On May 30, 2023, the General Counsel of the National Labor Relations Board issued a memorandum in which she opined that, “except in limited circumstances,” non-compete agreements between employers and employees violate the National Labor Relations Act (NLRA). The memorandum includes instructions to the NLRB’s regional offices to pursue immediately relief on behalf of employees subject to non-competes now deemed illegal.
To be clear, the General Counsel’s memorandum recognizes that, under certain circumstances, non-compete agreements may be permissible. For starters, agreements that protect trade secrets or intellectual property without expressly prohibiting employment with a competitor will be permitted. Additionally, non-compete agreements that preclude ownership in, or management of, a competitor … as opposed to a blanket prohibition on employment … may survive scrutiny.
The most noteworthy exception cited, at least from an insurance agency owner’s perspective, is this: “true independent-contractor relationships.” The NLRA governs employer-employee relationships in the workplace. It does not extend to true independent contractor relationships. Accordingly, the NLRA’s provisions offer no protection to someone challenging a non-compete agreement that was entered pursuant to an independent contractor relationship. Virtually every agency owner’s contract with its carrier(s) describes the relationship between them as an independent contractor relationship. Therefore, if the agent hopes to escape the non-compete restrictions within that contract based on the General Counsel’s guidance to the NLRB, the agent will need to prove that, notwithstanding what the contract says, the agent is in fact an employee.
There may be a second problem for agency owners seeking relief from the NLRB. The General Counsel’s opinion focuses on the ways non-competes discourage employees from exercising their pro-labor rights to organize or associate. She argues that non-compete agreements generally have a chilling effect on workers who might otherwise demand better pay or better working conditions. The key issue, again, is whether a non-compete that is a condition of employment is enforceable or whether it runs afoul of the NLRA’s protections. The opinion does not speak to the enforceability of a non-compete agreement made in exchange for the sale of an interest in an agency. Presumably, a court would find (and I suspect the General Counsel would agree) that the NLRA’s protections do not apply in the context of a business sale. If Agency Owner A sells her agency to Agency Owner B and promises not to compete for three years as part of the deal, can Agency Owner A violate that promise and take cover under the NLRA? Probably not. How about an Allstate Agency owner who separates and receives a termination payment, or a Farmers agent who retires and takes contract value? Can they ignore contractual restrictions on solicitation or competition with their former carriers by arguing the non-competes arose in the context of an employment relationship and therefore should not apply? It is a tough sell.
What about licensed producers who work for an agency? This is an interesting question. Often, agencies hire producers as W-2 employees. Can these producers rely on the General Counsel’s opinion as a basis to ignore their own non-competes with their agency employers? Maybe. Licensed insurance agents do not exactly match the low wage profile of the workers discussed in the General Counsel’s opinion. I suspect as these challenges play out in court, sales professionals will be held to a higher standard (i.e., more likely to be bound by their non-competes) than other workers. Until there is greater clarity, however, agency owners need to beware of this issue.
Bottom line: the NLRB’s new assault on non-compete agreements will not meaningfully change the playing field between carriers and insurance agency owners, but it may give licensed employee producers more leverage.
This article was written by Attorney Dirk Beamer who has extensive experience working with insurance agency owners. His website is https://www.wrightbeamer.com
