleging that "stay-or-pay" agreements are presumptively unlawful under the National Labor Relations Act ("NLRA") unless narrowly tailored, and urging the NLRB's Regional offices to significantly expand the remedies sought in connection with unlawful non-competes. This memorandum follows a memorandum issued by the General Counsel in 2023 in which she expressed the view that most non-compete terms are unlawful under the NLRA. Importantly, these memoranda do not apply to executive or managerial employees, as the NLRA does not apply to supervisors.

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Proposed New Analytical Framework for Stay-or-Pay Terms and Proposed Remedies

Stay-or-pay agreements are terms that require an employee to pay back certain benefits (such as signing bonuses, training repayment agreement provisions (TRAPS), relocation expenses, or tuition and educational reimbursements) in the event the employee does not remain employed with the employer for a certain period of time. In this new memorandum, Abruzzo takes the position that stay-or-pay terms "both restrict employee mobility, by making resigning from employment financially difficult or untenable, and increase employee fear of termination" and are therefore presumptively unlawful under Sections 7 and 8(a)(1) of the NLRA.

According to the General Counsel, an employer may rebut that presumption "by proving that the stay-or-pay provision advances a legitimate business interest and is narrowly tailored to minimize any infringement on Section 7 rights, that is, the provision:

(1) is voluntarily entered into in exchange for a benefit;

(2) has a reasonable and specific repayment amount;

(3) has a reasonable 'stay' period; and

(4) does not require repayment if the employee is terminated without cause."

According to the General Counsel, if the stay-or-pay term was entered voluntarily with the employee, the "employer should be ordered" to rescind and replace the unlawful provision, and to undertake traditional make-whole remedies. The memorandum provides that if the stay-or-pay term was entered involuntarily, a "more robust remedy" is "require[d]," and the employee should be made "whole for any financial harms resulting from . . . attempted enforcement" of a stay-or-pay clause.

The memorandum acknowledges that it contains "new, specific requirements" for stay-or-pay clauses, and accordingly, the General Counsel will "grant employers a sixty-day window," which began on October 7, 2024, to "cure any preexisting stay-or-pay provisions that advance a legitimate business interest." Otherwise, the General Counsel will "prosecute preexisting stay-or-pay arrangements . . . and seek retroactive application, absent extenuating circumstances."

Proposed New Remedies for Unlawful Non-Competes

The new memorandum reiterates the General Counsel's view that unlawful non-compete agreements "may have a harmful financial impact on employee wages and benefits by explicitly restricting employees' job opportunities," or by creating financial burdens on employees, such as requiring them to "relocate, take a lower-paying job rather than one in their field, or pay for training to qualify for a position not covered by the [non-compete] provision."

To the extent the NLRB finds that an employer has maintained an unlawful non-compete provision, the General Counsel will seek to have the provision rescinded, and may also seek make-whole remedies designed to address "the harmful financial effects caused by current employees' and former employees' attempts to comply with the provision." Make-whole remedies may include, for example, the difference in compensation between what an employee earned at the employer and what they would have earned elsewhere absent the non-compete term, lost wages if an employee was out of work for longer than they otherwise would have been, or compensation in respect of any costs associated with complying with the non-compete, such as relocation or job training expenses.

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Although the memorandum is not legally binding, it reflects the NLRB's enforcement priorities and views on non-compete and stay-or-pay agreements. To mitigate legal risks, employers should consider reviewing their existing employment agreements for compliance with this new guidance.