After many years, Massachusetts legislators have finally agreed upon non-compete reform. On August 10, 2018, Massachusetts Governor Charlie Baker signed into law a new bill that affects the applicability, scope, and influence of non-compete agreements between Massachusetts employers and employees. The new law, which becomes effective on October 1, 2018, follows years of unsuccessful legislative attempts at reforming Massachusetts non-compete law that to date has been governed by common law. Conn Kavanaugh’s employment law practice group has commented on these unsuccessful initiatives in prior years: Andrew Dennington and Alexis Theriault previously discussed the unsuccessful efforts of the Massachusetts House and Senate to agree on non-compete reform measures in 2016, and Johanna Matloff described failed legislation that would have banned Massachusetts non-competes overall in 2015.
The new law does not ban non-compete agreements, but it will require employers to consider new restrictions, implement new standard language, and understand a variety of new consequences. Below are ten of the most important aspects of the new non-compete law for employers to review in preparation for the changing Massachusetts landscape.
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. Litigation over the enforceability of once-allowable provisions within existing non-competes that the new law now prohibits is bound to embroil Massachusetts employers in the coming years.
2) Continued employment is not sufficient consideration for a non-compete agreement
Non-compete agreements may be entered into during employment, but such agreements must be supported by “fair and reasonable” independent consideration beyond continued employment. The law does not define when consideration is “fair and reasonable.” We thus think it advisable for employers, if possible, to obtain non-competes at the commencement of employment considering that is the time when the employee’s full and compete compensation package can and should be negotiated. Employers who wait will be required to provide additional consideration to the employee over and above what the employer originally intended to provide. Doing so will result not only in additional costs to the employer, but also uncertainty about valuing the worth of individual non-competes and allocating consideration among key employees.
3) Employees are entitled to advanced notice of non-compete agreements
For non-compete agreements entered into at the commencement of employment, the agreement must be provided either (a) before a formal offer is made or (b) ten (10) days before the employment commences, whichever comes first. For agreements entered into after employment has commenced, the employee must receive notice of the agreement’s effective date at least ten (10) days beforehand.
All new non-compete agreements also must abide by the following procedural requirements: (i) they must be in writing, (ii) they must be signed by the employer and the employee, and (iii) they must expressly state that the employee has the right to consult with an attorney prior to signing.
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.” Provisions addressing these considerations must be stated explicitly in the agreement. The “garden leave” clause 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 (up to one year). The employer’s payment obligation is prorated over the non-compete period. The requirement is enforced only where the employer chooses to enforce the non-compete restrictions and the employee is in compliance with the non-compete agreement.
Non-compete restrictions also can be supported by other “mutually agreed upon consideration.” The law does not define what constitutes mutually agreed upon consideration, which will create additional financial uncertainties for employers. For example, does the law allow an employer and an employee mutually to agree upon consideration that amounts to less than what the employee would have received under the garden leave provision? If so, how much less? We suspect that courts will utilize other provisions of the new law to guide them on questions like this, including the aforementioned “fair and reasonable” consideration provision.
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 activities
The new law attempts to clarify certain prerequisites carried over from the common law, particularly those pertaining to the reasonability of the non-compete’s 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 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 employment. “Legitimate business interests” is a defined term that includes the employer’s trade secretes, 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
The terms and structure of non-solicitation, non-disclosure, separation, “no raid,” confidentiality, and other agreements, including certain agreements made in connection with the sale of a business or of substantially all of a business’s operating assets, will not be affected. Of note, non-compete provisions entered into as part of a separation agreement are not considered non-compete agreements under the new law so long as the employee expressly is given seven business days to rescind acceptance.
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 were 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 duties up to the employer’s standards or where the relationship simply did not work out. Employers are thus encouraged to define cause, with specificity, in their non-compete agreements to avoid any doubt about whether or not the threshold has been met.
As mentioned above in § 7, non-compete restrictions entered into as part of a separation 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 agreement. We thus expect that employers will utilize separation agreements more often and in more creative ways in order to avoid the new non-compete law’s reach.
9) The law applies both to employees and to independent contractors
The term employee is specifically defined to include independent contractors.
10) 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.
The new non-compete law will affect employers of all shapes and sizes and will do so quickly considering it becomes effective on October 1, 2018. Prudent employers should contact their counsel, including any of the experienced employment and business attorneys at Conn Kavanaugh, as soon as possible in order to ensure that their non-compete agreements fit within the parameters of the state’s new non-compete law.