New Massachusetts Law Substantially Restricts Employee Non-Compete Agreements
Today, August 10, 2018, Massachusetts Governor Charlie Baker signed into law a comprehensive economic development act which amends the Massachusetts General Laws Chapter 149 to create a new Section 24L, which will impose substantial new restrictions on employers’ use of non-compete agreements.
What Constitutes a “Non-Competition Agreement” Under the New Law?
Lawyers and human resources professionals frequently refer to extensive employment agreements encompassing multiple restrictive covenants as “non-competes.” The new law, however, only applies to certain types of non-competition agreements.
In fact, the law clarifies that it does not apply to many types of typical restrictive covenants entered into between employers and employees, such as: (1) agreements not to solicit or hire employees or not to solicit or do business with customers, clients, or vendors of the employer; (2) invention assignment agreements; (3) agreements by the employee not to reapply for employment; and (4) non-disclosure or confidentiality agreements.
In addition, the law expressly excludes others types of agreements, such as:
- non-competes entered into in connection with the sale of a business, sale of substantially all of the operating assets of a business, or in connection with the disposal of the ownership interest of a business or partnership where the individual is a significant owner, member or partner, and where he or she will receive significant consideration from the sale;
- non-competes outside of the employment relationship; and
- forfeiture agreements (i.e., an agreement that imposes an adverse financial consequence on a terminated employee, regardless of whether the employee engages in competitive activity).
Employers should note that the law also excludes non-competes entered into in connection with the separation from employment, but only if the employer expressly gives the employee seven business days to rescind acceptance.
Non-Competes Will Not Be Enforceable Against Certain Employees
The new law also exempts certain categories of employees from enforceability, including:
- employees classified as non-exempt under the Fair Labor Standards Act (i.e., low wage employees);
- undergraduate or graduate students participating in an internship or other short-term employment relationship;
- employees who have been terminated without cause or laid off; and
- employees who are 18 years old or younger.
With the exception of these four categories of employees, the other provisions of the new non-compete law apply not only to traditional employees, but also to independent contractors as defined by Chapter 148B.
In addition, because non-competes will not apply to employees who have been terminated without cause or laid off, use of non-competes at the time of termination, as discussed above, will only be enforceable against employees who are voluntarily leaving the company or who have been terminated for cause.
Non-Competes Will Not Be Enforceable Unless Minimum Requirements Are Met
With this enactment, non-competes that do not comply with the following requirements will no longer be enforceable.
- New Hires. The agreement must be in writing, signed by both the employer and the employee, expressly state that the employee has the right to consult with counsel prior to signing, and be provided to the employee on the earlier of either a formal offer of employment or 10 business days before the commencement of employment.
- Existing Employees Not Facing Termination. The agreement must be in writing, signed by both the employer and the employee, expressly state that the employee has the right to consult with counsel prior to signing, be supported by fair and reasonable consideration independent from the continuation of employment, and be provided to the employee at least 10 business days before the agreement is to be effective.
- Only Protect the Employer’s Legitimate Business Interests. The agreement must be no broader than necessary to protect the employer’s legitimate business interests, which include (1) trade secrets; (2) confidential information; or (3) good-will. The non-compete will be presumed necessary where the employer’s business interests cannot be adequately protected through an alternative restrictive covenant, such as non-solicitations or confidentiality agreements.
- Temporal Restrictions. The duration of the restricted period is limited to 12 months from the date of separation of employment, unless the employee breached his or her fiduciary duty to the employer or has unlawfully taken, physically or electronically, property belonging to the employer, in which case the restricted period may extend up to 2 years.
- Geographic Limitations. The permissible geographic limitation is not defined by the employer’s footprint, but by the employee’s presence. An agreement that limits the geographic reach to the area in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence is presumptively reasonable.
- Reasonable in Scope. The agreement must be reasonable in the scope of proscribed activities. In other words, the employer will need to tie the prohibited activities to the protection of a legitimate business interest and limit the scope to the specific types of services provided by the employee during the last 2 years of employment.
- Inclusion of a “Garden Leave” Clause. Non-competes will need to be supported by a garden leave clause or other mutually agreed upon consideration, provided that the consideration is specified in the agreement. At minimum, the garden leave clause must provide for wage continuation for the duration of the restricted period of at least 50% of the employee’s highest annualized base salary within the 2 years preceding termination. The provision must also clarify that, except in the event of a breach by the employee, the employer is not permitted to unilaterally stop payments during the restricted period. That said, if the restricted period has been extended as a result of the employee’s malfeasance as discussed above, the employer is not required to make garden leave payments during the extended restricted period.
- Public Policy. Finally, the non-compete must be consonant with public policy.
Other Provisions Affecting Enforcement of Non-Competes
Courts will be permitted to “blue pencil” or revise an otherwise unenforceable non-compete in order to render it enforceable, but only to the extent necessary to protect a legitimate business interest of the employer.
In addition, choice-of-law provisions that are incompatible with the law are unenforceable, where the employee is a resident of, or employed in, Massachusetts, and has been for at least 30 day preceding termination.
The law requires that an action to enforce a non-compete be brought in the county where the employee resides or, if agreed upon by the employer and employee, in Suffolk county.
Finally, under the law, exclusive jurisdiction is provided in the county where the employee resides or Suffolk County. If brought in Suffolk County, the Superior Court or Business Litigation Session have exclusive jurisdiction.
Employers who have questions or need advice or assistance with non-competes or other restrictive covenants should contact John K. Baker (firstname.lastname@example.org) 610-782-4913 or Victoria Fuller (email@example.com) 617-748-5211