This Blog has previously covered the six non-compete bills that were introduced in the Massachusetts Legislature in 2017 (See articles dated December 27, 2017, and March 2, 2018). On April 17, 2018, the Joint Committee on Labor and Workforce Development submitted a revised bill, House Bill 4419 (“H 4419”), in place of the prior bills. Through this action, the Joint Committee has taken a significant step toward the finish line regarding proposed non-compete legislation.
This post offers some quick impressions following our initial review of the bill.
Definition of Employee
Resolving a split among the 2017 bills, H 4419 proposes to include independent contractors under the definition of a covered “employee.”
Like all contracts, non-compete agreements must be supported by valuable consideration. H 4419 provides that non-compete agreements presented to an employee after the commencement of employment must be supported by additional consideration over and above continued employment. Further, while the bill does not impose a similar requirement for agreements that are entered into in connection with the commencement of employment, no employer may enforce a non-compete covenant without complying with the bill’s “garden leave” provision (see below).
Permissible Scope of a Non-Compete Covenant
Under H 4419, a non-compete covenant must be no broader than necessary to protect a legitimate business interest; must include a geographic scope that is reasonable “in relation to the interests protected”; must not exceed one year in duration from the date of separation (with tolling up to one additional year if the employee is found to have breached a fiduciary duty or unlawfully taken his or her former employer’s property); and must be reasonable in the scope of the proscribed activities in relation to the interests protected.
Requirement of Garden Leave Pay or Some “Other Mutually-Agreed Upon Consideration”
Like three of the 2017 bills, H 4419 requires the payment of “garden leave” or some “other mutually-agreed upon consideration” whenever an employer chooses to enforce a non-compete covenant following the date of separation (for a more in depth discussion of the “garden leave” concept, see our article dated December 27, 2017). For agreements that call for “garden leave” pay (as opposed to “other … consideration”), the employer must, during the restricted period, continue paying the former employee an amount defined as “at least 50 percent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding the employee’s termination.”
H 4419 diverges from the 2017 garden leave bills by imposing no requirements on the value or timing of any “other” consideration that the employer and employee may agree upon as an alternative to garden leave. Under the 2017 bills, the value of the alternative consideration needed to be equal to or greater than the statutorily-defined garden leave payments. Further, the timing of the consideration needed to be in line with the applicable garden leave period.
H 4419 imposes no such conditions, and, as such, appears to allow parties to agree to less valuable consideration which could be provided to the employee at any time, including the commencement of employment (for instance, a hiring bonus). This “other mutually-agreed upon consideration” provision effectively negates any requirement that the non-compete contain a garden leave clause, and may be a sticking point for certain legislators as the bill makes its way through the legislative process.
Under H 4419, non-compete agreements may not be enforced against the following types of employees:
- Employees who are classified as non-exempt under the Fair Labor Standards Act;
- Undergraduate or graduate students who are engaged in short-term employment;
- Employees who have been terminated without cause or laid off; or
- Employees who are not more than 18 years of age.
H 4419 permits courts to “reform or otherwise revise” an overly broad non-compete covenant to the extent necessary to protect the applicable legitimate business interests. Of note, most of the 2017 bills would have rendered overly broad covenants null and void.
Finally, barring any further revisions, H 4419 would take effect on October 1, 2018 if it is ultimately enacted. Further, any agreements entered into prior to that date would be governed by Massachusetts common law standards.
According to the Legislature’s bill scheduling calendar, H 4419 has a July 31, 2018 deadline for passage. Although summer is close, this should afford sufficient time to get it to a vote.