On July 31, 2018, the Massachusetts Legislature finally passed non-compete reform. We had been reporting annually on earlier failed attempts to enact legislation limiting non-competition agreements in Massachusetts. It looked like this year would be no different, but on the last day of the just-concluded legislative session, the Legislature passed a non-compete reform bill. The bill is expected to be signed into law by Governor Baker and to go into effect on October 1, 2018.
Overall, the law represents a significant compromise between those who believe non-competition agreements stifle economic growth and those who believe that they foster growth by protecting a company’s investment in confidential information and customer goodwill. In striking this balance, the Legislature rejected more extreme elements of earlier proposed legislation, which had failed to garner sufficient support in the past, and instead opted for a law that imposes new requirements, but does not prohibit employers from requiring non-competes as a condition of employment.
This alert will describe the major changes that the legislation introduces and will provide recommendations for employers to comply with the new law while continuing to reap the benefits of these types of agreements. Fortunately, the law will apply only to agreements signed on or after the October 1, 2018, and employers will not necessarily need to scrap existing agreements. The new rules also do not apply to other forms of restrictions, such as non-solicitation agreements.
When and How Agreement Is Presented to Employees for Signature
The Legislature clearly wanted to eliminate the common practice where a new employee shows up for the first day of work and is given a non-competition agreement to sign. Of course, at that point, the employee has little choice but to sign whatever is put in front of him or her. The Legislature has tried to create ground rules that will provide the employee with an element of choice (or, at least, a period of reflection) on whether to sign or not:
- A non-compete agreement must be presented to a new employee before a formal offer of employment is made or 10 business days before the commencement of the employee’s employment, whichever comes first.
- A non-compete agreement must be presented to an existing employee at least 10 business days before the effective date of the agreement.
- In all cases, the agreement must expressly notify the employee that he/she has the right to consult with counsel prior to signing.
And, while this sounds like it should go without saying, the agreement must be signed by the employee and the employer. Not infrequently, especially in the rush of the on-boarding process, employers never countersign the agreement. Until now, these agreements were generally still considered enforceable. Arguably, under the new law, an agreement signed by only one party will be per se invalid.
Scope of Restrictions
The Legislature has sought to prevent employer overreach by putting a one-year cap on non-compete restrictions (i.e., the non-compete period cannot exceed 12 months from the date of termination), except in circumstances where the ex-employee unlawfully takes the employer’s confidential information or otherwise breaches a fiduciary duty, in which case the restriction can extend up to two years post-employment.
Consideration and Economic Benefits
The Legislature viewed the typical non-compete agreement as lacking mutuality of benefit. It sought to redress this perceived imbalance in the following ways:
- If an agreement is presented to an existing employee, there will have to be additional consideration for the agreement beyond continued employment. The Legislature did not provide much guidance on what consideration will satisfy this requirement. The new law simply states that the consideration must be “fair and reasonable.” Unfortunately, employers will have to wait for the courts to flesh out what this requirement means in practice.
- A non-compete agreement must provide some income protection for the employee during the restricted period. This must be in the form of either 1) so-called “garden leave”, where the employee is paid no less than 50% of his/her former base salary, or 2) “other mutually agreed upon consideration” set forth in the agreement. The latter concept is not defined in the statute, but would seem to contemplate that the employer and employee can agree to a figure that is lower than the garden leave requirement described above, provided that the precise amount or consideration is set forth in the agreement.
Non-Competition Agreements to Which the New Law Does Not Apply
The Legislature concluded that there were certain circumstances where an employee’s bargaining power or choice was more likely to be present, and it largely exempted those situations from the new rules:
- The new law exempts agreements made in connection with the sale of a business.
- The new law exempts separation agreements (i.e., a separation agreement that contains a non-competition clause), provided that the employee is given 7 business days to rescind acceptance.
Other Restrictions to Which the New Law Does Not Apply
There are a host of restrictive covenant agreements that the new law does not affect, and which will continue to be governed by courts and case law, including:
- Agreements prohibiting solicitation of employees and customers;
- Non-disclosure and confidentiality agreements; and
- Invention and intellectual property agreements.
Classes of Employees Who Are Exempt from Non-Compete Agreements
The Legislature sought to protect those employees who, almost by definition, have little bargaining power, would be unlikely to have significant confidential information or customer relationships, and/or those upon whom a non-compete restriction would seem to work a particularly harsh result. Thus, under the new law, non-competition agreements are not enforceable against:
- Non-exempt employees (i.e., hourly employees who are eligible for overtime) or
- An employee who is terminated without cause or is laid off.
Governor Baker is very likely to sign the non-compete bill into law, especially because the legislation had the support of significant players in the business community. Employers who regularly use non-competes will need to review both their agreements and their procedures for presenting these agreements to employees in order to determine what changes they will need to make to be in compliance come October 1st.
Finally, while the new law does not govern or invalidate agreements that were signed before the effective date, over the long term, the standards of the new law are likely to be adopted by the courts as the public policy of the Commonwealth. Agreements that don’t adhere to these standards may be deemed unreasonable (and hence, unenforceable) restrictions on competition. Therefore, employers should review their existing agreements with employees, and if there are opportunities in the future (e.g., promotions or equity awards) to present employees with new and compliant agreements, they should consider doing so.
Given the complexity of the new law and the importance of the issues at stake, it makes sense for employers to consult with experienced employment law counsel as they work through these issues. If you have any questions about the information presented in this alert, or would like to learn more about how Prince Lobel can help you draft new or revise existing non-compete agreements, please contact Daniel Tarlow, the head of our Employment Law Practice Group and the author of this alert, at 617.456.8013, or firstname.lastname@example.org.