This week, the Massachusetts Noncompetition Agreement Act became effective. For employers, this means that all non-compete agreements entered into on or after October 1, 2018 must comply with the new law’s requirements. It is likely that most Massachusetts employers will have to revise their existing agreements.
When evaluating their non-competes, employers should keep the following key points in mind:
Garden Leave Payments
As consideration for a non-compete restriction—which cannot exceed 12 months pursuant to the Act, absent extraordinary circumstances—an employer must pay a former employee a “garden leave” payment of at least 50% of the employee’s highest annualized base salary over the preceding two years on a pro rata basis over the restricted period, or other mutually-agreed upon consideration.
“Mutually agreed upon consideration” is not defined in the Act, but most employers are considering signing bonuses in return for signing a non-compete. But providing garden leave payments may be the least risky approach until the courts provide some parameters for what constitutes sufficient other consideration.
Notice. Advance notice of the non-compete must be provided to employees. For new employees, notice must be provided the earlier of a formal offer of employment or 10 business days before commencement of employment. For existing employees, notice must be given 10 business days before the non-compete is to become effective.
Consideration. For a non-compete entered into after the commencement of employment, continued employment is no longer sufficient consideration—the employer must provide additional “fair and reasonable” consideration beyond continued employment.
Right to Counsel. The non-compete must expressly provide that the employee has the right to consult with counsel prior to signing the agreement, and must be signed by both parties to be effective.
Choice of Law. For employees that live in or work in Massachusetts, non-competes must have a Massachusetts choice of law provision.
Outside the Scope of the Act
Recall that the Act does not apply to customer or employee non-solicit agreements, non-disclosure agreements, non-competes included in a separation agreement (with a seven day rescission period), and non-compete agreements entered into in connection with the sale of a business, among others.
The Act renders non-competes unenforceable against certain types of employees, including those 18 years old or younger, undergraduate or graduate students employed as interns, employees classified as non-exempt under the Fair Labor Standards Act, and, notably, employees terminated without cause. “Cause” is not defined in the Act, so employers should consider whether they should be defining “Cause” in their agreements.
While the meaning of certain language in the Act (such as “other mutually agreed upon consideration,” “fair and reasonable,” and “cause”) will need to be fleshed out by the courts, the Act does provide some guidelines for employers when drafting revised non-compete agreements. Employers looking to hire new Massachusetts employees, or enter into new non-competes with current employees, must carefully review the Act’s requirements to ensure compliance with the law.
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