LawFlash

Massachusetts Passes Bill Restricting Noncompetition Agreements

August 03, 2018

The Massachusetts legislature recently passed legislation covering all private sector employees and independent contractors with regard to noncompetition agreements entered into on or after October 1, 2018. The bill sets minimum requirements for the enforceability of such agreements, limits their duration to one year, requires “garden leave” or other post-termination pay, and bars them for certain categories of employees, among other novel provisions.

After many previous failed efforts to restrict noncompetition agreements, or noncompetes, Massachusetts has passed legislation setting the minimum requirements for noncompetes to be enforceable; limiting the permissible duration of most noncompetes to one year; requiring “garden leave” or other post-termination pay; and barring noncompetes for low-wage workers and certain other categories of employees. The restrictions were included in Massachusetts House Bill 4868, and would be effective on October 1, 2018, if signed into law by Governor Charlie Baker.

What’s Covered

The bill covers all employees and independent contractors[1] of private sector employers who live or work in Massachusetts, and broadly applies to noncompetes entered into on or after October 1, 2018, in which an employee agrees that “he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.”

What’s Not Covered

The bill does not apply to the following:

  • Existing noncompetes—this bill will only restrict agreements entered into on or after October 1, 2018, assuming it is signed into law.
  • Noncompetes entered into in connection with the sale of a business entity or an ownership interest in such an entity, when the restricted party is a “significant” owner who receives “significant consideration or benefit” from the sale.
  • Noncompetes entered into in connection with a separation from employment if the employee is given seven days to rescind acceptance.
  • Nonsolicitation agreements—including covenants not to solicit employees, customers, clients, or vendors.
  • Confidentiality and nondisclosure agreements.
  • Invention assignment agreements.
  • Agreements not to reapply for employment.

Minimum Requirements for Enforceability

The bill establishes minimum requirements for a noncompete to be enforceable:

  • Noncompetes entered into in connection with the commencement of employment must be signed by both the employer and the employee, expressly state an employee’s right to counsel before signing, and be provided to the employee upon the earlier of the date of the offer of employment or 10 days before the commencement of employment.
  • Noncompetes entered into after the commencement of employment (but not in connection with a separation from employment) must be supported by fair and reasonable consideration independent from continued employment, must be signed by both the employer and the employee, must expressly state the employee’s right to counsel before signing, and must take effect no sooner than 10 days after the agreement is provided to the employee.
  • Consistent with existing law in Massachusetts, noncompetes must be “no broader than necessary” to protect an employer’s legitimate business interest. The bill defines legitimate business interests as an employer’s trade secrets, confidential information, or goodwill. A presumption of necessity arises when an alternative restrictive covenant (such as a nonsolicitation, nondisclosure, or confidentiality agreement) would not adequately protect an employer’s legitimate business interest.

Limitations on Scope of Noncompetes

The bill restricts the scope of enforceable noncompetes in terms of duration, geography, and prohibited activities:

  • Noncompetes cannot be enforced for more than 12 months from the date of termination of employment, unless an employee has breached a fiduciary duty to an employer or unlawfully taken the employer’s property, in which case the noncompete can be enforced for two years from the date of termination of employment.
  • Noncompetes must be “reasonable in geographic reach”; the geographic areas where the employee provided services or had a material presence or influence during the last two years of employment is presumptively reasonable.
  • Noncompetes must reasonably prohibit activities in relation to the employer’s protected interests; a restriction that protects a legitimate business interest and is limited to the specific types of services provided by the employee during the last two years of employment is presumptively reasonable.

‘Garden Leave’ Pay or Some ‘Other Mutually Agreed-Upon Consideration’

To be enforceable, noncompetes must provide for “garden leave” pay during the entirety of the restricted period or some “other mutually agreed-upon consideration,” which must be specified in the agreement. Significantly, because it can be a substitute for garden leave pay under the statute, the term “other mutually agreed-upon consideration” is normally a very broad concept under the law. It appears to mean that something substantially less valuable than garden leave pay can be sufficient consideration for the noncompete. If garden leave pay is used, it must be “at least 50 percent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding employee’s termination,” to be paid pro rata. Except in the event of breach by an employee, an employer cannot unilaterally discontinue or fail to make post-termination payments. In the event of a noncompete lasting beyond 12 months from the termination of employment due to an employee’s breach of fiduciary duty or theft of employer property, an employer need not pay garden leave pay beyond the 12 months.

Noncompetes Unenforceable Against Certain Employees

The bill renders noncompetes unenforceable against certain categories of employees:

  • Employees classified as nonexempt under the Fair Labor Standards Act.
  • Undergraduate or graduate students employed in short-term employment or internships (paid or unpaid) while enrolled in school.
  • Employees terminated without cause or laid off.
  • Employees age 18 or younger.

Takeaways

If this bill is signed into law, the following significant changes will occur in Massachusetts as of October 1, 2018:

  • Noncompetes must provide for garden leave pay or some “other mutually agreed-upon consideration,” which must be specified in the agreement.
  • Noncompetes generally cannot be enforced for more than 12 months from termination of employment.
  • Employers cannot enforce noncompetes against employees terminated without cause or laid off.
  • Noncompetes must expressly state an employee’s right to counsel before signing.
  • Noncompetes with independent contractors are restricted in the same manner as are noncompetes with employees.

Contacts

If you have any questions or would like to discuss how best to protect your business interests in compliance with this bill, please contact any of the following Morgan Lewis lawyers:

Boston
Siobhan E. Mee

Boston/New York
David A. McManus
Douglas T. Schwarz


[1] As the bill defines an “employee” to include independent contractors, the above references to employees include independent contractors as well.