Non-Compete Reform Statute Poses Challenges For Massachusetts Employers
For years, the business and legal communities of Massachusetts watched and waited for proposed reforms regarding non-competition agreements to become law. Numerous attempts by the Legislature to pass legislation in this area proved unsuccessful, with efforts to work out a bill that both the House and Senate could agree on repeatedly falling short.
This past July, non-compete reform legislation finally passed the Legislature and was signed by Governor Baker. The new Massachusetts law, which went into effect on October 1, 2018, implements significant changes that employers in the Commonwealth need to be aware of.
Non-competition agreements restrict employees from working for business competitors for some period of time after their employment terminates. Up until now, Massachusetts did not have 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 attempted enforcement of non-competition agreements have been resolved at the trial court level, as the crux of such disputes is generally whether a preliminary injunction will be issued prohibiting an individual from accepting a competing position. With little guidance from the appellate courts, employers and employees alike have often found it difficult to predict whether a particular non-competition restriction will be upheld.
The state's new non-compete law provides some much-needed clarity in this area. It codifies some basic legal principles that have long been in place, while also incorporating some new and specific limitations on the permissible scope of non-compete agreements.
Summary Of The New Law
The most significant provisions of the new Massachusetts non-compete statute are summarized below:
Limits On Duration
The law now sets, for the first time, a one-year limit on the period of time over which an employer can require a former employee to refrain from competition. Non-compete clauses will be valid for only one year after an employee's departure, except where the employee misappropriates trade secrets or otherwise breaches a fiduciary duty to his or her former employer, in which case the non-compete may be enforced for up to two (2) years after the employee's departure.
Limits On Scope
In line with established common-law principles, the new statute provides that a non-compete can be only so broad as is necessary to protect the employer's legitimate business interests. In particular, a non-compete must be "reasonable" in temporal and geographic scope, as well as in the scope of activities prohibited. The statute specifies that a non-compete will be considered presumptively valid if it is limited to (a) those locations where an employee provided services or otherwise had a "material presence or influence" within his or her final two years of employment, or (b) the specific types of services provided by the employee during those final two years.
Garden Leave And Independent Consideration
Perhaps the most significant change brought about by the new statute is a requirement that an employer pay a former employee during any post-employment restricted period. Specifically, an employer must pay a former employee either (a) at least 50% of his or her annual salary for the duration of the restricted period (so-called "garden leave"), or (b) "some other mutually agreed upon consideration." In either event, the post-employment consideration must be specified in the non-competition agreement.
Additionally, a non-compete entered into after the start of the individual's employment is valid only if it provides for "fair and reasonable" independent consideration at the inception of the agreement, beyond mere continued employment. This new requirement overturns longstanding Massachusetts court precedents holding that continued employment is sufficient consideration for a non-compete.
Restrictions On Categories Of Employees Subject To Non-Competes
Employers are prohibited under the new law from enforcing non-competes against (i) employees who are non-exempt (i.e., overtime-eligible) under the FLSA, (ii) employees age 18 or younger, (iii) undergraduate and graduate students working part-time, and (iv) employees who are laid off or terminated "without cause." As "cause" is not defined in the statute, it will likely be left to the courts to delineate the scope of this exception.
The new statute mandates that an employer allow a minimum time period for an employee to review a non-competition agreement before being required to sign and return it. For a new employee, a non-compete must be provided either (a) with the formal offer of employment, or (b) at least 10 business days before the employee's first day of work, whichever occurs first. For an existing employee, a non-compete must be presented to the employee at least 10 business days before the agreement is to become effective.
Additionally, for both new and existing employees, a non-compete must state that the employee has the right to consult with counsel before signing the agreement, and the non-compete must be signed by both the employee and the employer.
The new law applies only to non-competes entered into on or after October 1, 2018. Thus, non-competition agreements signed before October 1, 2018 will continue to be evaluated under established common-law principles.
Recommendations For Employers
Massachusetts employers that rely on non-competition agreements should act now to ensure that any non-compete agreements entered into after the statute's October 1, 2018 effective date comply with these new requirements.
Employers should also consider how the new statute may impact their view of non-competes as a business matter. For example, an employer should evaluate whether the value of a given non-compete outweighs the cost of the additional consideration that must be provided to obtain it. Such determinations 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, and the costs of seeking to enforce the restriction.
In analyzing these issues, and in drafting future non-competition agreements, employers would be wise to confer with experienced employment counsel.
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Please feel free to contact us with any questions about the Massachusetts non-compete reform statute or non-competition agreements generally.