Massachusetts Enacts Law Governing Non-Compete Agreements
On August 10, 2018, Massachusetts Governor Charlie Baker signed the Massachusetts Noncompetition Agreement Act (the “Act”), which sets forth new restrictions and requirements for non-compete agreements entered into on or after October 1, 2018. Key provisions are discussed below.
Garden leave. The Act makes Massachusetts the first state in the country to impose a “garden leave” requirement on employers, meaning that employers must compensate employees while they are restricted from engaging in competitive activity. Under the new law, employers must pay a minimum of 50 percent of the employee’s highest base salary during the two years prior to the termination of employment. However, the garden leave provision allows that in lieu of such leave, the parties can negotiate “other mutually agreed-upon consideration between the employer and the employee” as long as it is specified in the non-compete agreement. Thus, some have argued that the provision may not offer much protection to employees, as those in weaker bargaining positions or who are unaware of the law may still be forced to accept lesser consideration during the restricted period.
Restrictions on who can be bound. Although the Act applies to both independent contractors and employees, it prohibits companies from entering into or enforcing non-compete agreements with certain classes of employees. For example, businesses are no longer permitted to enter into non-compete agreements with employees who are classified as nonexempt under the Fair Labor Standards Act. This prohibition addresses concerns that companies are increasingly asking workers in hourly jobs that do not require specialized skills to enter into non-compete agreements. The Act also prohibits non-compete agreements for employees who have been laid off or terminated without cause.
Enforceability. The Act has codified and strengthened existing case law and added additional requirements. In order to be enforceable under the Act, non-compete agreements must meet the following requirements:
- The agreement can be no broader than necessary to protect an employer’s legitimate business interests, defined as trade secrets, confidential information or goodwill. The agreement will be presumed necessary where the legitimate business interest cannot be adequately protected through an alternative restrictive covenant.
- The restricted period is limited to one year from the last date of employment. The restricted period can be extended to two years if the employer can show that the employee has unlawfully taken property belonging to the employer (either physically or electronically).
- The geographic reach of the agreement must be reasonable, and in no event larger than the geographic ares in which the employee provided services or had a material presence or influence during the prior two years.
Carve-out for non-solicitation and non-disclosure agreements. Also notable is the Act’s carve-out for non-solicitation and non-disclosure agreements. Non-solicitation agreements prevent employees from soliciting customers or other employees upon leaving the company, and non-disclosure agreements prevent employees from using confidential or proprietary information after their employment has ended. Thus, while Massachusetts employers must be careful to follow the new law with respect to non-compete agreements, they can still use non-solicitation and non-disclosure agreements to protect their interests when an employee leaves the company without new restrictions.
Additional requirements. In addition to the above considerations, non-compete agreements in Massachusetts must also meet the following requirements:
- Agreements must be in writing and signed by both the employer and employee.
- Agreements must be provided to the employee before a formal offer of employment is made, or 10 business days before the commencement of employment, whichever is earlier.
- Agreements entered into during employment must provide for fair and reasonable consideration, independent from the continuation of employment.
- Agreements cannot require interpretation under another state’s law, where the employee works or resides in Massachusetts.
The Act applies to non-compete agreements entered into on or after October 1, 2018. Both employers and employees with a presence in Massachusetts are advised to review and revise their existing non-compete agreements and policies in order to comply with new requirements.
This article is intended only as a general discussion of these issues. It is not considered to be legal advice or relied upon. For more information, please contact RPJ Associate Jill Kahn Marshall, who counsels clients on employment matters, including discrimination, sexual harassment and contracts. Ms. Marshall is admitted to practice in New York and Massachusetts, as well as the U.S. District Courts for Massachusetts and the the Southern and Eastern Districts of New York. Attorney Advertising.
For more information on non-competes and restrictive covenants, watch RPJ Partner Larry Brocchini’s Expert Insights series, “Non-Competes — Drafting for Enforceability in the Internet Age.“