Effective October 1, 2018: Unprecedented Legislative Change in the Law of Massachusetts Non-Compete Agreements
On August 10, 2018, Massachusetts Governor Baker signed a law that will take effect on October 1, 2018, and implements major new requirements for non-compete agreements entered into on or after October 1, 2018, to be enforceable.
The most significant changes from current law are:
- Non-competes are no longer enforceable against employees who have been terminated without cause or laid off.
- Employers are required to pay compensation to the employee during the non-compete term equal to 50% of their base salary or other mutually-agreed consideration.
All employers who use non-compete agreements should carefully review the impact of the new law on their business practices. The additional key aspects of the new law are summarized below.
Who and what is covered?
- The law does not cover all restrictive covenants, just non-competes in the context of employment, so the new rules do not apply to, among other types of agreements, agreements not to solicit customers, clients, vendors, or employers; confidentiality/non-disclosure agreements; or non-compete agreements made in connection with a sale of a business.
- The rules only apply to non-competes entered into on or after October 1, 2018, not agreements entered into before that date.
- The law covers both employees and independent contractors.
- The new law applies to every employee who has been a resident of, or employed in, Massachusetts for at least 30 days before their employment ends, regardless of any contractual provisions in the agreement attempting to control what state’s law applies.
Are non-competes enforceable against all categories of employees?
No. Not enforceable against:
- Non-exempt employees under the Fair Labor Standards Act (which will likely result in more disputes over classification);
- Undergraduates and graduate students working as interns or not full-time;
- Employees terminated without cause (a term which will need to be defined in the non-compete agreement or determined by courts in future cases) or laid off;
- Or anyone 18 or younger.
When are non-competes enforceable?
- Non-competes have to signed by both parties, and must expressly state that the employee has the right to consult counsel prior to signing;
- The non-compete has to be presented to the employee at the time of the formal offer or ten days before the employment begins, whichever is earlier;
- If entered into after the employment has begun, all the same requirements apply (including ten days notice), but there must be additional fair and reasonable consideration – on-going employment is officially no longer enough even for an at will employee;
- The non-compete must be no broader than necessary to protect the employer’s legitimate business interests, specifically trade secrets, confidential information and/or goodwill, and it must be reasonable in geographic scope and the scope of prohibited activities; provided, however, that it will be 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 restricted period may not exceed 12 months unless the employee breaches his or her fiduciary duty to the employer or unlawfully takes employer property (in which case the restricted period is limited to two years);
- The non-compete must be consistent with public policy.
What post-employment compensation is required for non-competes to be enforceable?
In a major new addition and departure from existing Massachusetts law and practice, the non-compete must include “garden leave” (post-employment payment to the employee of no less than 50% of highest annualized compensation within the past two years, pro rata for the period of the restriction, and no ability of employer to refuse to make payments unless employee breaches the agreement) or other mutually agreed upon consideration (which is not defined in the new statute and will likely be a phrase defined through future court cases).
What steps should employers take?
The new law significantly changes the legal landscape for all parties involved in the employment relationship (e.g., employers seeking to protect their business interests by having employees sign restrictive covenants, potential new employers contemplating hiring employees subject to non-compete agreements, and employees evaluating their post-employment options and obligations).
Since the changes to the law on non-competes are so significant, we encourage all employers who intend to have employees sign non-compete agreements starting October 1, 2018, to review their non-compete agreement forms with their counsel as soon as possible to determine what changes need to be made to comply with the new law.
Employers may also want to consider whether their objectives can be met through non-solicitation or other contractual provisions that are not governed by the new law.
Please do not hesitate to contact us with any questions or for additional information about this important change in the law.