Just as the 2018 legislative session came to a close on the night of July 31, 2018, the Legislature passed a bill reforming the law of noncompetition agreements (“noncompetes”) in Massachusetts. The bill is being viewed as a compromise following years of unsuccessful efforts to pass noncompete reform. The governor is expected to sign the bill into law in the coming days.
What types of agreements are covered?
The bill defines noncompetes broadly to include any agreement between a private employer and an employee or prospective employee “under which the employee or expected employee agrees that the employee will not engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended.” This includes “forfeiture for competition agreements,” where an employee forfeits certain benefits by competing with the employer after the employment relationship ends. Notably, the bill also covers agreements between private businesses and independent contractors.
A number of other restrictive agreements that are often grouped together with noncompetes are not covered and will not be subject to the new bill’s restrictions. Excluded from the bill’s prohibitions are: agreements not to solicit the employer’s employees or customers, agreements arising from the sale of a business, forfeiture agreements (which impose adverse financial consequences on an employee at the termination of the employment relationship, regardless of whether the employee competes), nondisclosure or confidentiality agreements, separation agreements (where the employee has at least seven days to rescind), and others.
What has changed?
For the first time, the factors that determine who can be subject to noncompetes and whether such agreements will be valid and enforceable have been codified. To be enforceable, a noncompete entered at the outset of the employment relationship must:
- be in writing and signed by the employer and employee;
- state expressly that the employee has a right to consult with counsel prior to signing; and
- be presented to the prospective employee before an employment offer is made or 10 days before the commencement of employment, whichever is earlier.
Where a noncompete is entered after an employee begins working, it must:
- be supported “by fair and reasonable consideration independent from the continuation of employment”;
- be provided to the employee no less than 10 business days prior to the effective date;
- be in writing and signed by the employer and employee;
- state expressly that the employee has a right to consult with counsel prior to signing.
The requirement that the employee receive “fair and reasonable consideration” beyond continued employment is a significant change to the law. It remains to be seen what will constitute “fair and reasonable consideration” within the meaning of the statute.
In addition, the following restrictions will apply to all noncompetition agreements:
- Noncompetes will not be enforceable with respect to any employee who:
i) is not exempt from the Fair Labor Standards Act (i.e. employees entitled to overtime pay);
ii) is an undergraduate or graduate student engaged in an internship or other short-term employment while enrolled in school;
iii) has been terminated without cause or laid off; or iv) is 18 years old or younger.
- The employer must provide so-called “garden leave” or other mutually-agreed upon consideration during the period in which the employee is restricted from competing. Unless the parties agree on other consideration, the bill requires the employer to pay 50% of the employee’s highest annual base salary paid during the last 2 years of employment. The employer cannot unilaterally stop paying such benefits unless the employee breaches the agreement during the restricted period.
- The agreement must be no broader than necessary to protect the legitimate interests of the employer, including trade secrets, confidential information and goodwill; the bill permits courts to reform or revise a noncompete to render it enforceable to the extent necessary to protect these business interests.
- The restrictive period on competition cannot exceed 1 year from the date the employment relationship ends, unless the employee has engaged in “bad acts” by taking the employer’s property or breaching a fiduciary duty to the employer.
- The agreement must be reasonable in geographic reach in relation to the interests protected; the geographic restriction will be presumed reasonable if it is limited to the area serviced by the employee or where the employee had a material presence or influence during the last 2 years of employment.
- The scope of prohibited activities must also be reasonable in relation to the interests protected; the list of prohibited activities is presumed reasonable if limited to the specific types of services provided by the employee at any time during the last 2 years of employment.
- All noncompetes must be consistent with public policy.
- Any lawsuit arising out of the noncompete must be filed in the county where the employee lives or, if the employer and employee agree, the suit may be filed in the Superior Court in Suffolk County. While the bill seems to contemplate that all lawsuits arising from noncompetes will be filed in state court, it is not clear whether such a claim can be heard in federal court if joined with other federal claims.
Are Current Agreements Enforceable?
The bill will apply to any noncompetition agreement entered into after October 1, 2018. Thus, any agreement that is currently in place will not be affected and will continue to be governed by existing law. While there is still time to enter into noncompetes before the bill becomes effective, it is reasonable to assume that courts will be skeptical of agreements entered after the passage of the bill that are inconsistent with the new requirements. In any event, courts would likely consider the requirements of the new statute as a guide in determining whether a pre-October 1, 2018 noncompete is valid.
Businesses that use noncompetes should carefully consider the scope of such agreements going forward. Identifying legitimate interests that require protection is the first step toward ensuring that a noncompete is required in the first place. In some instances, the protections sought by a noncompete might be accomplished with a less restrictive trade secret nondisclosure agreement. If you have any questions concerning this or other legal issues, please contact us.