On July 31, 2018, after years of debate and attempts at compromise, the Massachusetts legislature finally passed a bill that will fundamentally alter the use of noncompete agreements in the Commonwealth. The bill was signed by Governor Baker on August 10, 2018, and the law will go into effect on October 1, 2018. The new law will apply only to agreements that are signed on or after October 1, 2018.
The law does not prohibit the use of noncompete agreements altogether, but it does create specific standards regarding the enforceability of such agreements.
The new law applies to employees who work or reside in Massachusetts. A choice of law clause providing that the law of some other jurisdiction will apply will not be effective with regard to employees who have worked or lived in Massachusetts for at least 30 days prior to termination. The law includes independent contractors within the definition of “employee” and noncompete agreements with contractors are therefore covered. As an aside, entities engaging independent contractors should ensure that they satisfy the stringent requirements of the Massachusetts Independent Contractor law. (M.G.L. c. 149 § 148B.)
Employees Who May Not Be Subject to Noncompete Agreements
The law provides that noncompete agreements may not be enforced against the following types of employees:
- Employees who are non-exempt under the Fair Labor Standards Act (i.e. employees eligible for overtime);
- Undergraduate or graduate students who are employed as interns or are engaged in short-term employment, as well as employees under the age of 18;
- Employees who have been terminated without “cause” or who have been laid off.
The law does not define what constitutes “cause” for termination, and employers may be well served by including a definition of what constitutes cause for termination in their noncompete agreements. Whether court cases create a common law definition of cause in this context remains to be seen.
Consistent with established Massachusetts case law, the law provides that a noncompete agreement must be no broader than necessary to protect the confidential information, trade secrets, or good will of the employer.
A covenant not to compete cannot exceed a 12-month period from the date of the employee’s departure. This period may be extended up to 24 months if the employee breaches his or her fiduciary duty to the employer or unlawfully takes the employer’s property.
- Geographic Scope
The agreement must be reasonable in geographic scope. An agreement limited to the geographic area in which the employee provided services or had a material presence within the last two years of employment will be presumptively reasonable.
- Scope of Restricted Activities
The agreement must also be reasonable as to the scope of restricted activities. A restriction limited to the specific services the individual provided over the two years prior to termination is presumptively reasonable, provided that the restriction otherwise seeks to protect legitimate business interests.
Garden Leave / Other Consideration
The law requires that the agreement provide “garden leave” or “other mutually-agreed upon consideration.” Garden leave requires payment during the restricted period of at least 50% of the employee’s highest annual salary within two years prior to the employee’s termination. The law does not define “other mutually-agreed upon consideration.” For existing employees, however, the law expressly provides that continued employment alone is not sufficient consideration for a non-compete agreement and the employer will have to provide some additional “fair and reasonable” value to the employee.
Review By Individual
Like the federal Age Discrimination in Employment Act’s release requirements, the law has specific provisions regarding review and consideration of noncompete agreements.
- At Hire
The written noncompete agreement must be provided with the formal offer of employment, or ten (10) business days before employment starts, whichever is earlier. The agreement must expressly state that the individual has the right to consult with counsel prior to signing.
- During Employment
The written noncompete agreement must be provided ten (10) business days before the agreement is to be effective, and must expressly state that the individual has the right to consult with counsel prior to signing.
Any civil actions relating to noncompetition agreements must be brought in the county where the individual resides or, if the parties agree, in the Business Litigation Session of the Suffolk Superior Court.
What is Not Covered
The noncompete law will not apply to:
- Agreements restricting solicitation of customers or former coworkers.
- Nondisclosure and confidentiality agreements.
- Noncompete agreements entered into in connection with the sale of a business.
- Noncompete agreements made in connection with separation from employment, provided that the employee is given seven (7) days to rescind acceptance.
Employers planning to use noncompete agreements going forward should review and revise their agreements and overall strategy for protection of legitimate business interests in order to be ready for the October 1st effective date.