- Employers may be required to provide compensation to employees during the restricted period under covered noncompete agreements.
- Noncompete agreements are unenforceable against broad categories of employees.
- Other commonly used restrictive covenants are not covered under the new law.
On August 10, 2018, Massachusetts Governor Charlie Baker signed into law the Massachusetts Noncompetition Agreement Act as part of a comprehensive economic development bill. The Act provides specific constraints on new noncompete agreements for Massachusetts employers and employers outside the state who have employees in it. Employers should be aware of the Act’s requirements and legislative escape clauses that enable employers to protect their legitimate business interests against departing employees. The new law applies to noncompete agreements entered into on or after October 1, 2018.
What Is a Noncompete Agreement Under the New Law?
The new Massachusetts law defines a noncompete agreement as “an agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.” However, the new law specifically excludes certain agreements:
- Nonsolicitation agreements covering solicitation of employees
- Nonsolicitation agreements covering solicitation of and business transactions with customers, clients or vendors
- Noncompete agreements made in connection with the sale of a business or partnership, or disposing of the ownership interest of a business or partnership
- Noncompete agreements outside of an employment relationship
- Forfeiture agreements
- Nondisclosure or confidentiality agreements
- Invention assignment agreements
- Garden leave clauses
- Noncompete agreements made in connection with the separation of employment if the employee is expressly given seven business days to rescind his or her acceptance
- Agreements that prohibit an employee’s reemployment with the same employer after termination of employment
With Whom Can Employers Enter Into Noncompete Agreements?
Notably, noncompete agreements in Massachusetts will be enforceable against employees and independent contractors, but not against the following categories of employees:
- Nonexempt employees
- Undergraduate or graduate students in a paid or unpaid internship or short-term employment relationship while the students are enrolled in school
- Employees terminated without cause or laid off
- Employees under the age of 18
The law does not, however, prohibit a court from imposing a noncompete restriction against employees in these categories as a remedy for a breach of another agreement or statutory or common law duty.
What Are the Basic Requirements?
If a noncompete agreement is entered into at the beginning of employment, it must be in writing and provided by the earlier of a formal offer of employment or 10 business days before commencing employment. If a noncompete agreement is entered into during employment (but not in connection with the employee’s separation), it must be supported by fair and reasonable consideration above and beyond the mere continuation of employment. Notice of the agreement must be provided at least 10 business days before the agreement is to be effective. In both situations, the noncompete agreement must be signed by both the employee and employer and must state that the employee has the right to consult with legal counsel prior to signing it.
All noncompete agreements require an employer to provide either “garden leave” (where a terminated employee is instructed to stay away from the workplace during the notice period, but remains on the payroll) or other mutually agreed upon consideration. An employer providing garden leave must provide wage payments for the entire duration of the restricted period equal to at least 50 percent of the employee’s highest annualized base salary earned during the two years preceding the agreement. If a noncompete agreement is extended due to an employee’s breach of fiduciary duty or taking of company property, the employer is not required to make garden leave payments during the extension. The law has yet to define “other mutually agreed upon consideration” and whether that consideration must be equivalent in some way to the garden leave payments.
What Is the Scope of a Noncompete Agreement?
A noncompete agreement may be no broader than necessary to protect an employer’s legitimate business interests, including trade secrets, confidential information not rising to the level of a trade secret, and goodwill. A noncompete agreement is presumed necessary where the employer’s legitimate business interests cannot adequately be protected through an alternative restrictive covenant, including a nonsolicitation, nondisclosure or confidentiality agreement.
A noncompete agreement’s restrictive period cannot exceed 12 months from the date of separation from employment. However, if the employee breaches his or her fiduciary duty to the employer or has unlawfully taken property belonging to the employer, the restrictive period can be extended to two years from the date of separation. The geographic area of a noncompete is limited to the area in which the employee provided services or had a material presence or influence within the two years preceding the agreement. Similarly, the reasonable scope of restricted activities is limited to the specific types of services the employee provided at any time during the two years preceding the agreement.
The new law prohibits a choice of law provision involving a Massachusetts resident or person who has been employed in Massachusetts for at least 30 days prior to the termination of his or her employment. Finally, the new law permits a court, in its discretion, to revise an unenforceable noncompete agreement to make it valid and enforceable to the extent necessary to protect an employer’s legitimate business interests.
Next Steps for Employers
Employers who have operations in Massachusetts should consider consulting with employment counsel when drafting noncompete agreements and other restrictive covenants moving forward. Carefully crafted noncompete agreements can enable employers to work within the new law’s constraints while adequately protecting their business interests. Additionally, the new law leaves room for employers to strengthen other restrictive covenants, like nonsolicitation, nondisclosure and confidentiality agreements, to protect themselves against potential adverse actions by departing employees.