On May 16, 2016, the Massachusetts General Court’s Joint Committee on Labor & Workforce Development reviewed a re-drafted bill concerning non-compete agreements in the Commonwealth and reported it out of the Committee favorably. It is the latest in a series of similar legislative efforts dating back to the Patrick administration and beyond. Many observers consider this bill, known as the Massachusetts Noncompetition Agreement Act, to have a better shot at becoming law than did its predecessors. Here, we take a look at the proposed Act and how it would affect the use and enforceability of non-competes in Massachusetts.
The proposed Act defines “noncompetition agreement” as an agreement under which an employee or prospective 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.” Both employees and independent contractors are considered “employees” for purposes of the Act. Several alternative forms of restrictive covenant are excluded from the definition of “noncompetition agreement,” and therefore from the requirements of the Act. These include:
- Covenants not to solicit or transact business with the employer’s customers or vendors;
- Covenants not to solicit or hire the employer’s employees;
- Non-disclosure and confidentiality agreements;
- Non-competes against owners in the sale-of-business context; and
- Non-competes made in connection with the end of employment, if the employee is given seven business days to rescind acceptance.
Non-compete agreements entered into before July 1, 2016 would also be excluded from the requirements of the proposed Act.
Restrictions on the Use of Non-Competes
The proposed Act prohibits non-competes entirely with respect to several types of employees, including those classified as non-exempt for purposes of overtime and minimum wage laws and those terminated without cause or laid off. For other employees, it sets forth a series of requirements for a valid and enforceable non-compete.
To be enforceable under the proposed Act, a non-compete would need to be in writing, signed by both the employer and employee, and would need to state the employee’s right to consult with counsel before signing. If sought at the commencement of employment, the non-compete would need to be presented to the employee at the time of a formal offer of employment or 10 business days before the employee begins work, whichever is earlier. If sought during employment, the non-compete would need to be presented to the employee at least 10 business days before it is to become effective.
An offer to commence employment would remain sufficient consideration for a non-compete. Continuing employment, however, would no longer suffice, meaning that a non-compete sought after employment begins would need to be supported by some other fair and reasonable consideration. In addition, every non-compete would now need to be supported by a “garden leave clause,” providing for continuation of the employee’s salary at 50 percent or higher during the restricted period.
The proposed Act would limit non-competes to 12 months in most cases, but provide for up to a two-year restriction if the employee had breached his or her fiduciary duties to the employer or unlawfully taken the employer’s property. Garden leave would need not be paid during this extension.
In keeping with Massachusetts case law, a non-compete would only be enforceable to the extent necessary to protect an employer’s legitimate business interests. The Act limits these interests to the employer’s trade secrets, confidential information, and goodwill. An enforceable non-compete would also need to be reasonable in geographic reach and in the scope of proscribed activities in relation to the interests protected.
The proposed Act carries several presumptions that may be helpful to employers. First, it provides that a non-compete is reasonably necessary where an employer’s legitimate business interests cannot be protected by another form of restrictive covenant, such as a non-disclosure or non-solicitation agreement. Second, it presumes that the geographic scope of a non-compete is reasonable if it is limited to areas in which the employee provided services or had a material presence or influence in the last two years of employment. Third, it provides that a restriction on activities that is limited to the specific types of services provided by the employee during the last two years of employment is presumptively reasonable.
The proposed Act would expressly deprive courts of the discretion to revise invalid non-competes to render them enforceable, meaning that special care would be required at the drafting stage. Employers will likely need to toss their existing form non-compete agreements and start from scratch with a new form that hits the requirements of the proposed Act.
Likelihood of Enactment
The proposed Act will next likely be referred to the Joint Ways & Means Committee. From there, it will need to make its way through the full House and Senate. With the current legislative session ending on July 31, 2016, the timeline for passage may be tight. Nevertheless, with apparent support in both branches of the Legislature and indications from Governor Baker that he is interested in seeking the middle ground on this issue, the Massachusetts Noncompetition Agreement Act may offer the clearest glimpse yet of the future of non-competes in Massachusetts.