By: Stéphanie Smith
After many failed prior attempts to limit or prohibit the use of non-compete agreements in Massachusetts, at the end of July, state legislators finally passed “An Act Relative To The Judicial Enforcement of Noncompetition Agreements.” Governor Charlie Baker signed the bill into law on August 10, 2018. The Act significantly alters the non-compete landscape and will require all employers who utilize non-competition agreements to review and likely revise their practices.
Key Aspects of the Law
The new law governs any non-competition agreement entered into on or after October 1, 2018, which it defines as an agreement “under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.” Importantly, the law does not apply to several other types of covenants, including:
- employee and customer/vendor non-solicitation provisions;
- non-disclosure agreements;
- invention assignment agreements;
- a non-compete agreement entered into at the end of employment, if the employee is given at least 7 business days to rescind the agreement; and
- noncompetition agreements outside of an employment relationship or made in connection with the sale of a business (but only if the individual restricted is a “significant” owner who will receive “significant” consideration or benefit from the sale).
Employers should take notice that the law expressly includes independent contractors in the definition of “employees.” Therefore, non-competition provisions in independent contractor agreements entered into on or after October 1, 2018 will also need to comply with the law.
The law dictates both procedural and substantive requirements for the enforceability of non-competition agreements. These requirements are summarized below.
- Non-compete agreements entered into on or after October 1, 2018 will need to be in writing and signed by both the employer and the employee.
- If the agreement is entered into in connection with new employment, the agreement must be provided to the new hire either with the formal offer letter or 10 business days before the start of employment, whichever is earlier.
- If the agreement is entered into after the start of employment (but not at the time of separation), the individual must receive “fair and reasonable consideration” in exchange for the restriction and at least 10 business days’ advance notice before the agreement is to be effective.
Importantly, the law codifies a rule – contrary to some cases – that continued employment is not sufficient consideration to support a non-compete agreement entered into after the start of employment. However, the law does not define what will constitute “fair and reasonable consideration.”
The most important substantive requirements are summarized below:
- After October 1, 2018, the non-compete agreement must state that the employee has the right to consult with an attorney before signing it.
- The non-compete restriction must extend to no more than 12 months post-employment (but if the individual has breached his/her fiduciary duty to the employer or misappropriated trade secrets, confidential information or other property belonging to the employer, the post-employment restriction can extend to 2 years post-employment).
- The law also codifies current common law, which requires that a non-competition agreement be (i) no broader than necessary to protect a legitimate business interest of the employer (which the law defines as trade secrets, confidential information or employer goodwill) and (ii) reasonable in geographic scope and scope of restricted activities.
- A non-competition agreement cannot be sought from the following employees: (i) non-exempt employees (as defined under the Fair Labor Standards Act); (ii) undergraduate or graduate students engaged in connection with an internship or other short-term employment; (iii) employees 18 years or younger.
- The agreement must include a “garden leave” clause or “other mutually agreed upon consideration” in return for enforcement of the non-compete. Garden leave is defined as payment to the individual throughout the restricted period of at least 50% the employee’s highest annualized base salary within the last two years. The alternative of “other mutually-agreed upon consideration” is not defined. The statute does not address how these requirements would apply to commissioned employees who receive no base salary. Payments cannot be discontinued except in the event of a breach by the employee.
- Out-of-state employers cannot attempt to avoid the requirements of Massachusetts law by including a choice of law provision in the agreement. The law renders a non-Massachusetts choice of law provision unenforceable if the employee was a resident of or employed in Massachusetts for at least 30 days immediately before the end of employment.
Critically, the law states that a non-competition agreement shall not be enforceable against an employee who has been terminated without cause or laid off.
What Employers Should Do
Given the new law, employers should step back and consider whether to require non-competition agreements from new hires moving forward, or rely solely on other forms of restrictive covenants, such as non-solicitation provisions, which fall outside of the statute. This analysis will require careful consideration.
Employers who decide to continue requiring new hires (and independent contractors) to sign a non-compete will need to substantially revise their agreements to bring them into compliance with the new requirements. who opt to cease utilizing non-compete clauses and to utilize other forms of restrictive covenants should also review and revise their agreements accordingly. Until we receive more guidance from courts or the Attorney General, employers who choose to deviate from the garden leave formula “50% of the highest annual base salary” rule (or an equivalent amount for commissioned employees), will do so at their own risk.
Employers who choose to continue using non-competes and revise their agreements accordingly should also review their current practices and train HR personnel (or other employees responsible for onboarding new hires) to ensure that the agreement is distributed at the proper time and signed by both parties. It would be good practice for the candidate to receive an agreement that has already been signed by the employer and to send back the signed agreement (by mail or email) before the first day of employment. This step often falls through the cracks during the onboarding process and will require vigilance.
Finally, employers will need to consider the new non-compete law when letting go of employees with non-competition provisions entered into on or after October 1, 2018.
The employment and business lawyers at Casner & Edwards are available to assist employers in deciding how to respond to the new law, including reviewing and revising their existing agreements and deciding how to handle employee separations.