Massachusetts has enacted a new non-competition law that dramatically changes the state of the law in the Commonwealth. The new law, which becomes effective on October 1, 2018, provides significant new restrictions on non-competition agreements, while exempting some post-employment agreements. It applies only to agreements entered into on or after October 1, 2018, but could be used to interpret earlier agreements. Among other things, the new law:
- Limits non-competition agreements to no more than one year post-employment except for agreements involving a sale or certain “bad acts”;
- No longer allows continued employment to qualify as consideration for non- competition agreements entered into after the start of employment;
- Makes non-competition agreements unenforceable against employees 18 or younger, student interns, employees terminated without cause, and non- exempt employees (typically those paid on an hourly basis);
- Requires employers to pay a “garden leave” for the length of the restricted period of 50% of the employee's highest base salary during the prior two years, or some “other mutually-agreed upon consideration”;
- Requires employers to provide advance notice to employees of any non- competition restrictions;
- Applies to 1099 independent contractors as well as W-2 employees.WHAT IS REQUIREDPrior Notice. Employers must now provide advance notice of the non-compete to employees. For new employees, the non- compete must be provided by the earlier of a formal offer of employment, or 10 business days before the commencement of employment. For non-competes entered into after the start of employment, notice must be provided at least 10 business days before becoming effective. In both cases, the agreement must be in writing, signed by both the employer and the employee, and state that the employee has the right to consult with counsel prior to signing.
- Garden Leave. Employers must pay former employees against whom a non-compete is enforced a “garden leave” of at least 50% of the employee's highest annualized base salary over the preceding two years for the duration of the restricted period, or “other mutually-agreed upon consideration,” provided the mutually agreed upon consideration is specified in the non-compete.
- Reach and Scope. The agreement must be “reasonable” in relation to the interests protected – both in the reach of geographic area and the scope of prohibited activities. The law defines reasonableness for geographic reach as the area in which the employee worked or had a “material presence or influence” during the prior two years. Scope is defined by the kinds of services provided by the employee.
- WHAT IS PROHIBITED
- Non-competes are unenforceable against employees 18 years of age or younger, student interns, employees terminated without cause, and non-exempt employees under the Fair Labor Standards Act.
- Restricted periods may not exceed 12 months from the date of cessation of employment, absent certain unlawful behavior by the employee.
- Non-competes may not be “broader than necessary to
- protect the legitimate business interests of the employer.” The law defines “legitimate business interests” as the employer's trade secrets, confidential information, and goodwill.
- The new law also voids non- competes where the employer terminates employees without cause or includes them in a layoff or reduction-in-force.
- WHAT IS ALLOWED
- The non-compete will be considered presumptively reasonable – and thus enforceable, assuming other requirements are met - if it is tailored to the geographic reach and scope criteria noted above.
- Several post-employment agreements are exempted. The new law does not apply to: post- employment customer or employee non-solicitation agreements; non-competes entered in connection with the sale of a business when the restricted employee is an owner, member or partner receiving significant consideration from the sale; non-disclosure, invention assignment, and confidentiality agreements; and non-competes involving separation agreements if the employee is given seven days to rescind acceptance. These carve-outs may result in a greater use of customer non-solicitation agreements and severance packages that include a non- compete clause.
- WHAT SHOULD EMPLOYERS DO
- Given the broad scope of the new law and its impact on new and existing non-competition agreements, employers should:
- • Review existing non- competition agreements to ensure they are sufficiently reasonable in light of the new standards, or whether new agreements should be given. Courts may interpret old agreements by the new reasonableness standards.
- • Draft new non-competition agreements for employees hired after October 1, 2018. Do not use an old form as it may not meet the new law's requirements. Consult legal counsel to help prepare the new agreements.
- • Ensure that new non- competition agreements are executed within 10 days of an employment offer or commencement of employment, whichever is earlier, and that they state the employee has the right to confer with counsel prior to signing.
- • Update employee handbooks and procedures, ensure that human resources personnel are aware of the new law; and make certain on-boarding and exiting procedures and documents comply with the new requirements for notice, consideration, review, etc.
