The Summer of Noncompete Reform: Three Other New England States Get In On the Act – Part 1

Most readers are probably aware that the Massachusetts legislature, after a decade of starts and stops, passed a very detailed bill retaining but reforming the use of employee noncompetition agreements last summer.  While we were the first New England state to get a bill over the goal line, the summer of 2019 saw three of our neighboring states – New Hampshire, Maine and Rhode Island – get in on the act and pass their own noncompetition agreement reform bills.  For employers whose business crosses state lines within the region and who use or are thinking of using noncompetition agreements, it is important to be aware of the highlights/lowlights/differences/similarities between those three new statutes and our Massachusetts Noncompetition Agreements Act which took effect on October 1, 2018.

In this series of posts, I will provide a quick refresher on the Massachusetts statute and compare and contrast the other states’ new acts to it.

The Massachusetts Noncompetition Agreement Act Basics

The Massachusetts Act, codified at Massachusetts General Laws chapter 149, section 24L, preserves the ability of employers to continue to use noncompetition agreements.  It does, however, impose a number of new requirements and restrictions on their use.  Most notably, it provides:

  • Noncompetition agreements cannot be used with non-exempt employees, young employees (under age 19) or student interns;
  • Even if valid when executed, the noncompetition restriction vanishes if the employee is terminated without cause or laid off;
  • A new employee must be given advance notice at the time of the offer of employment that he will be required to sign a noncompete;
  • A noncompetition agreement given to a current employee to sign cannot take effect before 10 business days have passed after the employee is given notice of it;
  • One asked to sign a noncompetition agreement must be notified in writing of her right to have legal counsel review the agreement before signing;
  • “Fair and reasonable” consideration must be provided to a current employee in return for agreeing not to compete (this is a very confusing aspect of the Act and differs from the consideration that must be given to a new employee asked to sign);
  • The permissible geographic scope of the noncompetition restriction is more narrowly defined;
  • The permissible scope of the post-termination subject matter restrictions is also more narrowly defined; and
  • The Act provides no punishment for an employer who has an employee sign an agreement that is not in compliance with these new provisions – the only apparent penalty is the likelihood that the agreement will not be enforced if the employee then competes.

Aside from these specific provisions, the Act also provides not-so-subtle encouragement to employers to use other forms of restrictive covenants rather than noncompetition agreements to protect their goodwill, confidential information and trade secrets.  Specifically, the Legislature nudged employers in the direction of using nondisclosure and customer and employee non-solicitation agreements rather than noncompetition agreements.  It did so by expressly excluding such agreements from the scope of the new Act thereby permitting employers to avoid the troublesome restrictions and limitations listed above.

The Other Acts

None of the new laws in the other three New England states are nearly as complex, far-ranging or as difficult to interpret and apply as the Massachusetts statute.  The only common thread is the banning of noncompetition agreements for certain low wage or low level employees although each state goes about in different ways.

Beyond that single common thread, each state’s Act addressed only a few of the issues embedded in the Massachusetts Act.  As a result, none come close to the complexity found in the Massachusetts statute.

The New Hampshire statute which takes effect September 8, 2019 is extremely limited in scope.  It bans the use of noncompetition agreements with low wage employees as that term is defined above.  It has no other impact.

The Maine statute which takes effect September 19, 2019 is more detailed than New Hampshire’s, but still quite modest.  Like Massachusetts, it imposes advance notice requirements.  The Maine statute, however, differs from the Massachusetts law in a few important ways – a waiting period before the restrictions become enforceable, $5,000 penalties for overreaching employers; and a ban on no poaching agreements (referred to as “restrictive employment agreements”).

The Rhode Island statute which takes effect January 15, 2020 on its face has more in common with the Massachusetts statute, but it still pales by comparison in terms of complexity.  Like Massachusetts, it broadens the employees with whom noncompetition agreements may not be used and also expressly excludes from its coverage nondisclosure and non-solicitation agreements as well as noncompetition agreements executed in connection with a business sale or severance agreement.  Unlike Massachusetts and Maine, it does not require any advance notice to the employee.  It also does not apply to independent contractors.

Perhaps what is most noteworthy about each of these new laws are the areas addressed in the Massachusetts law which are left untouched in this summer’s enactments.

More details on these new laws and their comparison with the Massachusetts precursor will be set forth in Part 2.

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Employers Should Continue to Use Expired Form I-9

The U.S. Citizenship and Immigration Services (USCIS) recently announced that employers should to continue to use the currently available version of the Form I-9, even though the form lists an expiration date of August 31, 2019. USCIS intends to issue details about a new version of the Form I-9 when they become available.

The current version of the Form I-9 is available on the USICS’s website.

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More News on the Noncompete Front: Employers Should Still Expect Strict Scrutiny of Their Restrictive Covenant Agreements

In earlier posts, I reported on the passage of the new Massachusetts Noncompetition Agreement Act, which took effect on October 1, 2018. That Act significantly changed the law in this area, narrowing the permissible protections and imposing several new requirements on an employer who wants its employees to sign noncompetition agreements. 

While the Act did not ban noncompetition agreements altogether as certain constituencies had advocated, many commentators, including me, felt that the Act sent a dual message to employers. The first message was “you can still use noncompetition agreements if you must, but it isn’t going to be easy and they won’t be as useful as you would like.” The second implicit message was “you are better off using less restrictive agreements such as nonsolicitation agreements and nondisclosure agreements.” 

As evidence of the implicit message, the legislation provided a definition of noncompetition agreements covered by the Act as well as express exclusions: 

“Noncompetition agreement”, 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 he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended. Noncompetition agreements … do not include: (ii) covenants not to solicit or transact business with customers, clients or vendors of the employer 

Accordingly, many employers have embraced the dual messages and abandoned the use of noncompetition agreements, but continued to have employees sign nonsolicitation agreements. 

A recent decision by a judge in the Business Litigation Session of the Superior Court in Bruett v. Walsh reminds us not to misperceive this encouragement as meaning the more limited restrictions will always be enforced. While nonsolicitation agreements were placed outside the scope of the Act, they will still be subjected to the same strict scrutiny by the courts that existed prior to the Act’s passage. Consequently, enforcement will not be a sure thing. 

David Bruett was an insurance agent who had started in the insurance business with John J. Walsh Insurance Agency. Prior to beginning that employment, he had signed an agreement whereby he agreed that he would not: 

solicit, attempt to obtain, accept, write, service or transact insurance business of any nature for any customer or account on the books of the Agency. 

Fourteen years later, Bruett left to start his own agency. Bruett scrupulously did not solicit his former customers nor did he even notify them of his new agency. Several of the customers, however, found out where he had gone and contacted him. In violation of the express language of his agreement, Bruett transacted insurance business and wrote polices for those former Walsh customers. 

Judge Mitchell Kaplan was called upon to determine whether a preliminary injunction should issue restraining Bruett from doing business with the former Walsh customers for the remaining term of the agreement. The Court noted the express language prohibiting the acceptance or transaction of business. The inquiry did not stop there, however, and the Court carefully reviewed the underlying facts and circumstances. Ultimately, the Court refused to impose that restraint, enjoining Bruett only from solicitation, something he was not doing anyway. 

Central to the Court’s reasoning was the requirement that to obtain enforcement an employer must be attempting to protect a legitimate business interest, typically trade secrets, confidential information or good will. The judge found that there were no trade secrets and only limited confidential information at issue. 

Turning to the question of good will, the Court noted that good will “is the prior history of reliability, integrity, knowledgeability, insurance experience, and prompt service that would cause present insurance clients to renew their existing insurance policies …, procure new policies … and to refer their friends and colleagues ….” The Walsh Agency had argued that this good will was its good will because it had invested the time, effort and expense to support Bruett’s development of the relationships with the customers. It was therefore entitled to protect it by the restraint requested. 

The Court did recognize that good will is typically the result of the combined efforts of the agent, as the public face of the Walsh Agency to the customers, and the management team, clerical and technical staff, who the customer may never see nor speak with. Despite noting that the company’s good will and the employee’s good will with those customers were “inevitably intertwined,” the Court drilled down to determine where the good will line should be drawn and whether Bruett should be restrained. 

In that regard, the Court’s inquiry was industry specific. It distinguished the insurance business from the business of a financial investment advisor that provides “handcrafted products.” In contrast, the Court found that the “products” of an insurance agency are not created by the agency, but rather the Agency steers the customer to the lowest price policies, provides assistance with claims and makes sure the policies don’t lapse. The Court then concluded that, by the nature of the insurance business, “most, although not all, of the good will belongs to the agent himself.” Granting the requested injunction, the Court said, would unfairly take away the good will that belongs to Bruett. The Court also noted that such restraint would impose a significant burden on the agent’s former customers who have come to trust him, not the agency, to handle their insurance needs.

As a result, the Court came down on the side of Bruett, leaving him free to do business with his former customers provided those customers had made, or in the future make, the first contact. 

Bruett does not pave new ground. It should, however, serve as a reminder to employers and their counsel that efforts at enforcing any type of restrictive covenant will occasion the same strict scrutiny that existed prior to the passage of the Noncompetition Agreements Act.   

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MA Paid Family and Medical Leave Act

On June 14th, we reported that Massachusetts delayed the implementation of the payroll tax under the Family and Medical Leave law by three months (i.e., until October 1, 2019). At the time, the government informed the public that the contribution rate would be increased from 0.63% to 0.75% of wages when withholding of contribution amounts begins on October 1st, but we were not informed about how the 0.75% contribution amount would be allocated between family leave and medical leave contributions. Last week, the Massachusetts Department of Family and Medical Leave answered that question and published two updated rate sheets and employer notices – one for employers with 25 or more covered individuals and the other for employers with fewer than 25 covered individuals.

Employers who completed the notification process prior to the June 14th extension will need to issue an amendment to the form and distribute it to all employees with the modified contribution rate. However, the amendment does not need to be signed by employees and can be sent electronically. The Department of Family and Medical Leave noted that this process will need to be completed each time that the rate changes. The revised notice forms, as well as the amendments, can be found here.

We will continue to monitor all developments regarding the Paid Family and Medical Leave law. Please contact any member of the Labor, Employment and Employee Benefits group if you have any questions.
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Massachusetts Delays Family and Medical Leave Act Payroll Contribution Three Months

Late Tuesday evening, news broke from Beacon Hill that the payroll tax funding the Paid Family and Medical Leave Act – scheduled to take effect on July 1st – is being delayed three months to October 1, 2019.  According to a joint statement issued by Governor Baker, House Speaker DeLeo, and Senate President Spilka, the delay is intended “[t]o ensure businesses have adequate time to implement the state’s Paid Family and Medical Leave program….”  It is expected that the legislature will pass, and the Governor will sign, an emergency bill over the next few days to officially delay the implementation of the payroll tax.

The joint statement also foreshadowed the legislature’s intent to “adopt technical changes to clarify program design.”  At this time, it is not clear what “technical changes” the legislature is considering.  It appears, however, that to maintain the amount of pre-funding and not reduce total contributions paid to the new family and medical leave trust fund, the contribution rate will be increased from .63 percent to .75 percent of wages when withholding of contribution amounts begin on October 1, 2019.

We will continue to monitor all developments regarding the Paid Family and Medical Leave Act.  Please contact any member of the Labor, Employment and Employee Benefits Group if you have any questions.

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Department of Family and Medical Leave Announces Extension of Time to Provide Notice to Employees

On May 1st, the Commonwealth’s Department of Family and Medical Leave announced that the deadline for the employer notice to employees has been extended from May 31, 2019 to June 30, 2019.  The notice, which may be provided electronically, must include the opportunity for an employee or self-employed individual (which would include independent contractors) to acknowledge receipt or decline to acknowledge receipt of the information.

It is anticipated that the Department will be publishing further updates as the final regulations deadline of July 1, 2019 approaches.  We will continue to provide updates as appropriate. 

If you have any questions on the above requirements or concerning the Commonwealth’s Paid Family and Medical Leave Law, please contact any member of Mirick O’Connell’s Labor, Employment and Employee Benefits Group.    

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A Rebalancing for Wage Act Claims and Class Actions?

Citing three Wage Act cases in 2018, I raised the question in this space whether the Massachusetts Supreme Judicial Court was now taking a more pro-employer view. With appointees of Governor Baker now holding a majority of the Court, did those three decisions in which the Court adopted a narrow interpretation of the Massachusetts Wage Act, G.L. c. 149, §148, mean that the interests of employers might be in the ascendancy? A fourth Wage Act decision decided in April 2019, however, suggests that those questions were premature.
In Gammella v. P.F. Chang’s China Bistro, Inc., the Court took up the appeal of a plaintiff-employee whose attempts to assert a class action based upon wage violations had been thrown out at the trial court level. The case involved alleged “reporting pay” violations by the defendant-employer. Specifically, “reporting pay” is required when an employee who appears for work is sent home early. When sent home early, the employee must be paid for at least minimum wage for three hours.
Mr. Gammella’s individual “reporting pay” claim was small – $453. He therefore sought class certification which would enable him to assert “reporting pay” claims on behalf of hundreds of employees of the defendant-employer who in the aggregate had been sent home early 7,000 times over a four year period. If proven, the class claims would dwarf the individual claims of Mr. Gammella.
A Superior Court judge denied class certification. He found that the plaintiff had failed to show that a sufficient number of those 7,000 instances were entitled to “reporting pay” due to violations by the employer to satisfy the class action numerosity requirement. In that regard, the lower court had held that the plaintiff’s showing had failed to establish which employees had been sent home for reasons that would trigger “reporting pay” and which had left early for reasons for which no such payment was required (for example, the employee had asked to leave early). Because of that uncertainty, the plaintiff’s proof failed and class certification was denied.
After successfully defeating the class certification attempt, the defendant-employer had then employed a tactic to prevent the plaintiff from appealing that denial. In that regard, it tendered a certified check for all of the payments that the plaintiff claimed were due. Following the plaintiff’s rejection of that check, the defendant argued that his claim should be dismissed. Adding insult to the injury of the denial of class certification, a different Superior Court judge agreed and found that the plaintiff’s rejection of that offer rendered his individual case moot. The case was then dismissed in its entirety.
On appeal, the Supreme Judicial Court sided with the employee, vacating the dismissal and denial of class certification. The Court then remanded the case for a further consideration of whether the class should be certified.
In reaching that conclusion, the Court looked askance at the employer’s obstruction of the plaintiff-employee’s efforts to develop the facts that might have permitted him to meet the class requirements. Specifically, the employer had provided records showing employees who had been sent home early, but its records did not show why. The employer also refused to provide employee names effectively handcuffing the plaintiff’s ability to show that the reasons were illegitimate and should have triggered the payment requirement. The uncertainty created by the defendant’s strategic “information monopoly,” the Court held, should not be held against the plaintiff-employee, but rather against the employer. Giving the benefit of the doubt to the employee, the Court held that it was “reasonable to infer that the number of plaintiffs would satisfy the numerosity requirement.”
The Court also rejected the employer’s argument that the plaintiff-employee’s refusal to accept its “make whole” offer should render his individual claim moot. Recognizing that such a finding would have the effect of terminating the entire litigation and avoiding the possibility of an appeal of the class certification denial, the Court overturned the lower court’s mootness ruling and dismissal. In doing so, the Court avoided giving the defendant the practical power to make the denial of class certification questions unreviewable through this type of clever buy-out strategy. The net effect was that the Court revived the plaintiff-employee’s individual claim and permitted him a chance to relitigate the class question aided by the Court’s strong language tilting in favor of certification.
In light of this recent opinion, it is apparent that the potential “lean” of the Baker Court perceived by this author [See “WARN Act Violations ≠ Wage Act Violations,” January 3, 2019; “Violation of Sick Time Payout Policy Not a Wage Act Violation,” January 31, 2018; “A Bridge Too Far – Individual Liability for Wage Act Violations,” January 3, 2018] was more imagination than reality. Or is it perhaps a situation where the employer’s aggressive tactics in this one case precipitated the need by the Court to level the playing field?
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