In May 2023, the non-compete world experienced two more major shifts. First, Minnesota passed a law banning employee non-compete agreements. Second, the National Labor Relations Board (“NLRB”) released a memo stating, essentially, that non-competes violate the National Labor Relations Act (“NLRA”).
It’s unclear exactly how employers are expected to respond to all these recent changes, but it’s certain that the non-compete landscape is shifting quickly. It’s important to review your organization’s employment contracts to determine whether they are both complying with the relevant laws and meeting your organization’s needs.
Minnesota non-compete ban
For many years, only three states had implemented total non-compete bans: California, North Dakota, and Oklahoma. On May 24, 2023, Minnesota joined that group when Governor Tim Walz signed into law State Senate Bill 3035 as part of the state budget, which includes a ban on future employee non-compete agreements. Beginning July 1, 2023, employers will be prohibited from executing non-competes with employees or contractors. Importantly, the ban does not apply retroactively to existing non-competes. Further, this ban only applies to employer-employee non-competes, so those executed as part of the sale of a business are unaffected.
Like Oklahoma, the law contemplates the legitimate need for companies to protect themselves and expressly excludes non-disclosure and non-solicitation agreements from its definition of “non-compete,” meaning the law remains unchanged for those types of agreements. And like California, Minnesota has also recognized that employers may attempt to circumvent the ban by including choice-of-law provisions in their agreements which would allow them to litigate under the law of a state that is more receptive to non-competes. In light of that recognition, the new law prohibits employers from requiring an employee who lives and works in Minnesota to agree to litigate elsewhere–Minnesota law must govern.
Under the law, any employment agreements including offensive non-compete clauses will not be found totally invalid. The unenforceable provisions will simply be severed and the rest of the agreement left to operate as it would otherwise. Additionally, employers will have a grace period of 180 days from the effective date “to cure any agreement made void and unenforceable by this section.” Finally, while the law permits injunctive relief, it also permits courts to award attorney’s fees and costs to employees who are forced to sue to pursue their rights.
NLRB memorandum
On May 30, 2023, National Labor Relations Board (“NLRB”) General Counsel Jennifer Abruzzo issued a memo opining, essentially, that proffering, maintaining, and enforcing non-competes violates the NLRA because doing so “reasonably tends to chill employees in the exercise of Section 7 rights.”
The memo outlines five ways that non-competes infringe on employees’ Section 7 rights:
- “First, they chill employees from concertedly threatening to resign to demand better working conditions.”
- “Second, they chill employees from carrying out concerted threats to resign or otherwise concertedly resigning to secure improved working conditions.”
- “Third, they chill employees from concertedly seeking or accepting employment with a local competitor to obtain better working conditions.”
- “Fourth, they chill employees from soliciting their co-workers to go work for a local competitor as part of a broader course of protected concerted activity.”
- “Finally, they chill employees from seeking employment, at least in part, to specifically engage in protected activity with other workers at an employer’s workplace.”
Essentially, her opinion and the NLRB’s stance is that, because non-competes unreasonably restrict employees’ ability to conduct concerted activity or engage in other protected activity, they violate the NLRA and are, therefore, unenforceable. While not mentioned directly, non-solicit agreements are implicated by the fourth factor above: non-competes restrict employees from soliciting co-workers to join them in working for a local competitor. It is not clear whether that factor was intended to encompass non-solicitation agreements, but it is clear that employers should keep non-solicits in their minds as they decide how to act upon this memo.
Importantly, Section 7 does not protect “any individual having the status of an independent contractor, or any individual employed as a supervisor,” among others. In fact, Ms. Abruzzo appeared to emphasize that the NLRB is focused on non-competes executed with low-wage workers. If you have non-competes with employees classified as supervisors under the NLRA, this memo does not apply to them.
What does this mean for non-compete agreements?
In Minnesota, the next steps are clear. Employers need to examine their form documents to ensure that there are no non-compete clauses hidden away that could run afoul of the new law. Further, for those employers who have regularly used non-competes in the past, now is the time to determine whether your interests can be protected by a less restrictive covenant, like a non-solicitation or non-disclosure agreement.
The NLRB has muddied the non-compete water significantly by issuing this memo because it is unclear exactly what or who is covered, what enforcement actions will look like, or what employers need to do to avoid the NLRB’s ire, though it’s almost certain that additional memos will be published further explaining and clarifying these issues. For now, employers should evaluate whether they are using non-competes with employees protected by the NLRA and consider other ways to protect their legitimate business interests, such as issuing confidentiality agreements or proprietary information and invention assignment agreements instead.
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