On July 31, 2018, the Massachusetts Legislature passed the “Act relative to the judicial enforcement of noncompetition agreements” (the “Act”).
If signed by Governor Charlie Baker, the Act will take effect on October 1, 2018 and limit the ability of private employers to enter into – and ultimately enforce – noncompetition agreements with employees (defined broadly to include independent contractors) who work in Massachusetts. The Act broadly defines a noncompetition agreement as “an agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that the employee will not engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended.” To be enforceable, the noncompetition agreement must satisfy certain technical and substantive requirements, as set forth below.
Technical Enforceability Requirements
To be enforceable, a noncompetition agreement must (1) be in writing; (2) be signed by both the employer and the employee; (3) expressly affirm the employee’s right to consult with counsel prior to signing; and (4) contain a garden leave provision.
As a general matter, “garden leave” describes a practice whereby a former employee is no longer employed by the employer but continues to receive pay from the employer for a certain period of time. Pursuant to the Act, a noncompetition agreement must include a garden leave provision that provides that if and when a former employee is restricted from competition for a certain time period (called the “restricted period”), the employer will pay the former employee during the entire restricted period a sum at the rate of at least 50% of the employee’s highest base salary over the prior two years or other mutually agreed-upon consideration.
In addition, the Act provides that if a noncompetition agreement is signed at the commencement of the employee’s employment, it must be presented to the employee at either (a) the time the offer of employment is made; or (b) ten days before the commencement of employment, whichever is earlier.
If the noncompetition agreement is signed after the commencement of employment (but not in connection with the termination of the employee’s employment), it must be supported by “fair and reasonable consideration independent from the continuation of employment.” However, it is unclear whether the “garden leave” provision will be considered sufficient “independent consideration.”
Enforceability Requirements – Reasonableness
As a substantive matter, a noncompetition agreement will only be enforceable if:
- It is no broader than necessary to protect a legitimate business interest;
- The restricted period does not exceed one year in duration (unless the employee is shown to have breached a fiduciary duty or has unlawfully taken the employer’s property, in which case the restricted period can be longer and the employer will not be required to provide garden leave pay to the former employee during the restricted period);
- It is reasonable in geographic scope; and
- It is reasonable in the scope of proscribed activities in relation to the interests protected.
Despite the broad language, the Act provides that the following covenants and agreements are exempted from the prohibition on non-competition agreements:
- A covenant not to solicit or hire employees of the employer;
- A covenant not to solicit or transact business with customers, clients, or vendors of the employer;
- An agreement made in connection with the sale of a business entity;
- An agreement outside of the employment relationship;
- A forfeiture agreement (which is an agreement that imposes adverse financial consequences on an employee if the employment relationship is terminated);
- A nondisclosure or confidentiality agreement;
- An invention assignment agreement;
- A garden leave clause;
- An agreement made in connection with the cessation of or separation from employment if the employee is expressly given seven business days to rescind acceptance; and
- An agreement by which an employee agrees not to reapply for employment to the same employer after the employee’s termination.
Since these ten categories of covenants and agreements will be outside the purview of the Act, they will continue to be governed by common law.
Under the Act, noncompetition agreements will not be enforced against certain types of employees, including employees who are classified as “non-exempt” under the Fair Labor Standards Act and employees who have been terminated without cause (a term which is not defined by the Act) or have been laid off.
Next Steps for Employers
While the Act has not been signed into law yet, employers are well-advised to review their standard noncompetition agreements and related practices to ensure that any agreements entered into on or after October 1, 2018 will comply with the Act. We will closely monitor Governor Baker’s action on this Act and keep you informed of the passage of the Act and any modifications thereto.
If you have any questions about the Act or need any assistance reviewing, modifying, and/or drafting a noncompetition agreement, please contact one of Mirick O’Connell’s Labor and Employment Group attorneys.