On July 14, 2016, the Massachusetts Senate passed its version of a controversial bill that would, as a practical matter, substantially limit the scope and effectiveness of employee noncompetition agreements. As previously reported by Agency Checklists, the House of Representatives unanimously passed a different Bill on June 29, 2016, that had less stringent restrictions on noncompetition agreements than the Senate version. See “Legislature To Vote On Requiring Pay For Employees When Noncompetition Agreements Enforced.” Agency Checklists, July 11, 2016.
The two bills agree on provisions that would substantially regulate noncompetition agreements
Both the House and Senate bill versions would radically change existing law and require that all future noncompetition agreements provide that:
- Any new employees receive before, at least 10 days’ advance notice before signing of a non-compete, with the prospective employee being advised of their right to seek independent legal advice.
- Existing employees required to sign a non-compete must receive the same 10 day-notice, advice on seeking legal advice, and fair and reasonable consideration independent other than consideration of continued employment.
- Noncompetition enforcement periods would be limited by law (See differences below).
- Prohibit the enforcement of a noncompetition agreement where the employer terminates without cause or lays off an employee.
- Require the payment of compensation where an employer enforces a noncompetition agreement against an employee that has voluntarily left his or her employment.
- Geographic constraints based on where employee worked within the last 2 years of employment.
Senate and House have to work out differences in the two versions by July 31
If the Legislature is to pass a compromise bill, a conference committee made up of senators and members of the House of Representatives have to come up with a compromise bill, acceptable to both chambers of the Legislature by July 31. On that date, the formal sessions of the Legislature are scheduled to end under the Legislature’s rules.
Governor Baker after meeting with the Senate President, Stanley Rosenberg, and House Speaker, Robert DeLeo, last week characterized the noncompetition legislation as one of the major bills the Legislature had to deal with this session. However important the legislation may be, the political conventions for the Republicans and the Democrats come first. Between now and July 31, the Legislature is taking two breaks. The first break is being taken for some Republican members to attend the Republican National Convention in Cleveland. The second break will allow Democrats, including the House Speaker and the Senate President, to attend the Democratic National Convention in Philadelphia between July 25 and July 28.
Whether, when the House Speaker and Senate President return from their politicking in Philadelphia, the conference committee can fashion an acceptable noncompetition bill before the July 31 deadline remains unclear. The two bills in question have many common provisions but with some sharp differences in the effect of similar provisions.
The sticking points between the House and Senate bill versions
The conflicting provisions of the two proposed bills still provide enough differences that the passage of an agreed bill will require substantial compromise between the two chambers. These conflicts include:
|Maximum duration of a noncompetition restriction|
|House version: One year.||Senate version: Ninety days.|
|Garden leave period|
|House version: Up to one year.||Senate version: Ninety days.|
|Garden leave pay|
|House version: Garden leave payment equal to fifty percent of the employee’s highest base salary within the two-years preceding termination or “other mutually agreed consideration.” Other-agreed-consideration in the House version could conceivably be negotiated a part of the original noncompetition agreement and could provide less of a garden leave payment.||Senate version: Garden leave payment equal to one hundred percent of the employee’s highest base pay within the last two years or other mutually agreed upon consideration between the employer and the employee which shall be equal to or greater than one hundred per cent of the employee’s highest annualized earnings within the 2 years preceding the employee’s termination…|
|Noncompetition agreements illegal for certain persons|
|House version: Noncompetition agreement void if it restricts an employee terminated or laid off without cause; overtime eligible workers; undergraduate and graduate students; employees under age 18.||Senate version: Includes House’s exclusions but adds to the exclusions, employees earning less than two-times the state’s average weekly wage and independent contractors.|
|Definition of employees to whom the law will apply|
|House Version: Noncompetition agreement is void if it applies to an employee terminated or laid off without cause; overtime eligible workers; undergraduate and graduate students; employees under age 18.||Senate version: Same exclusions employees in House version but adds to exclusion employees earning less than two-times the state’s average weekly wage and independent contractors.|
|Time allowed for issuing notice of intent to enforce noncompetition agreement|
|House version: Employer not required to give employee any notice of its intent to enforce a noncompetition agreement after employees leaves employer’s employ.||Senate version: Employer must give employee notice of employer’s intent to enforce a noncompetition agreement within 10 days of employee leaving employer. The Senate bill then states: “If the employer fails to provide such notice, the noncompetition agreement shall be void.”|
|Court authority to revise unreasonably broad noncompetition agreements|
|House version: Present court decisions that allow Massachusetts courts to revise or otherwise reform unreasonable noncompetition agreement will continue to apply.||Senate version: Prohibits a court form “reform[ing] or otherwise revis[ing] a noncompetition agreement so as to render it valid and enforceable…” As a result, overly broad noncompetition agreements will not be revisable and if found unreasonable, the courts will have to find the agreements unenforceable.|
|Date after which new noncompetition agreements must comply|
|House version: October 1, 2016||Senate version: Emergency preamble to Senate bill makes law effective immediately when signed by the Governor.|
Both the House and Senate version only apply to defined noncompetition agreements
Both versions of the proposed law apply only to noncompetition agreements. Both the House and Senate version define a noncompetition agreement as:
an agreement between an employer and an employee arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees not to engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended…”
Under each version of the act, “noncompetition agreements” include forfeiture for competition agreements, but do not include:
- Covenants not to solicit or hire employees or independent contractors of the employer;
- Covenants not to solicit or transact business with customers of the employer;
- Noncompetition agreements made in connection with the sale of a business or substantially all of the assets of a business where restricted person is a substantial owner;
- Noncompetition agreements outside of an employment relationship;
- Forfeiture agreements;
- Non-disclosure or confidentiality agreements;
- Invention assignment agreements;
- Garden leave clauses;
- Noncompetition agreements made in connection with the cessation of or separation from employment if the employee is expressly given seven business days to rescind acceptance; or
- Agreements by which an employee agrees to not reapply for employment to the same employer after termination of the employee.
The push for restricting noncompetition agreements has been brewing for a while
At least since the publication in 1994, of a book, “Regional Advantage: Culture and Competition in Silicon Valley and Route 128” documenting the rise and triumph of California’s tech industry in the 1980’s and early 1990’s, the role of employers using noncompetition agreements in stifling innovation has been in the fore.
Advocates for abolishing or severely limiting the use of noncompetition agreements argue that they reduce job mobility for employees, stifle entrepreneurship, and cause the migration of talented workers to jurisdictions such a California which will not enforce most noncompetition agreements. These advocates point to companies, such as Facebook, that started in Massachusetts but quickly migrated to Silicon Valley where the free market in technological workers allowed the companies to grow and flourish.
Massachusetts already outlaws noncompetition agreements for many healthcare professionals, such as doctors and nurses, as well as for lawyers. We will soon know if this year the ban will be extended further into the workforce.
Agency Checklist will advise about employee noncompetition changes.
Agency Checklist will advise its readers if the Legislature meets its July 31 deadline and sends a noncompetition bill to the Governor.