Massachusetts Non-Compete Reform Signed into Law

Massachusetts has a new law that prohibits employers from requiring that certain types of employees sign non-competition or “forfeiture for competition” agreements (collectively “non-competition agreements”) and establishes minimum requirements that non-competition agreements must meet to be enforceable. The new law will take effect on October 1, 2018 and apply to agreements executed after that date. 

Coverage

The new law applies to employees and independent contractors who are, or have been for at least 30 days immediately prior to termination, a resident of or employed in Massachusetts. 

New Prohibitions

Under the new law, a non-competition agreement will not be enforceable against the following types of employees:

• Non-exempt (overtime eligible) employees under the Fair Labor Standards Act; 
• Undergraduate or graduate students employed as interns; 
• Employees terminated “without cause” or who are laid off; and
• Employees age 18 or younger.

The law is not intended to apply to other kinds of restrictive covenants, including non-disclosure agreements, assignment of invention provisions, and non-solicitation restrictions (as to employees, customers and vendors). 

Minimum Enforceability Requirements

Under the new law, non-competition agreements must meet the following requirements to be valid and enforceable:

• The agreement must be in writing and state that the employee has the right to consult with counsel prior to signing.
• If entered into at the time of hire, must be signed by both the employer and the employee.
• If entered into after the time of hire, there must be additional consideration (something of value) to support the restriction beyond mere continued employment, such as a bonus or a raise.
• If entered into at the time of hire, the employee must be provided the non-competition agreement upon the earlier of: (1) receipt of a formal offer of employment or (2) ten business days before the employee’s start date.
• In the case of an existing employee, the agreement must be provided 10 days before it goes into effect.
• The duration of the restriction generally cannot exceed one year though there are exceptions.
• The agreement must be no broader than necessary to protect an employer’s interests, including trade secrets, confidential information and/or good will.
• The restriction must be reasonable in geographic scope.
• The agreement must be reasonable in the scope of the prohibited activities in relation to the interests protected.
• The agreement must be consistent with public policy.
• The most notable part of the law is that the non-compete must now be supported by consideration in the form of either “garden leave” or “other mutually-agreed upon consideration.” “Garden leave” is defined to mean that the employee receives payment of wages during the entire restricted period of at least 50% of the employee’s highest annualized base salary within the preceding two years.  Interestingly though, the law does not define what constitutes “other mutually-agreed upon consideration.” Therefore, it remains to be seen whether an employer and employee may agree to something less than 50% of base pay during the entire restricted period, while still satisfying this requirement.
• Employers cannot avoid the law’s requirements by including a choice of law provision requiring that a different state’s law applies to the agreement. 
• All actions to enforce a non-compete must be brought in Massachusetts in the employee’s county or Suffolk County Business Litigation Section.

Checklist:  What you need to do now

• Employers should review and revise their existing forms of non-competition agreements to ensure compliance with the requirements summarized above. 

• Employers should also review and revise their practices for providing non-competition agreements to new hires and current employees to ensure that proper notice/timing requirements are met.

Please contact Gina Wodarski ([email protected]) or Jackie Piscitello ([email protected]) if you require assistance with developing or amending your non-competition agreements, or otherwise ensuring compliance with Massachusetts’ new non-competition law.