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As you may know, the Massachusetts Noncompetition Agreement Act of 2018 (the “Noncompete Act”), which significantly changes the landscape for noncompetition agreements in Massachusetts, became effective on October 1. Below are answers to some frequently asked questions about the Noncompete Act.
Does the Act apply to existing agreements?
No. The Act applies only to agreements entered into on or after October 1, 2018. Agreements entered into previously are unaffected. Pre-existing agreements do not need to be amended to comply with the new law. However, if an existing agreement is amended (e.g., as we recommend when an employee is promoted), the amended agreement must comply with the Act.
Who’s covered by the new law?
All employers are covered by the law. However, employers are prohibited from enforcing noncompetition agreements against certain types of employees, including non-exempt employees, college interns, employees under 18, or employees terminated without cause or laid off. Notably, the law’s definition of “employee” also includes independent contractors.
What’s covered by the new law?
The new law applies to “noncompetition agreements” which it defines 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.” The law includes forfeiture for competition agreements within this definition. A forfeiture for competition agreement provides that an employee who competes forfeits a certain benefit, such as a stock incentive rights or some other type of deferred compensation to which the employee otherwise would have been entitled.
What’s Required Under the New Law?
All noncompetition agreements must be in writing, signed by both the employee and the employer. They are required to state that the employee has the right to confer with counsel prior to signing. Employers also are required to provide the agreement at the time a formal offer of employment is conveyed or 10 business days before the start of employment, whichever is earlier.
If an employer intends to request that a current employee sign a noncompetition agreement, continued employment is no longer sufficient consideration to support the agreement. Employers will need to provide some other type of consideration, which may constitute a promotion or additional compensation. Current employees are entitled to receive notice 10 business days in advance of being required to sign.
The law also requires “garden leave,” meaning that the employer must pay the employee during the period of time she or he is prohibited from competing. Garden leave payments are to be paid on a pro-rata basis and equal at least 50% of the employee’s highest base salary within the prior two years.
Rather than garden leave, employers have the option of paying “other mutually-agreed consideration.” This term is undefined, leaving open the possibility that adequate consideration could consist of items such as a signing bonus or stock options.
What are the exceptions to the new law?
The following types of arrangements are expressly excluded from the new law:
- covenants not to solicit or hire employees;
- covenants not to solicit or transact business with customers, clients or vendors;
- noncompetition agreements made in connection with the sale of a business or substantially all of its operating assets, “or otherwise disposing of the ownership interest” of a business, division or subsidiary when “significant” owners receive “significant” consideration or benefits from the sale or disposal;
- noncompetition agreements outside of an employment relationship;
- forfeiture agreements;
- non-disclosure/confidentiality agreements;
- invention assignment agreements;
- garden leave clauses;1
- noncompetition agreements made in connection with cessation of or separation from employment if the employee is expressly given seven business days to rescind acceptance;
- or agreements by which an employee agrees not to reapply for employment after termination of employment.
What activities can a noncompetition agreement restrict?
A noncompetition agreement must be reasonable in “the scope of proscribed activities” relative to the legitimate business interests sought to be protected. A restriction limited to “the specific types of services provided by the employee at any time during the last 2 years of employment” is presumed to be reasonable. This presumption is not a limitation, so an employer can contend broader restrictions are necessary for certain employees – however, the validity of that assertion will depend upon the particular position and employee at issue. In general, employers should expect a high hurdle in proving a broader restriction is necessary.
What is a reasonable geographic scope?
The Noncompete Act states that the noncompetition agreement must have a “reasonable” geographic scope, and that limiting the scope to areas in which the employee “provided services or had a material presence or influence” in the past two years is “presumptively reasonable.” This language leaves open the possibility that broader geographic restrictions may be enforceable, depending on the circumstances.
How long can a noncompetition agreement last?
Under the new law, noncompetition agreements can last for 12 months after separation from employment, unless the employee has breached a fiduciary duty to the employer or unlawfully has taken, physically or electronically, property belonging to the employer, in which case the duration of the agreement may not exceed two years from the date of separation.
What legitimate business interests will support enforcement of a non-compete?
Legitimate business interests sufficient to support a noncompetition agreement are limited under the law to the employer’s trade secrets, confidential information, and goodwill.
Can employers avoid the restrictions in the Non-compete Act by choosing a state other than Massachusetts for choice of law or venue?
Employers cannot avoid the new limitations under the Noncompetition Law by imposing another state’s law in their noncompetition agreements. Under the new law, a choice of law provision applying the law of any state other than Massachusetts will not be enforceable if the employee has been a resident of, or employed in, Massachusetts for at least 30 days immediately prior to termination of employment. Employers seeking to enforce noncompetition agreements entered into on or after October 1, 2018 may seek enforcement only in the county where the employee lives, or if mutually agreed upon by the employer and employee, in Suffolk County’s superior court or its business litigation session.
1. The exclusion of “garden leave clauses” is puzzling given that the law separately provides that a garden leave clause is a component of a valid noncompetition agreement and one form of consideration that will support a noncompetition agreement. It is unclear what the legislature intended by this exclusion.