On August 10, 2018, Governor Baker signed a new bill into law that significantly restricts the use of non-compete agreements in Massachusetts. The Massachusetts Noncompetition Agreement Act goes into effect on October 1, 2018, which does not provide employers much time to digest these changes and make necessary modifications to update their agreements. Below is brief a discussion on what employers need to know about Massachusetts General Laws Chapter 149, Section 24L.
- Certain Employees Are Exempt from Noncompetition Agreements
Noncompetition agreements under the new law are not enforceable against employees who are: (A) 18 years old or younger; (B) undergraduate or graduate students partaking in an internship or otherwise entering a short-term employment relationship with an employer, whether paid or unpaid, while enrolled in a full-time or part-time undergraduate or graduate education institution; (C) classified as nonexempt under the Fair Labor Standards Act, 29 U.S.C. 201-219 (e.g., hourly employees); and, most notably, (D) terminated without cause or laid off. This last category is a significant departure from similar noncompetition laws in other states, which are enforced regardless of the circumstances of the employee’s cessation of employment. Additionally, unlike other states, noncompetition agreements in Massachusetts do apply to independent contractors.
- Basic Requirements for Noncompetition Agreements
Noncompetition agreements shall not be valid or enforceable under the Massachusetts Noncompetition Agreement Act unless they meet basic requirements and are consistent with public policy.
In the case of a noncompetition agreement entered into in connection with the commencement of employment, the agreement must: (A) be in writing and signed by both the employer and employee; (B) expressly state that the employee has the right to consult with counsel prior to signing; and (C) be provided to the employee before a formal offer of employment is made or ten business days before the commencement of the employee’s employment, whichever comes first.
In the case of a noncompetition agreement entered into after commencement of employment, but not in connection with the employee’s termination or separation from employment: (A) the agreement must be supported by fair and reasonable consideration (e.g., monetary compensation or something else of value) independent from the continuation of employment; and (B) notice of the agreement must be provided not less than ten business days before the effective date of the agreement. Additionally, the agreement must be: (C) in writing; (D) signed by both the employer and employee; and (E) expressly state that the employee has the right to consult prior to signing.
Notably, the restrictions set forth in the Massachusetts Noncompetition Agreement Act do not apply to agreements made in connection with an employee’s cessation of or separation from employment, so long as new consideration is provided and the employee is given seven business days to rescind acceptance.
- Agreements Must be Narrowly Tailored
Under the Massachusetts Noncompetition Agreement Act, noncompetition agreements must be narrowly tailored. They should be no broader than necessary to protect one or more of the following legitimate business interests of the employer: (A) trade secrets; (B) confidential information that otherwise would not qualify as trade secret; and/or (C) goodwill. An agreement will be presumed necessary where the legitimate business interest cannot be adequately protected through an alternative restrictive covenant, such as a non-solicitation agreement, non-disclosure agreement or confidentiality agreement.
The restricted period set forth in noncompetition agreements generally cannot exceed one year from the date of cessation of employment. However, if the employee has breached his or her fiduciary duty to the employer and/or has unlawfully taken, physically or electronically, property belonging to the employer, then the restricted period may be extended to two years from the date of cessation of employment.
Noncompetition agreements must also be restricted to a reasonable geographic area. A geographic reach that is limited to only the geographic areas in which the employee, during the last two years of his or her employment, provided services or had a material presence or influence shall be presumed reasonable.
Noncompetition agreements must also be reasonable in scope. A proscription on activities that protects a legitimate business interest and is only limited to the specific types of services provided by the employee during the last two years of his or her employment shall be presumed reasonable.
- Agreements Must Contain a “Garden Leave Clause” or “Other Mutually-Agreed Upon Consideration”
One of the most controversial new requirements is the garden leave clause. “Garden leave” is a provision by which an employer agrees to pay the employee while the employee is restricted from competing. Agreements governed by the Massachusetts Noncompetition Agreement Act must include a garden leave clause “or other mutually-agreed upon consideration” between the employer and employee that is specified in the agreement. Payment under the garden leave clause must be at least fifty percent of the employee’s highest annualized base salary paid by the employer within the two years preceding the employee’s termination. These payments must be made on a weekly or biweekly pro rata basis in compliance with the payment of wages under M.G.L. c. 149, §148. However, if the restricted period is extended beyond one year due to the employee’s breach, as noted above, the employer is not required to make these payments during the extended period.
- Legal Actions Relating to Noncompetition Agreements Under the New Law
An employee or employer seeking to enforce or throw out a noncompetition agreement governed by the Massachusetts Noncompetition Agreement Act must bring a legal action in the county where the employee resides or, if agreed upon by the employer and employee, in the Suffolk County Superior Court. Out of state employers who hire Massachusetts residents cannot contract around this requirement by, for example, including a non-Massachusetts choice-of-law provision.
The court retains the discretion to reform or otherwise revise a noncompetition agreement to bring it into compliance under the Act.
- Restrictions to Noncompetition Agreements Do Not Apply to Other Restrictive Covenants
These restrictions only apply to noncompetition agreements and non-compete provisions in broader employment agreements. An unenforceable non-compete provision shall not render the remainder of an employment agreement void or unenforceable. Furthermore, the Massachusetts Noncompetition Agreement Act does not affect the validity of other commonly used restrictive covenants, including non-disclosure agreements, non-solicitation agreements, confidentiality agreements, invention assignment agreements and certain agreements relating to the sale of a business.
- What Should Employers Do Between Now and October 1, 2018
The changes promulgated by the new Massachusetts Noncompetition Agreement Act are substantial and far-reaching, and will apply to noncompetition agreements entered into with Massachusetts employees on or after October 1, 2018. Therefore, it is important for employers to review their noncompetition agreements and make any necessary changes to bring them in compliance with the Act.
This summary is presented for informational and educational purposes only, does not constitute legal advice, nor create an attorney-client relationship. For a full understanding of the issues, please contact counsel of your choice.