After years of debate, the Massachusetts legislature late last night passed a comprehensive noncompete reform law. If, as expected, Governor Baker signs the bill in the next 10 days, it will take effect on October 1, 2018 and apply to agreements executed after that date. (It does not apply retroactively to existing agreements.)
As the summary below makes clear, the law represents a compromise between those who believe noncompetes should be abolished because they are fundamentally unfair to employees and bad for the Massachusetts economy, and those who believe noncompetes serve a legitimate business purpose when used in a reasonable manner.
Coverage and Application
The law applies to employees and independent contractors who are, or have been for at least 30 days immediately prior to termination, a resident of or employed in Massachusetts. Employers cannot avoid the new law by including a choice of law provision requiring a different state’s law to apply. This is particularly significant for employers based outside of Massachusetts who might want their Massachusetts employees to be subject to another state’s law.
The law applies to traditional noncompetition agreements, which prohibit competitive activities after employment ends, and “forfeiture for competition” agreements, which impose adverse financial consequences if an employee competes.
The law expressly does not apply to other kinds of restrictive covenants, including non-disclosure agreements, assignment of invention provisions, and non-solicitation restrictions (as to employees, customers and vendors). All of these restrictions will continue to be governed by existing common (judge-made) law. Importantly, the new law’s requirements do not apply to noncompetes included in a separation agreement, so long as the employee has been given seven days to rescind acceptance (similar to existing requirements for employees over 40 to sign a release of claims).
A noncompetition agreement will not be enforceable against the following categories of employees:
- Non-exempt (overtime eligible) employees under the Fair Labor Standards Act. One can imagine that there will be significant litigation over whether employees subject to noncompetes have been properly classified as exempt under the FLSA.
- Undergraduate or graduate students employed as interns.
- Employees terminated “without cause” or laid off. Because “cause” is not defined in the law, employers will need to consider providing a definition in their agreements.
- Employees age 18 or younger.
The law sets out eight minimum requirements for a noncompete to be valid and enforceable:
- If entered into at hire, the agreement must be signed by both the employer and the employee (a one-sided signature approach will not suffice), expressly state that the employee has the right to counsel prior to signing, and must be provided to the employee by the earlier of a formal offer of employment or 10 business days before the hire date.
- If entered into during employment (after hire), there must be additional consideration (something of value) supporting it, and the requirements above (signed by both parties, 10 days’ notice, right to counsel) also apply.
- The duration of the restriction cannot exceed 12 months, except that the duration can be as long two years where the employee breached his or her fiduciary duty or unlawfully took the employer’s property.
- Incorporating long-standing common law requirements, the agreement must be no broader than necessary to protect an employer’s trade secrets, confidential information and/or good will. A noncompete is presumed to be necessary where these interests cannot be adequately protected through other restrictions.
- Also incorporating existing law, it must be reasonable in geographic scope. If the scope is defined as the areas in which the employee “provided services or had a material presence or influence” during the past two years, it will be considered presumptively reasonable.
- Similarly, it must be reasonable in the scope of the prohibited activities in relation to the interests protected. It will be presumptively reasonable if it is limited to only the specific types of services provided by the employee during the last two years of employment.
- It must include a “garden leave” clause or “other mutually-agreed upon consideration.” A “garden leave” clause is defined as payment during the restricted period of at least 50% of the employee’s highest annualized base salary within the preceding two years. “Other mutually-agreed upon consideration” is not defined. It would seem that the employer and employee could agree to something less (perhaps much less) than 50% pay while still satisfying this requirement.
- The agreement must be consistent with public policy (as is the case under existing law).
All actions to enforce a noncompete must be brought in Massachusetts in the employee’s county or Suffolk County’s Business Litigation Session.
Assuming this is signed into law, employers in Massachusetts will need to carefully review and revise their existing forms of noncompetition agreements to ensure compliance with the requirements summarized above. Employers also will need to ensure that their hiring practices comply with the notice requirements of the law.