Q: My company is headquartered in Massachusetts. Does the new Massachusetts law on non-competes change how I structure non-compete agreements with employees?
A: Massachusetts recently enacted a new law outlining the requirements for valid employee non-competition agreements. The law will go into effect for non-competition agreements entered into on October 1, 2018 and later. Agreements signed prior to the new law will remain valid.
Significantly, the law limits the non-compete period to 12 months in most circumstances, and requires that employers offer the employee paid “garden leave” for the length of the restricted period of at least 50% of the employee’s highest base salary during the prior two years (or some “other mutually-agreed upon consideration,” which the agreement must specify). Moreover, the law prohibits agreements with non-exempt employees and provides that agreements with employees who have been terminated without cause or laid off are not enforceable unless they are included as part of a separation agreement.
If you are an employer in Massachusetts and you enter into a non-compete agreement with an employee (or independent contractor), the following provisions also must be included in order for the agreement to be valid:
- The agreement must be in writing and signed by both the employer and employee and expressly state that the employee has the right to consult with counsel prior to signing.
- The agreement must be provided to the employee by the earlier of a formal offer of employment or at least 10 business days before the commencement of the employee’s employment.
- The agreement cannot be broader than necessary to protect one or more of the following legitimate business interests of the employer: (i) the employer’s trade secrets, (as specifically defined in the statute); (ii) the employer’s confidential information that otherwise would not qualify as a trade secret; or (iii) the employer’s goodwill.
- The restricted period of the agreement cannot exceed 12 months from the cessation of employment UNLESS the employee has breached his or her fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer, in which case the duration may not exceed two years from the date of cessation of employment.
- The agreement must be reasonable in geographic reach in relation to the interests protected. The statute provides that a geographic reach that is limited to only the geographic areas in which the employee, during any time within the last two years of employment, provided services or had a material presence or influence is presumptively reasonable.
- When a non-compete agreement is entered into AFTER employment begins, Massachusetts employers must provide additional consideration to the employee, other than continued employment. The consideration must be fair and reasonable. The employee must receive notice of at least ten business days before the agreement is to be effective.
- The noncompetition agreement must include a garden leave clause or other mutually-agreed upon consideration between the employer and the employee, provided that such consideration is specified in the noncompetition agreement. As explained above, to constitute a garden leave clause, the agreement must: (i) provide payments for the length of the restricted period of at least 50% of the employee’s highest base salary during the prior two years and (ii) not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments (unless there is a breach by the employee. In addition, if the restricted period has been increased beyond 12 months as a result of the employee’s breach of a fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer, the employer is not required to provide payments to the employee during the extension of the restricted period).
Exclusions from the New Law
The following agreements, among others, fall outside of the definition of “non-compete agreement,” and therefore are not required to meet the requirements of the new law:
- Non-compete agreements made in connection with the sale of a business, or as part of a separation agreement (provided the employee is given seven business days to rescind acceptance);
- Non-solicitation agreements;
- Non-disclosure of confidential information agreements;
- Invention assignment agreements;
- Garden leave clauses unrelated to a non-compete agreement; and
- Agreements by which an employee agrees to not reapply for employment to the same employer after termination of the employee.
What Massachusetts Employers Must Do Now
Employers seeking to bind Massachusetts employees to a non-compete should analyze their overall non-compete strategy to make sure that it aligns with the new law. For example, given the financial impact of the required garden leave clause, employers will need to consider whether to require non-competes for a more narrow group of employees. Employers also will need to modify their non-compete templates for employees who sign such agreements after October 1st to comply with statutory requirements. Likewise, employers should make sure that their human resources staff are cognizant of the timing requirements to ensure that employment is considered to be sufficient consideration for the agreement to be enforceable.
–Kali T. Wellington-James and Tracey E. Diamond