Massachusetts Passes New Non-Compete Law
Last Friday, Governor Baker signed an economic development package into law that includes, among other things, new restrictions on the use of non-compete agreements in Massachusetts. The new law which will amend M.G.L. c. 149 §24L goes into effect on October 1, 2018 and applies to all non-compete agreements executed after that date. It does not apply retroactively to existing agreements.
The law applies to all employees and independent contractors who are, or have been a resident of or employed in Massachusetts for at least 30 days immediately prior to their termination and applies equally to employers based inside or outside of Massachusetts. The reach of the law cannot be avoided through use of a choice of law provision, so the relevant question will always be the location of the employee rather than the employer.
Moreover, the new law restricts the use of non-compete agreements against the following types of employees:
- Any employee who is classified as non-exempt by the Fair Labor Standards Act (eligible for overtime);
- Any employee terminated without “cause” (cause is undefined in the law and, therefore, should be defined in any new non-compete agreement) or laid off;
- Any employee who is 18 years old or younger; and
- Any undergraduate or graduate students in an internship or other short term employment.
Finally, any action brought to enforce a noncompete agreement must be brought in Massachusetts in the employee’s county or Suffolk County’s Business Litigation Session.
The law applies only to traditional noncompetition agreements prohibiting competitive activities after employment ends. It does not apply to other kinds of restrictive covenants, including non-disclosure agreements, assignment of invention provisions, and non-solicitation restrictions (as to employees, customers and vendors) which will continue to be governed by existing common law. It also does not apply to non-compete agreements made in connection with the sale of a business or outside the employment relationship.
Importantly, the new law’s requirements do not apply to non-compete agreements that are included as part of a separation agreement, however, the employee must been given seven days to rescind acceptance (similar to existing requirements for employees over 40 to sign a release of claims) and the non-compete agreement must be supported by consideration.
Requirements for Enforceable Non-Competes
In addition to ensuring that non-compete agreements are only provided to legally eligible employees, the law mandates additional minimum requirements in order for a non-compete to be valid and enforceable:
- The agreement must be signed by both the employer and the employee, expressly state that the employee has the right to counsel prior to signing the agreement, and must be provided to the employee on the earlier of the date of the formal offer of employment or 10 business days before the hire date.
- If entered into during employment (after hire), there must be additional consideration (something of value) supporting it.
- The duration of the restriction cannot exceed 12 months, except that the duration can be extended to two years in cases where an employee has breached his or her fiduciary duty or unlawfully taken employer’s property.
- Consistent with common law, the non-compete must be reasonable in its duration, geographic scope, and the scope of the prohibited activity. The following limitations will qualify as “presumptively reasonable:”
- Geographic Scope that is defined as the areas in which the employee “provided services or had a material presence or influence” during the past two years will be considered presumptively reasonable.
- The Duration which does not exceed 12 months (unless an employee has breached his or her fiduciary duties or unlawfully took employer property) is presumptively reasonable.
- Prohibited Activity must be reasonable in relation to the interests protected. If it is limited to only the specific types of services provided by the employee during the last two years of employment it will be presumptively reasonable.
- Garden Leave or “other mutually-agreed upon consideration” must be included. A “garden leave” clause is defined as payment during the restricted period of at least 50% of the employee’s highest annualized base salary within the preceding two years. “Other mutually-agreed upon consideration” is not defined and it is unclear whether it can amount to something less than the Garden Leave. We can expect to see this matter heavily litigated until we get further guidance from the courts or the legislature. From the text of the statute, however, it does appear that an employer and employee can mutually agree to something less than Garden Leave.
- The agreement must be consistent with public policy (as is the case under existing law).
In light of the new law, Employers should carefully review and revise their existing noncompetition agreements to ensure compliance with the requirements summarized above.