Why Non-Compete Agreements Are Now High-Risk
Post-employment non-compete agreements, long a standard fixture in many employment contracts, are now facing unprecedented legal challenges. This current wave of scrutiny is driven by actions from both state legislatures and, critically, two powerful federal agencies: the National Labor Relations Board (NLRB) and the Federal Trade Commission (FTC).
This pressure signals a fundamental shift in how the U.S. legal system views restrictive covenants, moving away from broad employer protection toward safeguarding employee mobility and employee rights.
Key Federal Agencies: NLRB and FTC
The latest and most immediate reason for employer caution is the Memo issued by the General Counsel of the NLRB.
This Memo, while not formal law, is highly influential, as it represents the official enforcement position of the NLRB. It clearly signals an intent to closely scrutinize non-compete clauses and potentially prosecute their enforcement as Unfair Labor Practices (ULPs).
Ignoring these federal developments poses an immediate risk of litigation and significant compliance costs. Employers must pay close attention to the dual pressures exerted by the NLRB (focused on labor rights) and the FTC (focused on antitrust and competition).
What is a Non-Compete Agreement?
Non-compete agreements, or restrictive covenants, are contractual clauses that prohibit an employee from working for a competing business or starting a similar business, within a specific geographic area and time frame after leaving their current employer. They are designed explicitly to limit a former employee’s post-employment activities.
Typical Uses and Purposes
Historically, non-compete agreements were used to protect an employer’s legitimate business interests. Their primary justifications included:
Safeguarding Trade Secrets: Protecting highly confidential proprietary information and unique business processes.
Preventing Client Solicitation: Ensuring departing employees cannot immediately poach former clients or customers.
Protecting Significant Investment: Recouping investment in specialized or costly employee training.
Common Misconceptions
Many employers operate under outdated assumptions that no longer hold in the face of federal action:
Misconception | Reality Under New Federal Scrutiny |
|---|---|
They are always enforceable. | Enforcement is highly dependent on state law, and federal actions (NLRB/FTC) may render them void regardless of state-level validity. |
They prevent workers from quitting. | The NLRB views using non-competes solely for worker retention as an unlawful restraint on NLRA-protected activities. |
A broad scope is safer. | Overly broad clauses are the specific target of the NLRB and the FTC, making them more likely to be struck down. |
NLRB’s Position on Non-Compete Clauses
The General Counsel’s Memo asserts that the inclusion or enforcement of non-compete clauses in agreements with non-supervisory workers generally violates the National Labor Relations Act (NLRA).
This stance is rooted in the belief that these agreements unlawfully restrain an employee’s right to engage in concerted activities aimed at improving working conditions.
Potential NLRA Violations (Unfair Labor Practices)
The NLRB interprets the imposition of these clauses, when used primarily for employee retention or to protect general training investments, as an Unfair Labor Practice (ULP). Because the NLRA protects the employee’s right to organize and collectively seek better employment terms, preventing them from accessing better jobs is seen as an illegal restraint on their economic freedom and workforce mobility.
Mini Scenario (ULP Risk for Low-Wage Workers): If a fast-food worker who only knows standard operating procedures is required to sign a non-compete, the NLRB would likely argue this is an Unfair Labor Practice. The clause is not protecting a trade secret but is merely discouraging the worker from seeking better pay at a competitor, thus violating their NLRA rights.
Mini Scenario (General Training): An employer invests $1,000 in general software training for a sales rep. Using a non-compete to protect this investment is highly risky. The NLRB would likely argue this common training does not constitute a legitimate proprietary interest outweighing the worker’s right to move.
Factors That Make a Non-Compete Problematic
A restrictive covenant is likely to be deemed problematic and violative of the NLRA if it:
Impede Mobility: Restricts the employee’s ability to quit or seek better pay, thereby limiting access to other employment opportunities.
Lack Justification: Serves exclusively for worker retention rather than protecting a legitimate, narrowly defined business interest.
Are Overly Broad: Utilizes excessively broad definitions of scope, duration, or geographic area.
Exceptions and Narrowly Tailored Clauses
The NLRB Memo does recognize that a narrowly tailored non-compete clause may be justified in certain limited situations.
Protection of Genuine Trade Secrets: Clauses designed to protect genuine trade secrets remain the strongest justification. The agreement must be limited only to the extent necessary to protect that specific secret.
Proprietary Interests: Protection of other critical proprietary interests may justify a clause. The NLRB will carefully scrutinize whether the employer’s need outweighs the employee’s right to mobility.
Independent Contractors: Narrowly tailored non-compete clauses may still be defensible in cases involving genuine independent contractor relationships, provided the relationship is not a misclassification.
Federal Developments: FTC Proposed Ban
The Federal Trade Commission (FTC) has proposed a sweeping new rule under its authority to prevent unfair methods of competition. The proposed rule, if finalized, would constitute a near-total ban on these restrictive covenants:
New Contracts: Ban on almost all new non-compete agreements.
Existing Agreements: Requirement to rescind existing agreements and formally notify current and former employees that the clauses are no longer in effect.
Senior Executives: Only permissible if they apply to “senior executives” and are part of the sale of a business.
Implications for Employers Nationwide
The FTC argues that non-competes unfairly suppress wages, stifle job mobility, and harm competition. If the rule takes effect, it would dramatically override most existing state laws and create a single, unified federal standard banning the practice nationwide.
Interaction with NLRB Oversight
Employers are pressured by two distinct federal legal regimes. The FTC seeks to eliminate non-competes as an antitrust matter, while the NLRB seeks to restrict them as a labor rights matter.
Agency | Primary Focus | Enforcement Tool | Impact on Employers |
|---|---|---|---|
NLRB | Labor Rights / Employee Mobility | Unfair Labor Practices (ULP) charges. | Immediate risk for usage with non-supervisors. |
FTC | Antitrust / Competition | New Federal Rule to ban most clauses. | Represents the greatest long-term threat to non-competes for all workers. |
Supervisory Exclusion and Employee Classification
The NLRB Memo specifically targets non-supervisory workers. Under the NLRA, a “supervisor” is defined based on their duties and use of independent judgment. A supervisor must have the authority to perform, or effectively recommend, functions such as hiring, discharging, assigning, or responsibly directing other employees.
Supervisors vs. Non-Supervisors: Non-Compete Risks
Genuine Supervisors: Employers still retain the ability to enforce traditional, state-law-compliant non-compete clauses for genuine supervisory and management personnel, as these roles fall outside the NLRA’s protection.
Non-Supervisors: For all other employees, the risk of an NLRB challenge is immediate and significant, requiring employers to rely on alternative protective clauses.
Risks of Employee Misclassification
Employers must be cautious of misclassification. If a low-level worker is falsely titled “supervisor” solely to impose a non-compete agreement, the NLRB will likely look past the title, apply NLRA protections, and invalidate the clause.
This highlights the necessity of due diligence in classifying all employees according to the NLRA’s strict definition.
Alternatives to Non-Compete Clauses
Given the dual federal enforcement efforts, employers must pivot quickly. Legally sound, alternative strategies are the best way to protect legitimate business interests without running afoul of the NLRB or the FTC.
Confidentiality and Non-Disclosure Agreements (NDAs)
NDAs are foundational. They protect trade secrets, client lists, and other proprietary business information by prohibiting the disclosure or unauthorized use of sensitive data both during and after employment. NDAs focus on information protection, not job restriction, making them highly enforceable.
Non-Solicitation and Non-Recruitment Clauses
Non-Solicitation Clauses: These restrict departing employees from actively recruiting former clients or customers for a specific period. They focus on protecting the revenue stream and goodwill.
Non-Recruitment Clauses: These provisions restrict former employees from soliciting or hiring their former colleagues. They are essential for preventing the immediate depletion of institutional talent and knowledge.
Benefits of Alternatives Over Broad Non-Competes
Strategy | Key Advantage | Focus of Protection |
|---|---|---|
NDAs | Highly enforceable and legal defense against trade secret theft. | Proprietary Information |
Non-Solicitation | Protects established client relationships and revenue. | Client Goodwill |
Non-Recruitment | Protects the employer’s talent base and team stability. | Workforce Stability |
Employer Action Plan: Non-Compete Review
You must immediately audit all current employment agreements and severance packages for non-compete clauses.
Identify contracts covering non-supervisory, lower-wage, and middle-wage workers, as these pose the highest risk under the NLRB Memo.
Analyze the scope, duration, and geographic limits of all existing clauses for reasonableness.
Drafting Legally Defensible Contracts
The time for broad, boilerplate non-compete forms is over. New contracts should:
Be Narrowly Tailored: Restrict only to the extent necessary to protect a clearly defined interest (like a trade secret).
Focus on Alternatives: Strategically replace broad non-competes with legally sound, robust Confidentiality (NDA) and Non-Solicitation/Non-Recruitment clauses.
Ensure Proper Classification: Verify that all employees classified as “Supervisors” genuinely meet the strict NLRA definition.
Partnering with Legal Counsel
Engaging experienced legal counsel is crucial for navigating this complexity. Attorneys can assist in classifying employees and draft contracts that comply with the complex, evolving federal rules to minimize future litigation risk and Unfair Labor Practices charges.
The Way Forward: Strategy and Risk Mitigation
The simultaneous enforcement efforts by the NLRB and the FTC signal the rapid end of broad, boilerplate non-compete agreements. The risk is immediate, particularly for non-supervisory employees, making immediate contract review mandatory to protect employee rights and workforce mobility.
Next Steps for Employers (Action Checklist)
The goal is to transition immediately to tailored protection strategies. Here’s what you must do next:
Audit: Review all current employment agreements and severance packages for non-compete clauses.
Identify Risk: Specifically identify contracts covering non-supervisory, lower-wage, and middle-wage workers.
Replace: Strategically replace broad non-competes with legally sound, narrowly tailored Confidentiality (NDA) and Non-Solicitation/Non-Recruitment clauses.
Reclassify: Ensure all employees classified as “Supervisors” genuinely meet the NLRA definition.
Consult: Engage experienced legal counsel to finalize compliance strategy.
Quick FAQ: Non-Compete Survival
Can non-competes still apply to managers? Yes, generally. Genuine supervisors are not protected by the NLRA, so non-competes for them are still governed by state law, though the FTC ban (if finalized) would largely restrict even these.
Are NDAs also under threat? No. NDAs (Confidentiality Agreements) are widely viewed as legally defensible because they protect trade secrets and do not restrict employee mobility. They are the preferred alternative.
What is the biggest risk right now? The biggest immediate risk is an NLRB Unfair Labor Practice (ULP) charge, which can be filed by an individual employee based on the General Counsel’s Memo, specifically regarding clauses applied to non-supervisory staff.
How quickly should agreements be reviewed? Immediately. The NLRB Memo has created an immediate risk of ULP charges. Waiting for the final FTC rule is too late for risk mitigation.
Can a non-compete affect contractors? It depends. The NLRA primarily protects employees. For true independent contractors, a narrowly tailored non-compete may be defensible, but caution is advised against misclassification.
How Crowley Law LLC Can Help You
If you are an employer revamping your employment agreements in light of evolving regulatory pressure on non‑compete clauses, Crowley Law LLC stands ready to support you every step of the way. As experienced legal counsel to technology and life‑sciences companies, we combine strategic insight with practical solutions.
At Crowley Law LLC, we offer comprehensive legal services tailored to companies navigating restrictive‑covenant risks and broader employment compliance, from drafting enforceable agreements to full regulatory and transaction support.
Let us help you:
Review and audit existing agreements – Identify which non‑compete, non‑solicitation, or confidentiality clauses pose risks under current NLRB or FTC scrutiny.
Draft legally defensible alternatives – Prepare narrowly‑tailored NDAs, non‑solicitation, non‑recruitment, and other restrictive‑covenant clauses that protect business interests while minimizing litigation exposure.
Ensure compliance across your workforce – Classify employees correctly (non‑supervisory vs. supervisory), align employment and contractor classifications, and reduce risk of misclassification claims.
Provide ongoing strategic counsel – As your business grows, we advise on hiring policies, employment contracts, M&A, equity structures, and exit strategiesee to keep your operations compliant and protected.
Support in disputes and litigation when necessary – If a former agreement is challenged, Crowley’s litigation‑ready team can defend your interests in contract enforcement, trade‑secret protection, or employment disputes.
Schedule a confidential consultation with Crowley Law LLC today. We’ll assess your current agreements, pinpoint potential liabilities, and help you implement a modern, defensible set of employment policies – so you can focus on growth, not legal risk.