What Business Owners Should Know About Massachusetts’ New Non-Compete Law
On August 10, 2018, Massachusetts Governor Charlie Baker signed into law a piece of legislation entitled “An Act Relative to Economic Development in the Commonwealth.” This new legislation brings long-awaited non-compete reform to Massachusetts, and lays out some new guidelines for business owners to consider when determining whether or not to require employees to sign true non-compete agreements that would prohibit a departing employee from engaging in competitive activities.
The new legislation applies only to non-compete agreements, and not other restrictive agreements such as non-solicitation agreements, confidentiality agreements, or assignment of invention agreements. It applies only to agreements entered into after October 1, 2018, and specifies that certain employees such as employees eligible for overtime, employees laid off or terminated without cause, and college interns may not be subject to non-compete restrictions.
Under the new law, effective non-compete agreements for new employees:
Must be in writing and signed by both parties;
Must expressly state that the employee has the right to confer with counsel prior to signing; and
Must be provided to the employee before the time of a formal offer or ten (10) business days before the beginning of employment, whichever is earlier.
If an employer wants a current employee to sign a new non-compete agreement consistent with the new law, the employer:
Must provide the employee with additional consideration (beyond continued employment); and
Must provide the agreement to the employee at least ten (10) business days before it is to be executed.
The new legislation provides for some restrictions on the scope of non-compete agreements:
The non-competition period cannot be longer than twelve (12) months (which can be extended if the employee engages in certain bad behaviors);
The non-compete agreement must protect a “legitimate business interest” of the employer, such as trade secrets, confidential information, or the goodwill of the employer; and
The non-compete may be limited geographically to those areas where the employee actually worked or had a material impact or presence.
The most significant change that the new law imposes is the obligation that any non-compete agreement requires that “garden leave payments” be paid to the employee.
These payments must be equal to fifty percent (50%) of the employee’s highest base salary paid within the last two (2) years, and can be paid pro-rata over the course of the non-compete period. The employer and employee may agree on alternative consideration, but any alternatives to the garden leave payments must be set forth in the non-compete agreement.
While providing some much needed clarity on the topic, the new law will present some challenges to employers. The garden leave payments are explicitly subject to the Massachusetts Wage Act, and therefore any violation in connection with making the required payments may subject the employer to enhanced damages. Employers must consider the impact that any increases in base compensation (vs. bonus or incentive compensation) will have on potential garden leave payments. Further, the requirement that the non-compete agreement be delivered “before a formal offer of employment is made” may complicate the timing of bringing on a new employee. The new statute requires that any civil action brought in connection with a non-compete agreement must be brought in the county in which the employee resides (unless the employer and employee agree in writing that any actions may be brought in Suffolk county) so a company could easily find itself litigating a claim in unfamiliar territory in a matter involving a remote employee.
In connection with the new law, employers should undertake a careful review of existing non-compete arrangements, and identify those where the non-compete provisions can be dropped. Where possible, employers should limit restrictive covenants to confidentiality, non-solicit, and other types of restrictive agreements that don’t prohibit post-employment competition. In those cases where a non-compete is truly vital to a company’s operations, new documents complying with the statute should be created and executed.