Massachusetts Non-Compete Changes Looming

 
S&W Client Advisory
September 10, 2018

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.

Coverage

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:

Application

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 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.

Enforcement

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.