Non-Compete Reform On The Horizon In Massachusetts
Over the past several years, the business and legal communities in Massachusetts have watched as numerous efforts to reform the Commonwealth’s laws regarding employee non-competition agreements have stalled in the Legislature. Two years ago, after the Massachusetts House of Representatives opted not to move forward with a proposal approved by the Senate, it appeared that any momentum toward reform had fizzled.
Fast forward to June 29, 2016, when the House unanimously (149-0) passed a non-compete reform bill that mirrored many of the proposals in the 2014 Senate bill. Soon after, on July 11, the Senate Rules Committee advanced a bill with even more dramatic reforms. Although a compromise has not yet been reached between the chambers, growing sentiment among lawmakers and commentators is that a bill will be passed and presented to Governor Baker for signature before the current legislative session ends on July 31.
Non-competition agreements restrict employees from working for business competitors for some period of time after their employment terminates. Up until now, Massachusetts has not had any comprehensive statute relating to non-competition agreements, leaving the courts to develop, on a case-by-case basis, the legal principles governing their enforceability. Most lawsuits in Massachusetts involving the attempted enforcement of non-competition agreements are resolved at the trial court level. With little guidance from the appellate courts, employers and employees alike have found it difficult to predict whether a particular non-competition restriction will be upheld.
Proponents of non-compete reform argue that a comprehensive state law will provide much-needed clarity as to the permissible scope of restrictions. Opponents counter that the proposed reforms will significantly curtail the business value and utility of non-competition agreements. With respect to the current proposals, both sides are correct in their arguments: the pending House and Senate bills would provide needed clarity on the permissible scope of restrictions, but would also dramatically limit the circumstances under which non-competition agreements could be enforced.
Despite many significant differences between the House and Senate bills, below are several features that appear likely to be enacted in some form:
Limit On Duration
Both proposals would set a limit on the period of time over which an employer could require a former employee to refrain from competition. The House bill includes a 12-month limit, while the Senate bill would narrow this time period to a mere three months.
Each bill would require employers to pay employees during any restricted period (so-called “garden leave”). The Senate proposal would require that an employee receive his or her full pay during the restricted period, while the House proposal would obligate an employer to pay only a portion of an employee’s compensation. Under either proposal, Massachusetts would become the first state in the country to provide for mandatory garden leave for non-competition agreements.
Restrictions On Employees Subject To Non-Competes
Both bills contain significant limitations on the types of workers who could be restricted by a non-compete. Under each proposal, employers would be prohibited from enforcing non-competes against non-exempt employees, interns, employees aged 18 or younger, independent contractors, or employees who are laid off or terminated without cause. Additionally, the Senate proposal would prohibit employers from enforcing a non-compete against any employee who does not earn at least double the “average weekly wage in the commonwealth,” or roughly $120,000 per year.
Consideration For Non-Competes
The House and Senate bills would both require employers to provide current employees with independent consideration, beyond their continued employment, in order to enforce a non-compete presented to an employee after the start of his or her employment. This would reverse longstanding Massachusetts court precedent holding that continued employment is sufficient consideration for a non-compete.
Both proposals would require employers to provide non-competition agreements to new employees with the offer of employment, or at least 10 business days before the commencement of employment. Each measure would also require a non-compete to state that the employee has the right to consult with counsel before signing the agreement.
Each proposed bill would apply only to non-competes entered into after October 1, 2016. Thus, agreements currently in force, and those signed before October 1, 2016, would continue to be evaluated under current common-law principles.
Recommendations For Employers
Massachusetts employers that rely on non-competition agreements should remain alert for the expected final version of the legislation. However it is ultimately crafted, it appears clear that the new statute will require significant changes in employers’ practices with regard to non-competes.
For instance, employers will need to evaluate whether the business value of a given non-compete outweighs the cost of the mandatory garden leave period. This consideration will depend on a myriad of factors – many of which already inform an employer’s decision whether to try to enforce a non-compete – including the nature of the business secrets held by the employee, whether the employee has engaged in theft or other bad acts, and the costs of seeking to enforce the restriction.
Similarly, employers will need to consider carefully whether to try to obtain new or modified non-competition covenants from employees before October 1, 2016, when the new legislation is expected to take effect. Employers would be wise to confer with experienced employment counsel in making such determinations.
* * *
We will update this information if and when a Massachusetts non-compete reform bill is enacted into law. In the meantime, please feel free to contact us with any questions or concerns.