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August 14, 2018

Legal Update
Kenneth N. Thayer

New Massachusetts non-compete law: Five things every employer should know

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On August 10, 2018, Massachusetts Governor Charlie Baker signed into law a new statute that will fundamentally alter the scope and enforceability of non-compete agreements between employers and their employees in the Commonwealth.  The new legislation, which becomes effective October 1, 2018, places additional requirements on employers seeking to prevent their employees from joining or starting competitive businesses, while also granting new protections to employees and limiting the types of employees who may be subject to non-compete covenants.  It is imperative that Massachusetts employers who rely on non-compete agreements to protect their confidential information and goodwill familiarize themselves with the new law and its impact on their employment contracts.  To that end, we have highlighted the law’s most significant provisions below:

1.  “Garden Leave” Payments are Required

The most significant aspect of the new non-compete law is the introduction of a “garden leave” provision, pursuant to which employers must compensate former employees who are restricted from taking competitive jobs.  More specifically, the garden leave requirement provides that an employer seeking to enforce a non-compete term must pay its former employee 50% of the employee’s base salary over the restrictive period (e.g., to enforce a 12-month non-compete period, the employer must pay the employee the equivalent of 6 months’ base salary).

Notably, the statute allows for the payment of “other consideration” in lieu of a 50% base salary payment, although the legislature did not offer guidance as to what that consideration might be.  Given this ambiguity, some employers may seek to avoid the 50% payment by offering different forms of compensation, such as signing bonuses, salary increases, or even non-monetary perks like extra vacation or flexible working hours.  Until lawmakers or the courts clarify the meaning of “other consideration,” however, employers who deviate from a straight 50% base salary payment will run the risk of having their agreements deemed unenforceable for lack of adequate consideration.

2.  Non-Compete Periods Cannot Exceed One Year

While Massachusetts courts have enforced non-compete periods for up to three years under prior common law, the new legislation imposes a one-year maximum duration on an employer’s ability to prevent its former employee from competing.  Any agreements entered into after October 1, 2018 must therefore limit the non-compete period to 12 months or less.  There is one exception, however: where an employee breaches her fiduciary duty to the employer or unlawfully takes any employer property, then the non-compete period may be extended from one year to two years.  Under these circumstances of employee misconduct, the employers are not required to continue paying garden leave beyond the first year.

Also note that the law is not retroactive, meaning agreements that were entered into prior to October 1st may contain longer restrictive periods.  Keep in mind, however, that courts have the authority to modify non-compete terms and, in light of the new law, some courts may decide to shorten restrictive periods that exceed the new one-year standard—even for agreements that are otherwise valid and enforceable.

3.  Employees are Entitled to Advance Notice and an Opportunity to Consult with Counsel

Under prior law, employers could present non-compete agreements to new employees on their first day and require signatures immediately as a condition of starting the job.  Under the new law, however, employers must (i) present the written non-compete agreement to new employees either before a formal offer of employment is made or at least ten business days before employment commences, whichever comes first; and (ii) expressly state in the agreement that the employee has the right to consult with counsel before signing.  In addition, employers and employees must both sign the agreement for it to be valid, whereas under the prior law only the employee’s signature was necessary.

4.  Non-Competes Cannot be Enforced Against “Nonexempt” Workers, Student Interns, Minors, or Employees Terminated Without Cause

While Massachusetts courts had for years declined to enforce non-compete agreements against most low-level and hourly employees, the new law formally limits the categories of employees who may be subject to these restrictive covenants.  Specifically, the law excludes three broad categories of employees, stating that non-compete agreements are unenforceable against them: (i) employees who are classified as “nonexempt” under the Fair Labor Standards Act, meaning employees who are entitled to received overtime pay and related benefits; (ii) undergraduate and graduate student interns; and (iii) employees under age 18.

In an even more significant departure from prior law, the new statute also bars enforcement of non-competes against employees who are “terminated without cause or laid off.”  In other words, employers can enforce non-compete agreements against former employees only in two situations: where the employee resigns voluntarily or is fired for cause.

5.    Scope of Non-Compete to be Defined by Employee’s Role with Former Employer

Under prior law, Massachusetts courts have upheld non-compete agreements that broadly prohibited employees from (i) competing in any geographic areas where the employer conducted business, or (ii) working for competing business ventures in any capacity, even if the employee’s day-to-day job duties would differ from their previous work.  The new statute, however, contains language urging employers to tailor their agreements more narrowly.  Indeed, the law states that non-competes must be geographically limited to areas in which the employee herself has provided services or had a “material presence or influence” within the past two years.  As a result, employers are likely unable to prevent an employee from moving to a new area and joining or starting a competing business—even if the employer already has established business contacts in that area.  Additionally, the new law provides that the scope of non-compete agreements must be limited to prevent competition only with respect to the specific types of services that the employee had performed over the past two years of her employment.  Consequently, agreements that seek to bar employees wholesale from working for an employer’s competitors—even in unrelated roles that would not involve any overlap of customers, technologies, etc.—may be struck down as overbroad.

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Massachusetts’ new non-compete statute represents a substantial shift in the enforceability of restrictive covenants in this state.  Employers that utilize these types of agreements will be well-served to closely examine their existing agreements and, in the weeks ahead, make the necessary revisions to ensure their new agreements will comply with all upcoming changes to the law.  Moreover, given the many areas of uncertainty in the new statute, employers should consult knowledgeable counsel to identify potential problem areas, minimize exposure, and safeguard company information and goodwill.