This past legislative session, “An Act Relative to the Judicial Enforcement of Noncompetition Agreements” was signed into law. Noncompete agreements in Massachusetts must now comply with the provisions of the new M.G.L. c. 149 §24L, and as a result, employers should begin immediately reviewing their current standard noncompete agreements, as all noncompete agreements entered into on or after October 1, 2018 must comply with the new law.
Below is a summary of what employers need to know and what actions employers should take to ensure their noncompete agreements comply with the law.
What Employers Need to Know
- The new law applies to both Massachusetts employees and independent contractors.
- While noncompete agreements entered into on or after October 1, 2018 must comply with M.G.L. c. 149 §24L, noncompete agreements entered into prior to October 1, 2018 are not subject to the new law.
- Employers are now required to offer paid garden leave of at least 50% of the employee’s highest base salary during the prior 2 years or other “other mutually-agreed upon consideration” as part of a noncompete for the length of time the employee is restricted from competing.
- Garden leave payments must be made pro-rata over the course of the restricted period and pay cannot be terminated unless the employee breaches the agreement or the employer waives the restrictions in the agreement.
- “Other mutually-agreed upon consideration” must be specified in the agreement. There is no guidance in the statute regarding what types of consideration are permissible (e.g. stock options, signing bonus) or what the “floor” is for value of consideration offered. Employers should be wary of using this clause as a “loophole” to avoid garden leave pay to offer something of substantially less value, as a court will examine all consideration offered (even if mutually agreed upon) in the context of the public policy behind the act (ensuring employees are fairly compensated for giving up their right to compete).
- The scope of a noncompete must be:
- No longer than 1 year (except the period may be extended to two years as a result of employee misconduct).
- No broader than necessary to protect “fair and legitimate business interests” (defined by statute as trade secrets (defined under M.G.L. c. 93L §1), other confidential information and goodwill).
- A noncompete agreement is “presumed necessary” where the above interests “cannot be adequately protected through an alternative restrictive covenant” (e.g., non-disclosure agreements (“NDAs”, non-solicit agreements or confidentiality agreements). However, the statute does not provide any guidance on how to determine whether a noncompete agreement cannot adequately protect “fair and legitimate business interests.”
- Reasonable in geographic reach (presumed reasonable if limited to the employee’s area of service, or where the employee had a “material presence or influence,” within the last 2 years). “Material presence or influence” is undefined in the statute.
- Reasonable relative to the employer’s interest sought to be protected (presumed reasonable if limited to the “specific type of services provided by the employee” within last 2 years).
- Certain types of agreements are not considered “noncompetition agreements” and are not subject to the statute, including:
- NDAs/confidentiality agreements;
- Non-solicit agreements (of employees or customers);
- Noncompete provisions in connection with the sale of a business;
- Severance agreements (if the employee is expressly given the right to rescind acceptance within 7 days of execution); and
- A forfeiture agreement (defined as “an agreement that imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship, regardless of whether the employee engages in competitive activities following cessation of the employment relationship”).
- “Forfeiture for competition agreements” are subject to the statute (defined as “an agreement that…imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship if the employee engages in competitive activities”).
- The law specifically prohibits enforcement of noncompete agreements against the following categories of workers:
- Non-exempt employees;
- Undergraduates or graduate students engaged in short-term employment;
- Employees age 18 or younger; and
- Employees terminated without cause or laid off.
- “Cause” is undefined by the statute, creating a grey area in the law. What constitutes “cause” will likely be the subject of frequent litigation as case law develops regarding this statute.
- All noncompete agreements must: (i) be in writing and signed by both parties; and (ii) expressly state that the employee has the right to consult with counsel.
- A noncompete presented in connection with the commencement of employment must be provided to the employee before the earlier of: (i) the date a formal offer of employment is made; or (ii) 10 business days before the commencement of the employee’s employment. The statute does not provide guidance on whether the 10-day waiting period may be waived.
- A noncompete presented during the employee’s employment (but not in connection with employee’s separation from the company) must: (i) be provided to the employee at least 10 days before to the effective date of the agreement; and (ii) the employer must offer “fair and reasonable consideration.” This term is undefined, but at the very least raises the bar above the typical minimal legal requirement of “consideration” for a court to find an enforceable agreement. Continued employment in and of itself is not fair and reasonable consideration.
- “Choice of law” provisions (stating that the agreement is subject to the law of a state other than Massachusetts) are invalid if the employee has lived or worked in Massachusetts for 30 days preceding the employee’s termination.
- Noncompete agreements that do not comply with the statute may be “reformed” by the courts to render them valid and enforceable.
What Employers Should Do to Ensure Compliance
- Draft new noncompete agreements that comply with statute’s provisions. In light of the cost that the employer must shoulder regarding garden leave/consideration (as well as possible litigation costs of enforcing noncompete agreements), employers may need to assess whether to limit noncompete agreements to key employees.
- Consider drafting new, strengthened non-disclosure, non-solicitation and separation agreements, to protect employer interests as these agreements are not subject to the new law (but, of course, are subject to common law rules of reasonableness).
- Implement human resources systems so that noncompete agreements are presented to employees in compliance with the statute (e.g., the pre-commencement and 10-day notice provisions discussed above).
- With the interpretation of several key provisions of the law left open for interpretation by the statute (e.g., as noted above, the meaning of termination for “cause,” what constitutes “fair and reasonable consideration,” what constitutes “material presence or influence,” under what circumstances a noncompete agreement would not adequately protect “fair and legitimate business interests”) employers should keep an eye on developments in this area of law, as such provisions will likely be fleshed out by the courts through litigation.
Please do not hesitate to contact us to set up an in-person or phone consultation to review and discuss your company’s noncompete agreements to ensure that they comply with the new law.