NLRB Ramps Up Fines for Employers Using “Stay-or-Pay” Noncompetes

In the wake of a Texas District Court’s injunction against the Federal Trade Commission’s nationwide ban on noncompete agreements, the National Labor Relations Board (NLRB) outlined potential financial penalties against employers for what it deems “unlawful” agreements.

Issued Oct. 7, 2024, the memo has two main focuses.

1. It provides a test to determine whether employers should be responsible for paying financial penalties to their employees or former employees affected by provisions the NLRB considers illegal.
2. It includes NLRB General Counsel Jennifer Abruzzo’s reasoning for why “stay-or-pay” provisions violate the National Labor Relations Act (NLRA).

Employer Penalties for Noncompete Provisions

Abruzzo explained her position that noncompete provisions are “self-enforcing” because employees may choose to decline alternate employment opportunities that could improve their income and other terms of employment due to a noncompete provision. She also explained that if employees pursue alternate employment when under a noncompete provision, these opportunities often require the employee 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 provision.”

Abruzzo therefore proposed that employers should be responsible for paying their employees certain damages when that employee can show that they have been financially harmed by a noncompete provision. The goal of the penalties is to “place employees in the same position, as nearly as possible, in which they would have been had the employer not maintained the unlawful provision.”

To be entitled to damages, an employee must show the following:

1. There was a vacancy available for a job with a better compensation package.
2. They were qualified for the job.
3. They were discouraged from applying for or accepting the job because of the noncompete provision.

Any uncertainty in these elements “should be resolved in favor of the employee under longstanding principles.” If the employee satisfies the test, the employer will be liable to the employee for the difference in pay or benefits between what they would have received had they taken the alternate employment opportunity and what they did receive while remaining employed with the employer.

The memo makes clear that former employees are also eligible for these types of damages if they can show that “there was a position available during their job search for which they were qualified but that they were discouraged from applying or accepting the position as a result of the non-compete provision.” Where a former employee did accept an employment opportunity that had lesser compensation, “they should be entitled to the difference between what they would have received and what they did receive.” These penalties could include moving costs or costs of any trainings that the employee undertook to qualify for a position outside of their field.

Stay-or-Pay Provisions

In her memo, Abruzzo also argued that certain “stay-or-pay” provisions violate the NLRA. She defined “stay-or-pay” provisions as “any contract under which an employee must pay their employer if they separate from employment, whether voluntarily or involuntarily, within a certain timeframe.” Examples include “training repayment agreement provisions…educational repayment contracts, quit fees, damages clauses, sign-on bonuses or other types of cash payments tied to a mandatory stay period.” Abruzzo stated that these types of provisions interfere with employees’ Section 7 rights because “employees are chilled from engaging in protected activity to try to better their working conditions in their current job…for fear that termination would trigger the payment obligation.”

Abruzzo stated that “stay-or-pay” provisions should be presumptively unlawful. An employer can only rebut this presumption “by proving that the stay-or-pay provision advances a legitimate business interest” and that the provision meets four conditions:

1. It is voluntarily entered into in exchange for a benefit.
2. It has a reasonable and specific repayment amount.
3. It has a reasonable “stay” period.
4. It does not require repayment if the employee is terminated without cause.

The proposed penalty assigned to the employer who enforces an unlawful stay-or-pay provision depends on the imperfections of the provision and other details regarding the specific employment relationship. These remedies range from rescinding and replacing the provision with a lawful version, to providing notice to employees regarding changes to the provision, to compensating employees if the employees are worse off financially because of the unlawful stay-or-pay provision.

Employers who currently enforce noncompete provisions or any types of “stay-or-pay” provisions should review the NLRB’s latest guidance and continue to monitor these issues closely. Employers may also consider revisions to any active policies that are relevant to this latest memorandum.

Please contact Caroline Perlis or any member of the Phelps labor and employment team if you have any questions or would like further guidance.