Governor Baker recently signed into law an economic development bill that will fundamentally reshape the use of non-competition agreements by Massachusetts employers. The new Massachusetts Noncompetition Agreement Act caps off years of efforts to reform this area of the law to be more favorable to employees. Here are the highlights that every Massachusetts employer should know:
- Agreements subject to the Act must meet 8 requirements to be enforceable. These are designed to ensure that both the process of entering into the agreement and the substance of the agreement are reasonable. For instance, employers must provide a copy of the agreement and notice of the employee’s right to consult with counsel by the time they extend an offer of employment or 10 business days before the employee begins a job, whichever occurs earlier. The law also requires “fair and reasonable” consideration beyond the mere continuation of employment to support a noncompetition agreement executed by an existing employee. Agreements subject to the Act must be consonant with public policy and no broader than necessary to protect legitimate business interests, which are defined as trade secrets, confidential information, or goodwill. They must also be reasonable in terms of the duration, geographic reach, and scope of proscribed activity; notably, the Act draws a bright line prohibiting restrictions in excess of 12 months, except that employees who breach a fiduciary duty or unlawfully take employer property (including electronic data), may be subject to a 2-year restriction. Finally, agreements subject to the Act must be supported by a “garden leave” clause providing salary continuation of at least 50% of the employee’s salary during the restricted period or “other mutually-agreed upon consideration.”
- The Act only applies to noncompetition agreements executed on or after October 1, 2018. Until then, employers are free to enter into agreements that do not meet the requirements of the new legislation and these agreements will, in theory, be enforceable to the same extent after October 1 as they are under current law. Employers should nevertheless expect that the new law may evolve into a judicial touchstone for evaluating the reasonableness of all noncompetition agreements. Employers can bolster the enforceability of agreements executed in the interim by incorporating terms (such as the duration or geographic scope of the restrictions) consistent with the new law.
- Some employees can’t be bound by non-competition agreements. Under noncompetition agreements subject to the Act, an employee cannot be subject to noncompetition restrictions if he or she is laid off or terminated without cause. This is also true for three other categories of employees: (1) those who are overtime-eligible (“non-exempt”) under the Fair Labor Standards Act; (2) undergraduate or graduate student interns and short-term employees; and (3) employees 18 years old or younger.
- Massachusetts law rules. Any employee who lives or works in Massachusetts for at least 30 days prior to the end of his or her employment is protected by the Act. An employer cannot avoid the Act by selecting the law of another state to govern the employment relationship, even if the employer is based in another jurisdiction.
- Other post-employment obligations are not affected. Nondisclosure agreements, agreements prohibiting the solicitation of an employer’s employees or clients, assignments of invention rights, and other agreements that protect an employer’s business interests but do not restrict an employee’s post-employment competition are not subject to the Act.
- There’s almost always a small exception to the rule. The Act does not apply to any noncompetition agreement executed as part of the sale of a business or in connection with a separation agreement (provided the employee is permitted seven business days to rescind).
What should Massachusetts employers be doing today to prepare for the change in the law?
Review your existing use of noncompetition agreements. Would your current noncompetition agreements meet the requirements of the new law? If not, you will need to make updates to ensure that agreements executed on or after October 1, 2018 comply with the Act. Exclude those not subject to noncompetition agreements under the Act (non-exempt employees, interns, and employees who are 18 years old or younger) from the segment of your workforce asked to execute noncompetition agreements. In view of the heightened requirements imposed by the Act, consider whether the business interests you are looking to guard through the use of a noncompetition agreement can be adequately protected with more stringent nonsolicitation or nondisclosure obligations.
Bring your onboarding procedures into compliance. The new law is designed to end the practice by which an employer presents a new hire with a noncompetition agreement on his or her first day of work and the employee has little or no room to negotiate over the terms. Educate those in your workforce responsible for hiring on the need to provide adequate time to review a noncompetition agreement in advance of an employee’s first day.
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