Legislature To Vote On Requiring Pay For Employees When Noncompetition Agreements Enforced

Noncompetition agreements between employers and employees could soon become a lot less common in Massachusetts.

On June 29, the Massachusetts Legislature unanimously passed, and sent to the Senate, a covenant not to compete reform Bill that, if passed and signed by the Governor, would radically change when and how these agreements could be used by any businesses, including insurance agencies.

The proposed Bill also adds the Uniform Trade Secrets Act to the General Laws. Massachusetts is the only state in the union that still has not passed this Act into its laws.

House Bill limits covenants not to compete for one-year and requires fifty percent pay

The House Bill add a new section 24L to Chapter 149, Labor and Industries, of the General Laws entitled the “Massachusetts Noncompetition Agreement Act.” This Act in the House version would require that any covenants not to compete would on be valid where:

• Any new employees receive, at least 10 days’ advance notice before signing of a non-compete, with the employee being advised of the right to seek 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 from their being able to keep their employment.
• The noncompetition agreement has a term of no more than one-year (House version).
• Geographic constraints based on where employee worked within the last 2 years of employment.

The House Bill also provides for an employee, who is bound by a covenant not to compete receive half-pay, euphemistically called “garden leave,” under a required “garden leave clause.” This statutory clause is defined by the House Bill as:

a provision within a noncompetition agreement by which an employer agrees to pay the employee during the restricted period, provided that such provision shall become effective upon termination of employment unless the restriction upon post-employment activities are waived by the employer…”

In the House Bill, garden leave payment are equal to fifty-percent of the employee’s highest base salary within the 2 years preceding termination “or other mutually agreed consideration.”

Senate scheduled to take up amended Bill this week

On Monday, July 11, 2016, the Senate committee on Rules recommended that the House Bill relative to noncompetition agreements ought to pass but with an amendment inserting the text from a Senate document. The Senate has schedule a vote on the proposed amendment for July 14.

Assuming that the Senate passes the Bill as amended, the House will either accept the amended Bill, as passed by the Senate, or the Bill will go to a conference committee for resolution of the differences between the two versions, if possible.

Both the House Bill and the amended Senate Bill have the same basic structure as to:

• At least 10 days’ advance notice for new employees before the signing of a non-compete with the prospective employee being advised of the right to seek 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 from their being able to keep their employment.
• A limit for a non-compete agreement term to one-year (House version) or three-months (Senate version).
• Geographic constraints based on where employee worked within the last 2 years of employment;
• Garden leave payment equal to a percentage of the employee’s highest base salary within the 2 years preceding termination or other mutually agreed consideration (50% House version) (100% Senate version).

Finally, each Bill would bar enforcement if an employee is terminated without cause and would ban non-competes for non-exempt worker eligible for overtime pay under the Fair Labor Standards Act.

The House Bill and the Senate Bill differ in some important points

However, some of the differences between the two Bills are shown in the following table:

As the table above show, the House Bill and the Senate Bill have sharply different terms on the duration of noncompetition agreements and of the required payment for garden leave. Also, while, the House Bill allows for negotiation between the employer and the employee over the amount of money payable upon the termination of employment, the Senate Bill provides that the garden leave cannot be less than one-hundred percent of the employees highest pay in the last two years.

The provisions of the proposed law only apply to 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:

1. Covenants not to solicit or hire employees or independent contractors of the employer;
2. Covenants not to solicit or transact business with customers of the employer;
3. 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;
4. Noncompetition agreements outside of an employment relationship;
5. Forfeiture agreements;
6. Non-disclosure or confidentiality agreements;
7. Invention assignment agreements;
8. Garden leave clauses;
9. 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
10. Agreements by which an employee agrees to not reapply for employment to the same employer after termination of the employee.

The Uniform Trade Secrets Act

Presently, forty-nine states have adopted the Uniform Trade Secrets Act (UTSA). Massachusetts is the lone holdout without a comprehensive trade secret law. Both the House and Senate version would have Massachusetts join all the other states that have passed the UTSA.

Under the UTSA, a trade secret only has to satisfy three conditions. Those are:

1. Information, including a formula, pattern, compilation, program, device, method, technique, or process,
2. That derives independent economic value, actual or potential, from not being generally known to or readily ascertainable through appropriate means by other persons who might obtain economic value from its disclosure or use; and
3. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Once those conditions apply, the UTSA prohibits the misappropriation of the trade secret by improper means or by a breach of confidence.

The UTSA allows for damages and injunctive relief by way of both restraint and by ordering affirmative acts. The UTSA also allows punitive damages for willful and malicious misappropriation as well as attorney fees if the claim of misappropriation is either made or defended in bad faith.

 If you having anyone sign a noncompetition, you may want to do it sooner rather than later: if you are being asked to sign one, you might want to wait

The proposed Senate Bill has an emergency preamble. The House Bill does not. If the Bills were reconciled and the Senate version became law, the law would become effective immediately upon passage. Any company attempting to enter into a covenant not to compete would have to comply immediately with the new law.

If any employer is considering to have someone sign a noncompetition agreement they would be well advised to act so sooner rather than later. Likewise, if any employee, or possibly independent contractor, is given a noncompetition agreement in the near future, they might want to think twice about signing it, while this legislation is pending.

In either case, Agency Checklist will keep you posted.

Agency Checklist will keep its readers posted and over the next few weeks as the proposed Bill winds its way through the legislature. As of now there is no indication whether Governor Baker would sign the legislation in the present form if passed by the Legislature. The prior Governor, Governor Patrick, had previously attempted to ban covenants not to compete. The present Bill while not outright banning such agreements would probably make then so onerous that only the most important employees would ever be required to honor their agreement by receiving garden leave payments.