Massachusetts Adopts Non-Compete Law Requiring Immediate Attention
Governor Baker signed legislation on August 10, 2018, regulating the use and enforcement of noncompetition agreements in Massachusetts. The Massachusetts Noncompetition Agreement Act (the “Act”) takes effect on October 1, 2018 and will apply to non-competition agreements entered into on or after that date for employees that reside or work in Massachusetts, including independent contractors. The Act does not apply retroactively to existing agreements; however, judges may use the provisions of the Act in determining whether current agreements are fair and reasonable. As the Act is quite extensive, we are providing you the highlights below.
What are the new requirements for a noncompete agreement to be valid and enforceable on October 1, 2018?
- Agreements with new employees — must be in writing; signed by both the employer and employee; expressly state that the employee has the right to counsel prior to signing; and must be provided to the employee by the earlier of a formal offer of employment or 10 business days before the hire date.
- Agreements with existing employees — must be in writing; signed by both the employer and employee; expressly state that the employee has the right to counsel prior to signing; be supported by “fair and reasonable consideration” independent from the continuation of employment; and provide advance notice of the agreement not less than 10 business days before the effective date of the agreement.
- The restricted period within the agreement cannot exceed one year from the date of cessation of employment (however, the restricted period can be extended to two years if the employee has breached the employee’s fiduciary duty or has unlawfully taken, physically or electronically, property belonging to the employer).
- The agreement must be “no broader than necessary” to protect one or more of the following legitimate business interests of the employer: employer’s trade secrets; employer’s confidential information; or employer’s goodwill.
- The agreement must be reasonable in geographic scope. The geographic scope will be considered presumptively reasonably if it is defined as the areas in which the employee “provided services or had a material presence or influence” during the past two years.
- The agreement must also be reasonable in the scope of the prohibited activities in relation to the interests protected.
- Lastly, the agreement must include a “garden leave clause” or “other mutually-agreed upon consideration” between the employer and employee. A “garden leave clause” is defined as payment during the restricted period of at least 50% of the employee’s highest annualized based salary during the last two years of employment.
Is the Act enforceable against all employees?
The Act does not apply to the following categories of employees:
- Non-exempt (overtime eligible) employees under the Fair Labor Standards Act;
- Undergraduate or graduate students who enter into an internship or short-term employment relationship, whether paid or unpaid;
- Employees terminated without cause or laid off; or
- Employees age 18 or younger.
Are there exceptions under the new Act?
Yes. The Act expressly does not apply to the following agreements:
- Covenants not to solicit or hire employees of the employer;
- Covenants not to solicit or transact business with customers, clients or vendors of the employer;
- Noncompetition agreements made in connection with the sale of a business entity;
- Noncompetition agreements made outside of an employment relationship; and
- Certain other agreements;
What should employers do next?
- Massachusetts employers should consult with their corporate attorneys before entering into new agreements to make sure they comply with the new Act.
- Employers should have their current agreements reviewed to determine if they will withstand judicial scrutiny in the event an employee challenges their validity under the “fair and reasonable” standard that courts will continue to apply to agreements entered into prior to the Act.
Please contact any of our corporate legal team partners Jay Pabian, Kim Kramer or Lara McKenna, with any questions you may have. We will be happy to review existing employment agreements and draft new agreements to comply with the new Act.
Disclaimer: This article has been prepared for informational purposes only. This article is not intended to provide legal advice and we urge you to consult with your legal consult regarding the application of the Act to your particular situation.