New Massachusetts Noncompetition Act: What Employers Need To Know
Massachusetts recently enacted a new statute that significantly changes the treatment of noncompetition agreements under Massachusetts law. The Massachusetts Noncompetition Agreement Act (the "Act") is effective October 1, 2018 (the "Effective Date"). All employers located in or employing individuals in the Commonwealth should be aware of this new law, which applies to all employee noncompetition agreements entered into after the Effective Date.
WHO IS COVERED BY THE ACT?
The Act applies to employees and independent contractors. Independent contractors are expressly included within the definition of "employees" under the Act and as that same term is used in this Client Alert. The Act applies to every employee who is a Massachusetts resident and those employees who are not Massachusetts residents, but have been employed in the Commonwealth for at least 30 days preceding the end date of their employment, regardless of any contrary choice of law provisions in any noncompetition agreement entered into by the employer and the employee.
CAN AN EMPLOYER ENFORCE A NONCOMPETITION AGREEMENT ENTERED INTO AFTER THE EFFECTIVE DATE AGAINST ALL EMPLOYEES?
No, noncompetition agreements cannot be enforced against:
- Employees who are terminated without cause or laid off;
- Employees who are classified as non-exempt under the Fair Labor Standards Act;
- Employees 18 years old or younger; and
- Undergraduate or graduate students participating in internships or short-term employment.
WHICH NONCOMPETITION AGREEMENTS ARE ENFORCEABLE?
In order to be valid and enforceable, a noncompetition agreement must:
- Be in writing, signed by both the employer and the employee, and given to the employee within the timeframes provided below;
- Expressly recite that the employee may consult with an attorney before signing;
- Be no broader than necessary to protect one or more of the following employer's "legitimate business interests" (defined below):
- trade secrets;
- confidential information that is not a trade secret; or
- the employer's good-will
- Be reasonable in scope; and
- Be consistent with public policy.
WHAT IS REASONABLE IN SCOPE?
To be reasonable in scope, the noncompetition agreement must be reasonable in duration, geographic restriction, and proscribed activities. Under the Act, the following restrictions are presumed to be reasonable:
- Duration: 12 Months: The duration of the noncompetition restriction is no longer than 12 months from the end of employment, unless the employee has either (i) breached a fiduciary duty to the employer, or (ii) misappropriated the employer's property, either tangible or intangible. In such cases, the noncompetition restriction may extend for up to 2 years.
- Geographic Restriction: The noncompetition restriction is limited to regions where the employee provided services or had a "material presence or influence" within the last 12 months of employment. Note: the Act does not define what is a "material presence or influence."
- Prohibited Activities. The noncompetition restriction is limited to the specific services provided by the employee within the last 2 years prior to the termination of employment.
WHAT COMPENSATION MUST THE EMPLOYER PROVIDE TO SUPPORT THE NONCOMPETITION AGREEMENT?
Noncompetition agreements must be supported by either a "garden leave clause" or "mutually agreed upon consideration." A "garden leave clause" provides that, during the entirety of the restricted period, the employer will continue to pay to the former employee, on a pro-rata basis, an amount which is defined as at least 50% of the employee's highest annualized salary paid by the employer within the 2 years immediately prior to the termination of employment. The employer may not terminate the garden leave payments without the consent of the employee unless the employee has breached the terms of the agreement. Alternatively, the employer and the employee may mutually agree on another form of consideration. The Act does not define "mutually agreed upon consideration."
WHAT ARE THE REQUIREMENTS FOR NONCOMPETITION AGREEMENTS ENTERED INTO AT THE TIME THE EMPLOYEE IS HIRED?
Noncompetition agreements entered into at the commencement of employment must be:
- Signed by both the employer and the employee;
- Supported by mutually agreed upon consideration or garden leave pay;
- State that the employee may consult with counsel prior to signing; and
- Provided to the employee upon the earlier of a formal offer of employment or 10 business days before the date when employee's employment commences.
WHAT IS REQUIRED FOR A NONCOMPETITION AGREEMENT SIGNED AFTER EMPLOYMENT COMMENCES?
Noncompetition agreements entered into after employment commences must be:
- Signed by both the employer and the employee;
- State that the employee may consult with counsel prior to signing;
- Provide notice to the employee at least 10 business days before it becomes effective; and
- Provide "fair and reasonable consideration" additional to any consideration provided in connection with employee's continued employment. Note: "fair and reasonable consideration" is not defined in the Act.
DOES THE ACT APPLY TO ALL POST-EMPLOYMENT RESTRICTIVE AGREEMENTS?
No, the Act does not apply to:
- Covenants not to solicit an employer's customers, clients or vendors;
- Covenants not to solicit an employer's employees;
- Noncompetition agreements entered into in connection with the sale of business or other similar situations described in the Act;
- Noncompetition agreements which are entered into outside of an employment relationship;
- Forfeiture agreements that are unrelated to competition;
- Non-disclosure or confidentiality agreements;
- Invention assignment agreements;
- Garden leave clauses;
- Noncompetition agreements made in connection with the cessation or separation from employment, but only if the employee is expressly given 7 days to rescind acceptance; or
- Agreements where the employee agrees not to reapply for employment with the same employer after termination.
The agreements mentioned above will continue to be subject to case law as reflected in Massachusetts court decisions.
CAN EMPLOYERS ENFORCE EXISTING NONCOMPETITION AGREEMENTS THAT DO CONFORM TO THE NEW ACT REQUIREMENTS?
Yes, employers can enforce existing noncompetition agreements which do not comply with the Act requirements if such agreement is either:
- entered into on or before October 1, 2018; or
- not subject to the Act's requirements (for example, because the employees are exempt).
CAN AN EMPLOYER INCLUDE A NON-COMPETE RESTRICTION AS PART OF A SEPARATION AGREEMENT?
As long as an employer provides an employee with at least 7 business days to rescind their acceptance, and the agreement is supported by consideration, an employer may include a non-compete restriction.
WHERE MUST AN EMPLOYER BRING AN ACTION FOR BREACH OF A NONCOMPETITION AGREEMENT WHICH IS SUBJECT TO THE ACT?
Any action to enforce a noncompetition agreement which is subject to the Act must be brought either:
- in the county in which the employee resides; or
- in Suffolk County under the exclusive jurisdiction of the Superior Court, Business Litigation Section, but only if agreed to by the employer and the employee.
WHAT ACTIONS SHOULD AN EMPLOYER TAKE NOW?
- Employers should consider whether, after October 1, 2018, a noncompetition agreement which is subject to the Act is necessary or appropriate, particularly in light of the constraints and requirements mentioned in this Client Alert.
- Employers should consult with legal counsel to determine whether a noncompetition agreement which is effective on or after October 1, 2018 complies with the Act's requirements.
- Employers should consult with legal counsel to determine whether there are more effective ways to protect the employer's trade secrets, confidential information, and goodwill.
- Employers should consider whether to include a definition of "cause" in their noncompetition agreements.
- While the Act does not apply retroactively, employers should consider whether to replace or reform their existing noncompetition agreements for consistency with noncompetition agreements entered into after October 1, 2018, or to conform with the Act's provisions regarding reasonableness. The closer the provisions of the employer's pre-October 1 noncompetition agreements are to the Act's requirements for enforceability, the greater confidence the employer may have that its noncompetition agreements will be enforceable. A note of caution: the Act does not address whether the reformation of a noncompetition agreement (for example, an amendment), which is dated after October 1, 2018, will cause the agreement to be subject to the Act's requirements. Until this ambiguity is clarified, an employer may be better served by entering into a new agreement rather than by attempting to amend an existing agreement.
- Employers should review and potentially revise its practices and procedures which relate to the noncompetition agreements to ensure that the prior notice which must be provided to employees and prospective employees is included.
If you would like to discuss the new Massachusetts Noncompetition Agreement Act and how it impacts you, please contact Elizabeth Myers at [email protected].
This communication is intended for general information purposes and as a service to clients and friends of Verrill Dana, LLP. This publication, which may be considered advertising under the ethical rules of certain jurisdictions, should not be construed as legal advice or a legal opinion on any specific facts or circumstances, nor does it create attorney-client privilege.