New law limits the scope of employment noncompetes in the state
By Lisa Nagele-Piazza, J.D., SHRM-SCP
August 14, 2018 - SHRM
Massachusetts employers must comply with new noncompete rules for agreements that are executed on or after Oct. 1. The legislation was nearly a decade in the making and was signed by Gov. Charlie Baker on Aug. 10. Here's what employers should know.
Employers should carefully review their current policies and practices because the new law will place significant limitations on the scope of noncompetes, said Bret Cohen, an attorney with Nelson Mullins Broad and Cassel in Boston.
About 37 percent of U.S. workers have been covered
by a noncompete at some point during their career, including some low-wage
earners, according to a study by the U.S. Department of the Treasury. The
Massachusetts law aims to prevent overuse of such agreements by prohibiting
noncompetes with employees who are:
For a noncompete to be valid, it must be:
The agreement must also inform employees of their right to consult legal counsel before signing it. If employers want existing staff to sign noncompetes, they will need to offer "fair and reasonable" consideration beyond continued employment for the agreements to be valid.
Garden Leave Option
Notably, Massachusetts is the first state to include "garden leave" in a noncompete law, said Michael Elkon, an attorney with Fisher Phillips in Atlanta. Garden leave is a term commonly used in Britain that refers to a post-employment period during which an employer continues to pay a former employee. Massachusetts was originally going to require employers to pay the employee's full salary for the time he or she is restricted by the agreement, but the amount was reduced to 50 percent of the employee's highest base salary that was earned with the employer in the two years preceding the employee's termination.
Instead of offering garden leave, a noncompete agreement may provide for "mutually agreed upon consideration," though the new law doesn't specify the amount of such consideration or the timing of any payment, Cohen noted.
"This is a big loophole," Elkon said. Former employees and employers will likely argue in court over what constitutes "mutually agreed upon consideration." Employers have some latitude, but they need to be careful not to abuse their bargaining power, he said. "It's a judgment call. How much would you be comfortable paying for someone to be on the sidelines?" The more an employer pays, the more likely a court will see the agreement as reasonable.
Coverage
Importantly, employers should note that noncompetes will not be enforceable
against employees who are laid off or fired without cause. This means
employers will likely have a two-part battle in court, Cohen said. They will
first have to prove that the employee was fired for cause and then show that the
agreement is otherwise valid and enforceable.
The new law applies to independent contractors as well as employees but doesn't apply to restrictive agreements other than traditional noncompetes. For example, nondisclosures that protect confidential information and nonsolicitation agreements that prohibit former employees from poaching workers, vendors or customers will not fall under the new law. Additionally, the law will not apply to noncompetes related to the sale of a business or those that are included in an employee's separation agreement—as long as the employee is given seven days to revoke the agreement.
The law applies to workers who have lived in Massachusetts for at least 30 days prior to termination. Lawsuits and other challenges must be brought in the county where the employee lives or in Suffolk County Superior Court—which covers Boston—if the parties mutually agree to it.
Some aspects of existing Massachusetts common law will still apply to noncompetes, Cohen said. For example, agreements must be limited to protect the employer's legitimate business interests and must have a reasonable geographic scope.
Tips for Employers
When drafting agreements, multistate employers should note that they can't have a choice-of-law provision that applies another state's law to noncompetes for employees who are covered under the Massachusetts law, Cohen said.
Since confidentiality and nonsolicitation agreements are carved out of the legislation, employers should also revisit those agreements to make sure they are strong, he suggested.
Noncompete agreements are a matter of state law and there are substantial
differences from state to state, Elkon said. The Massachusetts law illustrates
many of the points that employers need to pay attention to when reviewing
various state requirements. "It's absolutely worth it for employers to spend a
few hours of attorney time on making sure agreements are compliant with the
applicable state laws," he said.