By Mary O’Neal, Esq.
I have been hearing a great deal about a new non-compete law in Massachusetts and do not know if my old non-compete agreements that I require all employees to sign are still valid. Can you tell me what the new law provides?
Effective October 1, 2018, new non-competition agreements must comply with the new law. The new law enacted many changes to the old non-competition law, which was developed and refined over the years by courts in their decisional case law. Having a statute addressing non-competition agreements is something that Massachusetts did not previously have the benefit of and the provision of the new law will provide welcome certainty and guidance to employers and employees alike. The important, essential provisions of the new law are the following:
1) The law only applies to non-compete agreements entered into on or after October 1, 2018
Non-compete agreements entered into prior to October 1 will not be voided. However, it can be expected that the courts may examine and judge old non-compete agreements with the strictures of the new law in mind. As a result, litigation over the enforceability of once-allowable provisions within existing non-competes that the new law now prohibits is likely to embroil Massachusetts employers in the coming years.
2) Continued employment is not sufficient consideration for a non-compete agreement
Under previous court decisions, an employer’s request, during employment, that an employee sign a non-compete, for the first time, or a revised non-compete, could be supported by, as adequate consideration, the employer’s willingness to continue the employee’s employment. Under the new law, while non-compete agreements may be entered into during employment, such agreements must be supported by “fair and reasonable” independent consideration beyond continued employment. What this means is that an employer must offer consideration, that is fair and reasonable, and supports the employee’s agreement not to compete. Such consideration may be comprised of a grant of stock options; a bonus; or any other form of consideration that is meaningful, and not just a token payment.
3) Employees are entitled to advanced notice of non-compete agreements
For non-compete agreements entered into at the commencement of an employee’s employment, the agreement must be provided to the applicant/employee either (a) before a formal offer is made or (b) ten (10) days before the employment commences, whichever comes first.
4) Non-compete agreements must now guarantee paid leave
The new law requires employers to provide “garden leave” pay or other “mutually agreed upon consideration” during the non-compete period. Provisions addressing the consideration must be stated explicitly in the agreement. If an employer opts for the “garden leave” consideration, this mandates that the employer pay the employee at least 50% of the employee’s highest salary within the last two years of employment over the non-compete period (which may not exceed one year). The employer’s payment obligation is prorated over the non-compete period. The requirement to pay the garden leave consideration or the mutually agreed upon consideration is only triggered where the employer chooses to enforce the non-compete restrictions. In other words, the employer may waive the non-compete obligation to which the employee agreed, if it so chooses. If it does so, no payment during the non-compete period will be required.
5) Non-competes are limited to one year except in extraordinary circumstances
Post-employment noncompetition periods may only last one year, though the period can be extended for up to two years if the employee breaches a fiduciary duty or has unlawfully taken property belonging to the employer. Such property includes both physical or electronic property.
6) Presumed reasonability of geographic area restrictions and scope of prohibited competitive activities
The new law attempts to clarify certain prerequisites carried over from the case law, particularly those pertaining to the reasonability of the non-compete requirements. A non-compete will be presumed reasonable in geographic scope if it is limited to the geographic areas in which the employee provided services or had a “material presence or influence” within the last two years of the employee’s employment. A non-compete also will be considered reasonable in the scope of restricted activities if it protects “legitimate business interests” and is limited to the specific types of services the employee provided during the last two years of the employee’s employment. “Legitimate business interests” is a defined term that includes the employer’s trade secrets, confidential information, or goodwill. Moreover, non-competes must not be “broader than necessary to protect” these legitimate business interests.
7) Only non-compete provisions are affected, not other contracts with restrictive covenants
Many employers utilize a variety of other agreements intended to protect their confidential information and customer and employee relationships. Such agreements include non-solicitation, non-disclosure, “no raid,” confidentiality, and other similar agreements. Such agreements are not affected by the new law, including agreements made in connection with the sale of a business or of substantially all of a business’s operating assets.
8) Certain employees cannot be bound by non-competes
Employers are not permitted to enforce non-compete provisions against employees who: (i) have been terminated without cause, (ii) have been laid off, (iii) are classified as non-exempt/overtime eligible under the Fair Labor Standards Act, (iv) are eighteen or under, or (v) are undergraduate or graduate students working as interns or in other short-term employment.
Employers should pay particular attention to the fact that non-compete agreements under the new law do not apply to employees who are terminated without cause or laid off. Termination for “cause” generally occurs only where an employee has engaged in serious misdeeds, such as fraud, embezzlement, conviction of a crime, or willful failure or refusal to perform the essential functions of the job. Employees generally are not terminated for “cause” where they were not performing their job responsibilities up to the employer’s standards or where the relationship simply did not work out. Employers are therefore wise to define cause, with specificity, in their non-compete agreements to avoid any doubt about whether or not the threshold has been met.
9) Non-compete restrictions entered into as part of a separation or severance agreement fall outside the scope of the new law
A notable result of this exception is that employees who are terminated without cause or laid off can still be bound by non-compete limitations if those limitations are part of a separation or severance agreement and the employee expressly is given seven business days to rescind acceptance of the separation or severance agreement after the employee signs it. It would certainly make sense that the separation or severance pay be consistent with the new law in terms of the adequacy or fairness and reasonableness of the consideration, though the new law does not specifically address the same.
10) The law applies both to employees and to independent contractors
11) Venue restrictions
Enforcing a non-compete will require the employer to initiate an action in the county of the employee’s residency, or in Suffolk County state court if the parties mutually agree. Massachusetts law will be applied for Massachusetts residents and workers provided they resided in or worked in Massachusetts for the thirty (30) day period prior to the termination.
Mary O’Neal, Esq., is a partner in the Boston law firm of Conn, Kavanaugh, Rosenthal, Peisch & Ford LLP. Send questions to email@example.com.