After nearly a decade of debate in the Massachusetts Legislature, Governor Baker has signed a comprehensive non-compete reform bill into law prohibiting employers from requiring certain types of employees to sign non-competition agreements and establishing minimum requirements that non-competition agreements must meet to be enforceable.
The new law will take effect on October 1, 2018 and applies only to agreements executed after that date. Massachusetts employers will need to carefully review and revise their existing non-competition agreements and hiring practices to ensure compliance with the law’s requirements by that date.
What employee categories will be impacted
The law affects employees and independent contractors who are, or have been, a resident of or employed in Massachusetts for at least 30 days immediately prior to separation from employment. As provided by the new statute, a choice of law provision requiring that a different state’s law apply to the agreement is not permitted. Therefore, employers based outside of Massachusetts may not apply another state’s non-compete laws to Massachusetts employees. Likewise, Massachusetts employers may not apply another state’s non-compete laws to their employees who reside and work outside of the Commonwealth.
A non-competition agreement will not be enforceable against the following categories of employees:
- Non-exempt (overtime eligible) employees under the Fair Labor Standards Act
- Undergraduate or graduate students employed as interns
- Employees terminated “without cause” or who are laid off
- Employees age 18 or younger
What type of agreements does the law affect
The law applies to traditional non-competition agreements, which prohibit competitive activities after employment ends, and “forfeiture for competition” agreements, which impose unfavorable financial consequences if an employee competes. It does not apply to non-competes included in a separation agreement, as long as the employee has been given seven days to rescind acceptance of the separation agreement, or to other kinds of restrictive covenants, including non-disclosure agreements, assignment of invention provisions, and non-solicitation restrictions (to employees, customers, and vendors). These agreements and restrictions will continue to be administered by existing common law.
Non-competition agreements are obligated to meet the following minimum requirements to be valid and enforceable under the law:
- The agreement, if entered into at hire, must be signed by both the employer and the employee, clearly state that the employee has the right to counsel prior to signing, and must be provided to the employee before the formal offer of employment is made, or ten business days before the start date (whichever comes first).
- If entered into after hire (during employment), the agreement must contain additional consideration (something of value that is considered “fair and reasonable” and is not solely the continuation of employment), and as above, must be signed by both the employer and the employee, expressly state that the employee has the right to counsel prior to signing, and must be provided to the employee not less than 10 business days before the effective date of the new agreement.
- Restriction cannot exceed twelve months, but the duration can be as long two years if the employee breached his or her fiduciary duty or unlawfully took the employer’s property.
- The agreement must be no broader than necessary to protect an employer’s trade secrets, confidential information and/or good will, as in existing common law requirements.
- The agreement must be reasonable in the scope of prohibited activities in relation to the interests protected. It will be considered presumptively reasonable if it is limited to only the specific types of services provided by the employee during the last two years of employment.
- The geographic scope of the restriction must also be reasonable. It will be considered presumptively reasonable if the scope 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 include a “garden leave” clause or “other mutually-agreed upon consideration.” “Garden leave” is defined as payment during the restricted period of at least 50% of the employee’s highest annual base salary within the preceding two years. However, “other mutually-agreed upon consideration” is not defined. Therefore, it seems that an employer and employee could agree to a payment that is less than 50% while still upholding the requirement.
- As is the case under existing common law, the agreement must be consistent with public policy.
All non-compete enforcement actions must be brought in Massachusetts, in the employee’s county of residence, or in the Suffolk County Superior Court Business Litigation Session if mutually agreed upon by the employer and employee.
For more information
For more information or if you have questions about complying with the new law, please contact Ed Shoulkin at firstname.lastname@example.org; Kristen Whittle at email@example.com; or Greg Vanden-Eykel at firstname.lastname@example.org, or by phone at 617.654.8200.
Barton Gilman’s employment law team provides comprehensive legal guidance to a wide variety of employers on all aspects of the employment cycle—from hiring through separation—including personnel policies and handbooks, non-compete agreements, and representation before state and federal courts and agencies. To learn more, please visit www.bglaw.com/services/labor-employment/.