Last Friday, Governor Baker signed into law the Massachusetts Noncompetition Agreement Act. The Act will amend Chapter 149, Section 24L of the Massachusetts General Laws. Non-compete agreements are contracts between an employer and employee under which the employee agrees not to compete with the employer after their employment relationship ends.
The Act, which goes into effect October 1, 2018, includes significant changes to the common law, including limitations on which employees may be subject to such agreements; the length of such agreements; and the requirement of post-termination pay or other consideration. While the Act raises a number of questions that have yet to be answered, we summarize its key provisions below.
Who is covered by the law?
Both employees and independent contractors are covered by the new law. The Act will apply to every employee who has been a resident of, or employed in, Massachusetts for at least 30 days preceding the end of their employment, regardless of any contrary choice of law provisions in the agreement.
Note: For purposes of the non-compete law, the definition of “employee” also includes independent contractors.
Can an employer enforce non-competes against all personnel?
No. Non-compete agreements will be unenforceable as to:
- Employees who are classified as non-exempt under the Fair Labor Standards Act;
- Employees who are terminated without cause or laid off;
- Employees who are 18 years old or younger; and
- Undergraduate or graduate students in an internship or other short-term employment.
In what circumstances are non-competes enforceable?
Massachusetts will enforce non-competes (for those personnel who may be subject to them) so long as the agreement is:
- In writing, signed by both parties, and given to the affected employee in accordance with the timeframes described below;
- Supported by adequate consideration;
- No broader than necessary to protect one or more of the employer’s legitimate business interests in its: (1) trade secrets, (2) confidential information, or (3) employer’s goodwill;
- Reasonable in scope; and,
- Consonant with public policy.
What is considered “reasonable” in scope?
A non-compete must be reasonable in its duration, geographic reach, and the scope of prohibited activity. The Act provides that certain limitations are presumptively reasonable.
- 12-month maximum. Under the Act, non-competes may not exceed 12 months from the end of employment unless the employee has either (i) breached a fiduciary duty to the employer, or (ii) misappropriated the employer’s property, both tangible and intangible. In such cases, the non-compete may extend for up to two years from the end of employment.
- Proscribed activities. A restriction on activities is presumptively reasonable if it protects a legitimate business interest and is limited to the specific types of services the employee provided during the last two years of employment.
- Geographic limitations. Agreements limited to the geographic area where the employee provided services or “had a material presence or influence” within the last two years are presumptively reasonable. The Act does not define what constitutes a “material presence or influence.”
Are employers required to compensate employees during the restricted non-compete period?
Maybe. Non-compete agreements must be supported either by a “garden leave” clause or other “mutually-agreed upon consideration,” which must be specified in the agreement.
A garden leave clause is one in which an employer compensates an employee during the restricted period, from the date employment ends through the duration of the non-compete. If an employer elects to provide garden leave, an employee must be paid at least 50% of his or her highest annualized base salary (from within the 2 years prior to the employee’s termination) for the entirety of the restricted period. Additionally, an employer may not unilaterally discontinue payments unless the employee violates the terms of the agreement.
Employers should not overlook the option of providing other “mutually-agreed upon consideration.” The law does not define this broad term, which could mean that the employer and employee can agree to something of value that is less than garden leave pay. The lack of guidance about what constitutes adequate consideration is likely to be one of the most contested – and litigated – issues arising from the new law.
What is required for non-competes entered into at the time of hire?
Non-competes entered into at the time of hire must:
- Be written;
- Signed by both the employer and employee;
- Supported by mutually agreed consideration, such as garden leave;
- State that the employee has the right to consult counsel prior to signing; and
- Provide the employee either with a formal offer of employment or 10 business days before employment commences (whichever is earlier).
Is it permissible to require employees to sign a non-compete after their employment begins?
Yes, however, the employer must offer some benefit to the employee beyond continued employment. In a departure from current Massachusetts law, agreements must be supported by “fair and reasonable consideration” independent from continued employment. This means that employers who ask a current employee to sign a non-compete must provide some additional benefit, such as garden leave or other mutually agreed upon consideration, in exchange for the individual’s agreement not to compete.
As with non-competes entered into at the time of hire, agreements entered into after an employee’s hire also must: be in writing; signed by both the employer and employee; and expressly state that the employee has the right to consult with counsel prior to signing. The employer must also provide notice of the agreement at least 10 business days before it becomes effective.
Can an employer include a non-compete as part of a separation agreement?
Yes, so long as the employee is given at least seven business days to rescind acceptance and the agreement is supported by consideration.
Does the Act apply to all post-employment restrictive covenants?
No. The Act does not apply to:
- Covenants not to solicit an employer’s customer’s, clients, or vendors;
- Covenants not to solicit an employer’s employees;
- Non-competes in connection with the sale of a business or outside the employment relationship;
- Forfeiture agreements that are unrelated to competition;
- Non-disclosure or confidentiality agreements;
- Invention assignments;
- Garden leave clauses;
- Non-competes made in connection with the end of employment if the employee is expressly given 7 days to rescind acceptance; or
- Agreements where an employee agrees not to reapply for employment with the same employer after termination.
Can employers enforce existing agreements that do not comply with the new law?
The Massachusetts Noncompetition Agreement Act will go into effect on October 1, 2018 and will apply to non-compete agreements entered into on or after October 1, 2018.
What steps should employers take now?
Employers should take steps now to consider whether, going forward, non-competition agreements are worthwhile and necessary for their personnel. Employers also should consult with counsel to determine whether there are more effective tools for protecting trade secrets, confidential information, and good will, for example by using non-solicitation or nondisclosure agreements, which are not subject to the Act.
For those employers who anticipate the use of non-competition agreements, consider whether to update other policies implicated by the Act, such as a policy that defines termination “for cause.” And while the Act does not apply retroactively, consider whether existing non-compete agreements should be reformed to better reflect evolving notions of reasonableness.