On July 31, 2018, the Legislature passed the “Massachusetts Noncompetition Agreement Act” (“Act”) as §24L of Chapter 149 of the Massachusetts General Laws. The new law has been laid on the Governor’s desk, and he has ten days to sign or veto the bill.
Governor expected to sign the new noncompetition bill passed by the Legislature
The new noncompetition agreement bill as enacted has most of the provisions that were part of the Massachusetts House’s version of the Noncompetition Agreement Act that failed to pass in July 2016. At that time, Governor Baker publicly expressed his support for the House version of the Bill in contrast to the Senate’s more restrictive proposal. See Agency Checklists’ article of July 25, 2016, “Governor Baker Weighs in on Favoring House Version of the Noncompetition Bills.” Based on his prior support, Governor Baker is expected to sign this bill.
Based on the high degree of certainty this bill will become law, the following are some highlights of the major changes this bill will bring to noncompetition agreements in Massachusetts.
New Noncompetition Agreement Act takes effect October 1, 2018.
The Noncompetition Agreement Act will apply to any noncompetition agreements entered into on or after October 1, 2018. The Act does not apply to any noncompetition agreements existing as of September 30, 2018.
The Act applies to any employees and independent contractors of a business entity
As used in the Act, the term “employee” is defined, by reference to another statute, to include any individual performing any service for an employer and independent contractors providing services to an employer.
The Act applies to any business entity whether a person or group of persons including corporations, limited liability companies, limited partnerships or limited liability partnerships performing or engaging in any activity, enterprise, profession or occupation for gain, benefit, advantage or livelihood, whether for profit or not for profit.
The Act applies to noncompetition agreements and forfeiture for competition agreements
The Act applies to noncompetition agreements which is defined as “any agreement between an employer and an employee involving 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 their employer after the employment relationship has ended.”
The Act also applies to forfeiture for competition agreements which the Act defines as, “an agreement that by its terms or through the manner in which it is enforced imposes adverse financial consequences on a former employee as a result of the termination of an employment relationship if the employee engages in competitive activities.”
The Act restricts the terms of noncompetition agreements and forfeiture agreements
In Massachusetts, the terms and conditions of noncompetition and forfeiture agreements between employers and employees, with some statutory exceptions, are unregulated except for common law case decisions. Presently, employers do not have to give employees any additional monetary consideration for signing a noncompetition agreement. Also, an employer does not have to pay anything to a terminated or laid off employee while their noncompetition agreement prohibits them from working. The new law regulates and restricts noncompetition agreements for new and existing employees.
Requirements for valid noncompetition agreements for new and existing employees
The New Act regulates noncompetition agreements as of October 1, 2018. On and after that date, Massachusetts law will require for any noncompetition agreement signed by a new employee to be valid and enforceable :
- the new employee must receive the noncompetition agreement by the earlier of a formal offer of employment or ten business days before the commencement of the employee’s employment;
- the agreement must be in writing and expressly state that the employee has the right to consult with counsel before signing the noncompetition agreement: and,
- both the new employee and the employer must sign the agreement.
For noncompete agreements signed by existing employees to be valid and enforceable:
- the employee must receive the agreement at least ten business days before the agreement is to be effective, and must expressly state that the employee has the right to consult with counsel before signing the noncompetition agreement;
- the agreement must be in writing and signed by both the employer and employee; and
- the agreement must be supported by “fair and reasonable consideration independent from the continuation of employment;”
Agreements limited to one year and must provide “garden leave” payments while noncompete is in force
Any noncompetition agreements made after September 30, 2018, cannot restrict the employee from competing for more than one year from the date of their cessation of employment.
The only exceptions are if the employee has breached their 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 Act also provides for an employee, who is bound by a covenant not to compete, to receive half-pay under a required “garden leave clause.” The Act defines this statutory clause 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…”
A noncompetition agreement’s garden leave clause will have to:
- provide for the payment of wages, during the entirety of the restricted period under the noncompetition agreement, of at least fifty (50 %) percent of the employee’s highest annualized base salary paid by the employer within the two years preceding the employee’s termination; and
- except in the event of a breach of the covenant by the employee, not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments due to the former employee.
The garden leave provision of the Act does imply that the employer and the employee might vary the fifty (50%) percent of salary requirement if there is “other mutually-agreed upon consideration.” However, the Act provides no guidance in interpreting that phrase, and its meaning may have to await court decisions.
Also, an employer who had entered into a noncompetition agreement with a former employee may avoid paying garden leave by waving the restrictive covenant.
Noncompetition agreement unenforceable against employees terminated “without cause” or “laid off”
The Act prohibits the enforcement of covenants not to compete against certain workers including:
- undergraduate or graduate students that partake in an internship or otherwise enter a short-term employment relationship with an employer, whether paid or unpaid, while enrolled in a full-time or part-time undergraduate or graduate educational institution;
- an employee age 18 or younger;
- an employee who is classified as nonexempt under the Fair Labor Standards Act, 29 U.S.C. 201-219; or
- employees that have been terminated without cause or laid off.
Courts may reform noncompetition agreements although “choice of law” provisions void
The Act also has specific provisions relating to what court and how courts may deal with litigation over a noncompetition agreement.
An employer filing a lawsuit against a former employee over a noncompetition agreement must sue in the county where the employee resides. However, if the employer and employee agree, the lawsuit can be filed in the Suffolk County Superior Court or the Suffolk County Superior Court Business Litigation Session.
The legislation also provides authority for a court hearing a lawsuit over a noncompetition agreement to:
in its discretion, reform or otherwise revise a noncompetition agreement so as to render it valid and enforceable to the extent necessary to protect the applicable legitimate business interests.”
Finally, the Act bans choice of law provisions in noncompetition agreements involving a Massachusetts resident or person employed in Massachusetts for at least thirty days prior to their termination of employment.
The Act does not apply to customer non-solicitation and confidentiality agreements
While the new law regulates noncompetition agreements including forfeiture for competition agreements, other agreements commonly used in business to protect trade secrets and exclude former employees from dealing with a business’ existing customer base are allowed including:
- Covenants not to solicit or hire employees 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 the restricted person is a substantial owner;
- Noncompetition agreements outside of an employment relationship;
- Forfeiture agreements;
- Nondisclosure 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.
Agency Checklists will follow up on this bill becoming law, but we welcome comments and questions about this law and its potential effect on businesses in Massachusetts.
