NLRB challenges noncompete, no-recruit, no-hire, training repayment agreement, and others

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Recall that on May 30, 2023, the General Counsel of the National Labor Relations Board (NLRB) issued a memo asserting her view that noncompetes (and certain other restrictive covenants) are an unfair labor practice under the National Labor Relations Act (NLRA).

That was just the beginning.

As expected, much like the FTC’s enforcement actions, the NLRB is testing its theory.

Also much like the FTC’s enforcement actions, employers should take note of what specifically the agency finds objectionable. Some of the objections are well-founded (and should be obvious), while others are more reflective of the anti-restrictive covenant crusade.

The Complaint

On September 1, the NLRB (Region 9, which is in Cincinnati) issued an Order Consolidating Cases, Consolidated Complaint and Notice of Hearing (the “Complaint”) against Harper Holdings, LLC d/b/a Juvly Aesthetics (a spa providing cosmetic aesthetic services) charging that Juvly’s use of noncompetes, no-recruits, no-hire covenants, training repayment agreements, and other obligations constitute an unfair labor practice in violation of the NLRA.

The Complaint is based on charges brought by four former employees between July 27, 2022 December 9, 2022.

The employees’ agreements and Juvly’s handbook and processes include various restrictive covenants and obligations that the NLRB asserts constitute an unfair labor practice.

Specifically, the Complaint identifies the following (presumably problematic) provisions (among others) in the offer letter:

  • “You will be expected to abide by and adhere to the Company’s rules and standards.”
  • “During the period commencing on the Employee’s […] start date and through 24 months after termination, the Employee shall not . . . directly or indirectly, (i) solicit or encourage any person to leave the employment or other service of the Company or its Affiliates, or (ii) hire . . . any current or former employee of the Company or its Affiliates for up to two years after that employee’s termination date.”
  • “Not performing tasks requested by your supervisor is considered insubordination.”
  • “Threats, disparagement, or intimidation of management or other employees or malicious statements concerning individuals within management, other employees, or the Company will be considered insubordination and are prohibited.”
  • “Absolutely no drama in the workplace will be tolerated.”

The Complaint identifies the following (presumably problematic) language (as well as other language) in Juvly’s rules:

  • “Not performing tasks requested by your Company supervisor is considered insubordination.”
  • “[D]isparagement, or intimidation of management or other employees or malicious or disparaging statements concerning individuals within management, other employees, or The Company will be considered insubordination, both in writing, in person, on social media, on review sites and on all other venues and are prohibited.”
  • “Absolutely no drama in the workplace will be tolerated.”

The Complaint identifies the following (presumably problematic) language (as well as other language) in Juvly’s Code of Conduct:

  • “Employees are expected to refrain from conduct or communication, which may damage the goodwill, brand, or business reputation of The Company.”

The Complaint identifies the following (presumably problematic) covenants (among others) in Juvly’s restrictive covenant agreement:

  • A two-year (and during employment) noncompete that primarily prohibits the employee providing certain services within 20 miles of any Juvly location.
  • A training repayment agreement that requires repayment of identified training costs (up to a total of $105,000 for certain employees and $45,000 for others). The repayment obligation applies only if the employee leaves Juvly within the first two years of employment or violates the noncompete, and is prorated during the second year. Accordingly, it operates both as a training repayment tool (recovery if the employee leaves during the first two years) as well as a Sword of Damocles to ensure compliance with the noncompete during that period. Recall that this is similar to the penalty in one of the initial enforcement actions disclosed by the FTC in January of this year.
  • A two-year (and during employment) nonsolicit/no-recruit provision with a penalty of $150,000 (plus damages) for any violation of the no-recruit.
  • A confidentiality obligation prohibiting, among other things, discussion of salary information.
  • The following nondisparagement language: “Both employees and The Company, during and after employment, are prohibited from making negative comments about one another.”

The Complaint identifies the following (presumably problematic) “rules” (among others) in Juvly’s exit interview process:

  • “In your employment agreement you agreed to a charge of $25,000 for every client, and $150,000 for every employee contacted or solicited in any way. Payment is due at the time of the occurrence. Any past due balances over 10 days will incur 18% interest per month until collected and may be sent for collections at the 30-day past due.” (Additional warnings were also included.)
  • “Do not respond to any client questions regarding your employment status. You may only refer them to Juvly.com to book an appointment.”
  • “Should you choose to pursue work with any prior Juvly/Contour employee, retain all communications as this is considered a solicitation, their destruction is prohibited by law.”
  • “Do not discuss any information with any individual regarding your employment at Juvly/Contour Clinic.”
  • “Do not make any public statements to any party for any reason regarding Juvly employment, business practices, or treatment information.”
  • “Engaging beyond this may violate your anti-disparagement agreement and may be considered tortious interference.”
  • A requirement that the employee return or destroy “[a]ll compensation or human resource information” and “[a]ll documents or resources you created while employed at Juvly/Contour Clinic.”

Contractual terms and exit interview practices aside, the Complaint also identifies a handful of other statements that it presumably takes issue with, including that employees were told the following:

  • “[T]hey violate Respondent’s employee handbook if they discuss their individual employment contracts and handbooks.”
  • They were told “not to discuss their bonuses or evaluations with their peers, as doing so would violate the terms of the employee handbook.”
  • They were told “not to discuss with their peers any exceptions to Respondent’s employment policies that Respondent agrees to make for individual employees.”
  • They “instructed employees not to discuss with their peers their bonuses or individual exceptions Respondent agrees to make to Respondent’s standard employment terms and conditions of employment.”
  • They “instructed employees not to discuss anything with their coworkers” or “discuss with their peers any agreements, documents or conversations that the employees have with Respondent’s administration.”

Many of the above provisions and statements are on their face problematic. And, while some of the obligations would have been appropriate (had they been more narrowly tailored), collectively, the obligations are quite oppressive, especially considering that they apply to lower-level workers.

Next Steps

The Complaint required an answer by September 15 (or postmarked by September 14). Assuming the answer has been filed, it is yet publicly available. We will be on the lookout for it.

The Complaint also scheduled a hearing on November 28, 2023, 10 a.m. at Room 3-111 in the John Weld Peck Federal Building, 550 Main Street, Cincinnati, Ohio.

We will keep you posted.

Takeaways

This action highlights a theme: with the increasing hostility toward noncompetes, confidentiality obligations, and other covenants, companies should be thinking hard about what steps they need to take to protect their confidential information (including trade secrets), and other legitimate business interests. There are many options we’ve identified before and will be discussing again soon, along with additional ideas, including for example, ERISA “Top Hat Plans” with forfeiture-for-competition provisions.

Stay tuned.

In the meantime . . .  

We’ve created the following resources (available for free):

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*Thank you to David Dayen for reaching out to me and bringing this to my attention. His article discussing the NLRB action is here: NLRB Complaint Calls a Noncompete Agreement an Unfair Labor Practice.

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