On October 1, 2018, Massachusetts’ new noncompete law for employers and employees goes into effect. This law significantly limits the use of noncompete agreements within the Commonwealth, and incorporates additional unique wholesale changes. Below are highlights of certain provisions of the new law, along with recommendations on how employers can address their existing and future noncompete agreements to comport with the new law.
What is a noncompete agreement?
The new law defines a “noncompetition agreement” as “an agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that the employee will not engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended.”
New Law Is Limited to Noncompetes with “Employees”, Including Independent Contractors; Certain Employees Are Exempt
The new law is limited to noncompete agreements with “employees.” The definition of a covered “employee” includes independent contractors, which is not common in other states’ noncompete laws.
Notwithstanding this definition, noncompete agreements are not enforceable against employees who are:
- Undergraduate or graduate students with an internship or short-term employment relationship (whether paid or unpaid);
- 18 years old or younger;
- Hourly employees; or
- Terminated without cause or laid off (this last category is a significant difference from most states’ noncompete laws).
Technical and Timing Requirements
To be enforceable, noncompete agreements must meet certain basic technical and timing requirements. All agreements must:
- Be in writing;
- Be signed by both the employer and employee; and
- Expressly state that the employee has the right to consult with an attorney prior to signing.
There are also timing requirements for execution of the agreement:
- If a noncompete is signed at the commencement of employment, it must be provided to the employee by the earlier of a formal offer of employment or 10 business days before commencement of employment.
- If the noncompete is entered into after commencement of employment but not in connection with the separation from employment it must be provided at least 10 business days before the agreement is to be effective. In addition, it must be supported by fair and reasonable consideration independent from the continuation of employment. It is not currently clear as to what is considered “fair and reasonable consideration” (see the Garden Leave Requirement section below).
Reasonableness Requirements, Including “Presumption” of Reasonableness
To be enforceable, noncompete agreements must be reasonable in scope and duration. Specifically, they must:
- Be no broader than necessary to protect one or more of the following legitimate business interests of the employer: (1) the employer’s trade secrets; (2) the employer’s confidential information; or (3) the employer’s goodwill. A noncompete agreement is presumed necessary where the legitimate business interest cannot be adequately protected through an alternative restrictive covenant such as a nonsolicitation or confidentiality covenant.
- Not include a term of more than one year from the date of cessation of employment. The term may be up to two years if the employee has breached a fiduciary duty or has unlawfully taken (physically or electronically) property belonging to the employer.
- Be reasonable in geographic reach. A geographic reach is presumptively reasonable if it limited to only the geographic areas in which the employee, during any time within the last two years of employment, provided services or had a material presence or influence.
- Be reasonable in the scope of prohibited activities. A restriction is presumptively reasonable if it is on activities limited to only the specific types of services provided by the employee at any time during the last two years of employment.
Garden Leave/Consideration Requirement
One of the most unique requirements of the new law is that noncompete agreements must include a “garden leave” clause or other mutually agreed upon consideration. Under a garden leave clause, for the duration of the noncompete period, an employer must pay the employee for at least 50% of the employee’s highest salary within the last two years of employment. The employer’s obligation to pay the garden leave is excused only if the employee breaches the agreement.
The garden leave requirement, in itself, may deter some employers from requiring non-competes. In lieu of this provision, some employers may rely on the “other mutually-agreed upon consideration” provision. The law does not include any specifics on the amount or timing of other consideration that would be presumptively sufficient (e.g., it does not require that the consideration be at least as much as the garden leave amount). Accordingly, it leaves open the possibility of providing an amount of separate consideration at the time of execution of the agreement (such as a signing bonus). Relying on the other consideration provision, however, is inherently riskier, since there is no current case law or guidance as what makes such other consideration sufficient. In any event, in such event, the employer should expressly designate the applicable “other consideration” as being specific consideration for the noncompete covenant.
Choice of Law; Blue-Pencil
Employers cannot avoid the Massachusetts law by including another state in the governing law provision. The law applies to employees who have lived in Massachusetts for at least 30 days prior to termination, regardless of the governing law state. Lawsuits and other challenges must be brought in the county where the employee lives, or in Suffolk County Superior Court (which includes Boston) if the parties agree.
The law also allows courts to modify noncompete agreements to make them valid and enforceable (called “blue penciling”), to the extent necessary to protect the employer’s legitimate business interest. However, modification is within the court’s discretion, so employers should not rely on blue penciling to save a non-compete that would otherwise be prohibited.
Types of Agreements Not Covered by the New Law
The following are some of the types of agreements that are not covered by the new law:
- Employee non-solicitation covenants;
- Customer/Client/Vendor non-solicitation covenants;
- Nondisclosure/Confidentiality agreements;
- Noncompete agreements made in connection with the sale of the assets or equity of a business (when the party restricted is a significant owner of, or member or partner in, the business entity who will receive significant consideration or benefit from the sale);
- Noncompete agreements outside of an employment relationship; and
- Noncompete agreements made in connection with the cessation of or separation from employment if the employee is expressly given seven business days to rescind acceptance.
So – What Should Employers Do?
- Employers should reconsider their noncompete strategy and determine the set of employees for whom they will require noncompete agreements, as well as what consideration they will offer such employees (particularly given the garden leave requirements). For example, employers may require noncompete agreements only for officers or other key employees that would present a significant risk to their business if the employee departed to work for a competitor.
- Employers should revise their form noncompete agreements to comply with the new law, as well as any related human resource policies (e.g. offer letters);
- Employers should consider having their current employees execute new noncompete agreements in compliance with the new law to avoid potential issues with the enforcement of the existing agreements. However, this would require additional consideration for such employees.
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Anthony is a Partner with PIB Law and focuses his practice on advising companies on the full life cycle of commercial contracts from initial contract drafting and negotiation through maintenance, as well as review and, if ...