Massachusetts Legislature Passes Sweeping Non-Compete Employment Agreement Reform

The Massachusetts Legislature has long debated various legislation regarding noncompetition agreements.  That debate appears to finally be over with the state legislature recently passing an act designed to radically change the use of non-competes in the Commonwealth.  The main parts of the act are summarized below.  If signed into law, the act will take effect on October 1, 2018. You can read the law here.

What Non-Compete Agreements are Covered? 

The act applies to an agreement between an employer and employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee agrees not to engage in certain competitive activities after the employment ends.  The act does not apply to non-solicitation agreements, non-disclosure agreements, non-competes made as part of a sale of a business, and non-competes made in connection with cessation or separation of employment.  The act will only apply to agreements entered into on or after October 1, 2018. 

What Employees are Covered?  What Employees are Excluded? 

The act regulates only the use of non-competes with “employees,” but includes “independent contractors” in its definition of “employees.”  Accordingly, this act will govern non-competes with employees and independent contractors.  According to the act, non-compete agreements cannot be enforced against:  (1) employees who are classified as non-exempt under the Fair Labor Standards Act, (2) undergraduate or graduate students who are engaged in short-term employment, (3) employees who have been terminated without cause or laid off, or (4) employees who are 18 years of age or younger. 

Garden-Leave Pay – You Pay While They Can’t Work

The act requires non-compete agreements to provide for payment of “garden leave pay or some other mutually agreed-upon consideration.”  Noncompetition agreements that provide for “garden leave pay,” require the employer, during the restricted period, to continue paying the employee an amount equal to 50% of the employee’s highest annual salary paid within the two preceding years.  That act allows agreements to provide for “some other mutually agreed-upon consideration,” but does not provide guidance as to the timing or value of that consideration. 

Structural and Procedural Requirements

The act imposes the following structural and procedural requirements regarding the enforceability of non-compete agreements:  (1) they must be in writing, (2) they must be signed by both the employer and the employee, (3) they must state that employee has a right to consult with counsel before signing, (4) non-competes signed at the commencement of employment must be presented to the employee at the earlier of making an offer of employment or 10 days before the commencement of employment, (5) non-competes signed after the commencement of employment must be supported by consideration beyond the continuation of employment.

Limitations on Scope of Non-Compete Agreements

The act imposes significant restrictions on the scope of non-competes.  According to the act, non-competes (1) cannot be broader than necessary to protect a legitimate business interest, something defined as trade secrets, confidential information, and goodwill, (2) cannot exceed one-year in duration, (3) must be limited, geographically, to where the employer actually conducts business, and (4) be limited to the services actually performed by the to-be-restricted employee.  The act does provide that courts may “reform or otherwise revise” non-competes that are too broad in scope in order to bring them into compliance with the act’s scope of requirements. 

Next Steps for Employers

This act will dramatically impact employers who use non-compete agreements with their workforce.  Those who use them on a regular basis should consult with an employment attorney to be sure their use of them after October 1, 2018 complies with this act’s requirements.  Those who do not use them regularly, but have considered doing so, should give considerable thought to rolling out non-competes prior to October 1, 2018 because the act does not apply to agreements entered into prior to that date.