Massachusetts Non-Compete Changes Looming
The recently enacted Massachusetts economic development package includes new restrictions on (but does not outright prohibit) the use of non-compete agreements in Massachusetts. The new law, which will amend M.G.L. c. 149 §24L, goes into effect on October 1, 2018 and applies to all non-compete agreements executed on or after that date. The new law does not apply to existing agreements in effect prior to that date.
The law applies to all employees (determined for this purpose under the sweeping Massachusetts standard) and independent contractors. The new statute will effectively apply to anyone who is or has been a resident of or employed in Massachusetts for at least 30 days immediately prior to their termination. In other words, the reach of the law cannot be avoided through use of a choice of law provision so the relevant question will always be the location of the employee rather than the location of the employer. As a result, the law applies equally to employers based inside or outside of Massachusetts. (Employer for this purpose is also determined without regard to size or form.)
Moreover, the new law restricts the use of non-compete agreements against any of the following types of employees:
- Employees classified as non-exempt by the Fair Labor Standards Act (eligible for overtime);
- Employees terminated without "cause" (cause is undefined in the law and, therefore, should be defined in any new non-compete agreement) or laid off;
- Employees age 18 or younger; and
- Enrolled (full-time or part-time) undergraduate or graduate students in an internship or other short term employment.
The law applies only to traditional noncompetition agreements prohibiting competitive activities after employment ends. It does not apply to other kinds of restrictive covenants, including non-disclosure and confidentiality agreements, assignment of invention provisions and non-solicitation restrictions (as to employees, customers and vendors), all of which will continue to be governed by existing common law.
The new law also does not apply to a non-compete agreement made in connection with the sale of a business (equity or assets) where the individual subject to the agreement is a significant owner, member or partner who received "significant consideration or benefit" from the transaction, nor does it apply outside the employment relationship.
Importantly, the new law does not apply to a non-compete that is part of a separation agreement, however, the employee must be given seven days to rescind acceptance (similar to existing requirements for employees over 40 to sign a release of claims).
Finally, the law does not apply to non-compete agreements entered into prior to October 1, 2018.
Requirements for Enforceable Non-Competes
In addition to ensuring that non-compete agreements are only provided to legally eligible employees, the law mandates additional minimum requirements in order for a non-compete to be valid and enforceable.
- The agreement must be in writing, signed by both the employer and the employee and expressly state that the employee has the right to counsel prior to signing.
- In the case of a non-compete entered into when employment begins, the non-compete must be provided to the employee on the earlier of the date of the formal offer of employment or 10 business days before the hire date.
- In the case of a non-compete entered into during the course of employment, the agreement must be provided in exchange for "fair and reasonable" consideration independent from the continuation of employment and must be provided at least 10 business days before the effective date of the agreement.
- The non-compete "restricted period" cannot exceed 12 months, except that the duration can be extended to two years in cases where an employee has breached his or her fiduciary duty or unlawfully taken the employer's property.
- Consistent with common law, the non-compete must be reasonable in its duration, geographic scope and the scope of the prohibited activity. The following limitations will qualify as "presumptively reasonable" –
- Geographic scope that is defined as the area(s) in which the employee "provided services or had a material presence or influence" during the past two years;
- A 12 month duration (other than as noted above); and
- Scope of prohibited activity limited to only the specific types of services provided by the employee during the last two years of employment. (At a minimum, prohibited activity must be reasonable in relation to the interests protected. These interests include the employer’s trade secrets, other confidential information and goodwill.)
- The agreement must be consistent with public policy (as is the case under existing law).
The law also includes a consideration or "garden leave" requirement, the idea of which is that the individual is paid during the restricted period in which he or she is prevented from competing. To be compliant, the leave payment must be either: 50% or more of the employee’s highest annualized base salary within the preceding two years for the duration of the non-compete restricted period or "other mutually-agreed upon consideration." What will satisfy the latter requirement is not clear and we can expect to see this matter heavily litigated until we get further guidance from the courts or the legislature. From the text of the statute, however, it does appear that an employer and employee can mutually agree to something less than the 50% amount. If the 50% garden leave alternative is used, any payment must be made pro rata over the restricted period and the employer is generally unable to unilaterally stop payment absent a breach by the individual.
Any court proceeding relating to the new law (such as a challenge to a non-compete or an attempt to enforce it) must be brought in Massachusetts for the county in which the employee resides. The parties may, however, agree to bring the action in the Suffolk County Massachusetts Superior Court Business Litigation Session.
Courts may "blue pencil" the agreement, meaning that they may modify it so as to be enforceable, rather than tossing the entire agreement out.
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While there are many unanswered questions about the new law, employers should review and revise their existing non-competition agreements to ensure continued compliance on and after October 1, 2018. Any changes should also be carefully considered in light of tax laws, including Internal Revenue Code Section 409A.
Please contact a member of the Employment and Benefits Practice Group if you have any questions.