US Labor: Non-compete Agreement Bill Finally Passes in Massachusetts

Introduction

On July 31, 2018, after years of debate and attempts at compromise, the Massachusetts legislature finally passed a bill that will fundamentally alter the use of noncompete agreements in the Commonwealth. If the bill is signed by Governor Baker, the law will go into effect on October 1, 2018, and will apply only to agreements that are signed after that date. The bill does not prohibit the use of non-compete agreements altogether, but it does create specific standards regarding the enforceability of such agreements.

Coverage

The new law will apply to employees who work or reside in Massachusetts. A choice of law clause providing that the law of some other jurisdiction will apply will not be effective with regard to employees who have worked or lived in Massachusetts for at least 30 days prior to termination. The bill includes independent contractors within the definition of “employee” and non-compete agreements with contractors will be subject to the new law. As an aside, entities engaging independent contractors should ensure that they satisfy the stringent requirements of the Massachusetts Independent Contractor law. (M.G.L. c. 149 § 148B.)

Employees Who May Not Be Subject to Non-compete Agreements

The law provides that non-compete agreements may not be enforced against the following types of employees:

Employees who are non-exempt under the Fair Labor Standards Act (i.e. employees eligible for overtime);
Undergraduate or graduate students who are employed as interns or are engaged in short-term employment, as well as employees under the age of 18;
Employees who have been terminated without “cause” or who have been laid off.
The bill does not define what constitutes “cause” for termination, and employers may be well served by including a definition of what constitutes cause for termination in their non-compete agreements. Whether court cases create a common law definition of cause in this context remains to be seen.

Specific Provisions

A. Reasonableness

Consistent with established Massachusetts case law, the bill provides that a non-compete agreement must be no broader than necessary to protect the confidential information, trade secrets, or good will of the employer.

B. Duration

A covenant not to compete cannot exceed a 12-month period from the date of the employee’s departure. This period may be extended up to 24 months if the employee breaches his or her fiduciary duty to the employer or unlawfully takes the employer’s property.

C. Geographic Scope

The agreement must be reasonable in geographic scope. An agreement limited to the geographic area in which the employee provided services or had a material presence within the last two years of employment will be presumptively reasonable.

D. Scope of Restricted Activities

The agreement must also be reasonable as to the scope of restricted activities. A restriction limited to the specific services the individual provided over the two years prior to termination is presumptively reasonable, provided that the restriction otherwise seeks to protect legitimate business interests.

Garden Leave / Other Consideration

The bill requires that the agreement provide “garden leave” or “other mutually-agreed upon consideration.” Garden leave requires payment during the restricted period of at least 50% of the employee’s highest annual salary within two years prior to the employee’s termination. The bill does not define “other mutually-agreed upon consideration.” For existing employees, however, the bill expressly provides that continued employment is not sufficient consideration for a non-compete agreement and the employer will have to provide some additional “fair and reasonable” value to the employee.

Review By Individual

Like the federal Age Discrimination in Employment Act’s release requirements, the bill has specific provisions regarding review and consideration of non-compete agreements.

A. At Hire

The written non-compete agreement must be provided with the formal offer of employment, or ten (10) business days before employment starts, whichever is earlier. The agreement must expressly state that the individual has the right to consult with counsel prior to signing.

B. During Employment

The written non-compete agreement must be provided ten (10) business days before the agreement is to be effective, and must expressly state that the individual has the right to consult with counsel prior to signing.

Enforcement

Any civil actions relating to non-competition agreements would have to be brought in the county where the individual resides or, if the parties agree, in the Business Litigation Session of the Suffolk Superior Court.

What is Not Covered

The non-compete law will not apply to:

Agreements restricting solicitation of customers or former coworkers.
Nondisclosure and confidentiality agreements.
Non-compete agreements entered into in connection with the sale of a business.
Non-compete agreements made in connection with separation from employment, provided that the employee is given seven (7) days to rescind acceptance.
Planning

Assuming signature by the Governor, employers planning to use non-compete agreements going forward should review and revise their agreements and overall strategy for protection of legitimate business interests.

By LeClairRyan LLP, US, a Transatlantic Law International affiliated firm.

For further information or for any assistance regarding US labor law please contact James Anelli at uslabor@transatlanticlaw.com

Disclaimer: Transatlantic Law International Limited is a UK registered limited liability company providing international business and legal solutions through its own resources and the expertise of over 105 affiliated independent law firms in over 95 countries worldwide. This article is for background information only and provided in the context of the applicable law when published and does not constitute legal advice and cannot be relied on as such for any matter. Legal advice may be provided subject to the retention of Transatlantic Law International Limited’s services and its governing terms and conditions of service. Transatlantic Law International Limited, based at 42 Brook Street, London W1K 5DB, United Kingdom, is registered with Companies House, Reg Nr. 361484, with its registered address at 83 Cambridge Street, London SW1V 4PS, United Kingdom.