New Massachusetts Law Limits Non-Competes
On August 10, 2018, Massachusetts Governor Baker signed into law a bill regulating non-competes, limiting their enforceability and codifying express requirements they must meet. The law goes into effect on October 1, 2018, and Massachusetts now joins the likes of states such as Utah and Idaho who have also recently passed laws regulating employee non-compete agreements.
The new law, which applies to both employees and independent contractors, generally bans employment-related non-compete agreements in Massachusetts unless they meet certain statutory requirements. Specifically, the agreement must be in writing, signed by both the employer and employee, and state the employee has the right to consult counsel prior to signing. The employer must also provide notice of the agreement to the employee, the form and timing of which depends on when the employee is asked to sign the agreement:
- Employers who require employees to sign a non-compete at the beginning of employment must provide a copy of the agreement to the employee either before making a formal offer, or 10 days before the employee starts, whichever comes first.
- Employers who require employees to sign a non-compete mid-steam of employment must provide notice of the agreement not less than 10 business days before the agreement becomes effective.
- Further, non-competes entered during employment must be supported by independent consideration beyond continued employment.
The law also sets standards for other traditional common law requirements for reasonable non-competes, such as the scope of restraints and protectable interests. In terms of time, geography, and activity restraints, a Massachusetts non-compete will only be enforceable if the time restriction is for one year or less post-employment (unless the employee breaches his or her fiduciary duty or steals the employer’s property, in which case the non-compete can last up to 2 years). And, a non-compete will be presumed reasonable in scope if it is (i) limited to the geographic areas in which the employee provided services or had a material presence or influence within the last 2 years of employment, and (ii) limited to the specific types of services the employee provided during the last 2 years of employment. The law also recognizes three legitimate business interests, at least one of which the non-compete must be necessary to protect in order to be enforceable: trade secrets, confidential information, and employer goodwill.
One unique aspect Massachusetts’ new non-compete law is its requirement that non-compete agreements include a “garden leave” clause or other mutually-agreed consideration. A “garden leave” clause requires the employer to pay the employee for the duration of the non-compete period at least 50 percent of the employee’s highest salary within the last 2 years of employment. The employer’s obligation to pay the garden leave is relieved only if the employee breaches the agreement. This statutory obligation to pay an employee after he or she leaves employment may deter some employers from requiring non-competes in Massachusetts.
Like other jurisdictions that have sought to prohibit non-competes with low-wage employees (such as Illinois, New Jersey, and New York City), the Massachusetts law bans non-competes with employees who are classified as “non-exempt” under the FLSA. The law also prohibits non-competes with employees who are terminated without cause or laid off. This is an important departure from other states’ non-compete laws, which will enforce non-competes regardless of the circumstances of an employee’s termination. In Massachusetts, however, if an employee is terminated without cause or laid off, the non-compete is no longer enforceable.
A civil action relating to a Massachusetts non-compete must be brought in the county where the employee resides, or in Suffolk County, if the employer and employee mutually agree to litigate there. The law allows courts to rewrite non-competes to make them valid and enforceable, to the extent necessary to protect the employer’s legitimate business interest. However, modification is within the court’s discretion, so employers should not rely on a “blue pencil” provision to save a non-compete that would otherwise be inconsistent with public policy.
Notably, the law only applies to non-competes, and does not apply to customer or employee non-solicits or agreements made in connection with the sale of a business. Thus, employers in Massachusetts who believe a restrictive covenant is necessary to protect a legitimate business interest should consider using “tiered” agreements. That is,
- Tier 1 would include the suite of protective covenants (non-competes, customer and employee non-solicits, confidentiality and non-disclosure agreements) for high-level employees;
- Tier 2 would include non-solicits, confidentiality, and non-disclosure agreements (but no non-compete) for mid-level employees; and
- Tier 3 would include only confidentiality and non-disclosure agreements for low-level employees (no non-compete or non-solicits).