Employers will now face significant restrictions when seeking to impose non-compete obligations on Massachusetts workers. The Massachusetts legislature recently approved a comprehensive non-competition reform bill and Governor Charles Baker signed it into law late last week. The Massachusetts Noncompetition Agreement Act (the Act) will become effective on October 1, 2018, which does not leave much time for employers to consider what actions to take to protect their business interests.
This note briefly addresses what you need to know now about the Act. We will be providing a more detailed analysis of the Act and its practical implications shortly. We will also host both a webinar and a live breakfast seminar in our Boston office in September to provide additional opportunities to learn about the Act and ask questions about its impact; the details for these programs will be announced shortly.
Can an Employer Still Use Non-Competes in Massachusetts?
Yes, but only under certain circumstances. The Act imposes several new requirements for a non-compete to be valid and enforceable in Massachusetts, which include that:
- The restricted period cannot be longer than one year after termination (or up to two years for certain bad actors);
- The non-compete must be supported by continued payment of at least 50 percent of base salary during the restricted period or “other mutually-agreed upon consideration,” the amount of such consideration or when it is to be paid are not addressed in the Act;
- The non-compete cannot be enforced against an employee who is laid off or terminated without cause if it is entered into other than in connection with employment termination – what constitutes “cause” is not defined in the Act;
- The employer must comply with new procedural rules in connection with signing a non-compete intended to protect employees (e.g., notice periods, right to consult with counsel);
- Continued employment cannot be used as consideration to support a non-compete with a current employee;
- The non-compete cannot be broader than is necessary to protect the employer’s trade secrets, confidential information or goodwill, and must be consistent with public policy; and
- Only salaried employees may be covered by a non-compete.
These minimum requirements represent a departure from existing law. Few, if any, existing non-competition agreements will meet all of these requirements.
Does the Act Restrict Use of Non-Solicitation and Confidentiality Agreements?
No, employers may still use (i) covenants not to solicit employees, customers, clients or vendors of the employer; (ii) confidentiality agreements; and (iii) invention assignment agreements.
Are Independent Contractors Covered under the Act?
Yes, the non-compete restrictions under the Act cannot be avoided by structuring services under an independent contractor relationship.
What about Non-Compete Forfeiture Provisions in Compensation Arrangements?
The Act treats any agreement that imposes “adverse financial consequences” on a former employee who engages in competitive activities as a form of non-competition agreement. As a result, unless the minimum requirements noted above are met, the Act prohibits an employer from forfeiting previously accrued compensation due to a non-compete breach. It is quite common for employers to include non-compete forfeiture provisions in equity awards, deferred compensation arrangements and supplemental pensions. The Act would not affect service and performance based vesting conditions or bad boy clauses unrelated to non-compete obligations.
Our Business is Headquartered Outside of Massachusetts – Can’t We Just Provide That the Law of Our Home Stated Governs the Non-Compete to Avoid These Restrictions?
The Act contemplates that employers may try to use choice of law provisions to avoid the new minimum requirements. Massachusetts will refuse to honor a choice of law provision with respect to an employee who is, and has been for at least thirty days immediately before termination of employment, a resident of or employed in Massachusetts at the time of employment termination. This provision appears to apply to an employee who has recently moved to Massachusetts from another jurisdiction. In addition, the Act states that all civil actions relating to covered non-competition agreements be brought in the county where the employee resides or, if mutually agreed by the employer and employee, in the Superior Court of Suffolk County.
Will Existing Non-Competition Agreements Need to Be Amended to Comply with These Changes?
Generally, no. The Act only applies to non-competition agreements entered into on or after October 1, 2018. However, it remains to be seen whether amendments to a non-competition agreement on or after October 1st might cause it to become subject to the new non-compete restrictions under the Act.
Will a New Non-Competition Agreement Entered into before October 1, 2018 Be Exempt from These New Restrictions?
It seems that the answer is yes. There is nothing in the Act that covers new non-competition agreements entered into before October 1, 2018. However, it remains to be seen how courts might be influenced by the Act with respect to agreements that do not comply with the new minimum requirements (e.g., non-competes longer than 12 months).
What about Non-competition Agreements Made in Connection with the Sale of a Business?
Non-competition agreements made in connection with sale of a business may be enforceable against a “significant owner” of the business who will receive “significant consideration or benefit from the sale” without meeting the new minimum non-compete restrictions described above.
It remains to be seen how all of this will affect the ultimate enforceability of any particular non-compete provision in court. Assuming that all of the new technical drafting requirements are met, the standard for enforceability remains as it has for more than 30 years in Massachusetts: the agreement will be enforced only to the extent necessary to protect trade secrets, confidential business information or goodwill. This is, and always will be, an incredibly fact-intensive analysis.