Massachusetts has a new law regarding the enforcement of non-competition agreements that will go into effect as of October 1, 2018, including requirements for “garden leave.” As a result of the new law, most non-competition agreements entered after October 1, 2018 will no longer be enforceable in Massachusetts unless additional compensation is paid.
Many of the articles, blog posts, and other materials about this new law have focused on what will be prohibited if the law takes effect. However (as I like to do in life in general), I think we should look at the positive side of the new law and focus on what is still allowed – because it is just as important as what is not.
For example, all of the following are still okay:
• Agreements not to solicit or hire employees of the employer;
• Agreements not to solicit or transact business with customers, clients, or vendors of the employer;
• Non-competition agreements made in connection with the sale of a business entity or substantially all of the operating assets of a business entity, when the party restricted by the non-competition agreement is a significant owner of the business entity who will receive significant consideration or benefit from the sale;
• Non-competition agreements outside of an employment relationship;
• Forfeiture agreements;
• Non-disclosure or confidentiality agreements;
• Invention assignment agreements;
• Garden leave clauses;
• Non-competition agreements made in connection with the cessation of or separation from employment if the employee is expressly given seven business days to rescind acceptance; and
• Agreements by which an employee agrees not to reapply for employment to the same employer after termination of the employee’s employment.
So, in other words, employers can still prevent former employees from soliciting or hiring the employer’s employees. Employers can still prevent former employees from soliciting or transacting business with the employer’s customers, clients, and vendors. Employers can still enforce confidentiality agreements. Employers can still require, and enforce, intellectual property and invention assignment agreements. And buyers of entities can still prevent the former owners from going out and starting a new business that competes with the old one.
So if you are an employer and you have a former employee who cannot solicit your employees or your customers/clients, and she cannot use your confidential information or IP that she developed during her employment with you (and assuming you have appropriate contracts in place with the former employee addressing all of those things), really – what is left? The obvious answer is preventing her from working for a competitor, but if she cannot do any of the foregoing things, how important is that?
Allowing Employees to Earn A Living
Employers often want to use non-compete agreements with every single employee. However, the larger concern should be solicitation of employees and customers and the use of confidential information and IP. To that end, when considering the enforceability of non-compete agreements, Courts have often noted a public policy against putting restraints on an individual’s ability to make a living in their chosen field, which is what the MA law is looking to codify.
Under the law, provisions restricting an employee’s post-employment activities can only be enforced against employees (note that the law includes independent contractors in the definition of employees) if the agreement meets the following requirements:
1. Must be in writing.
2. Must be signed by both the employer and the employee.
3. Must state that the employee has the right to consult with counsel.
4. If the agreement is entered in connection with the commencement of employment, it must be provided by the earlier of the formal offer of employment or 10 business days before the commencement of employment.
5. If the agreement is entered after the commencement of employment but not in connection with the separation from employment, it must be supported by “fair and reasonable consideration independent from the continuation of employment” and notice must be provided at least 10 business days before the agreement is to be effective.
6. The agreement must be no broader than necessary to protect one or more of the legitimate business interests of the employer, such as (a) trade secrets, (b) confidential information that would not otherwise qualify as a trade secret, or (c) the employer’s goodwill.
7. The restricted period may not be longer than 12 months from the date employment ended, unless the employee has breached his or her fiduciary duty to the employer or taken the employer’s property (physical or electronic), in which case the period may not exceed 2 years.
8. The agreement must be reasonable in geographic relation to the employer’s interest that are being protected. An agreement limited to the geographic area in which the employee provided services or had a material presence during the preceding 2 years is presumptively reasonable.
9. The agreement must be reasonable in scope of the restricted activities in relation to the interests being protected. A restriction that protects a legitimate business interest and is limited to only the specific types of services provided by the employee during the preceding 2 years is presumptively reasonable.
10. And here is the biggie: The agreement must include a garden leave clause or “other mutually-agreed upon consideration.” To be considered garden leave under the law, the agreement must pay as wages on a pro-rata basis during the entirety of the restricted period at least 50% of the employee’s highest annualized base salary paid by the employer for the preceding 2 years, and unless the employee breaches the agreement, the employer cannot unilaterally stop making the payments; however, if the restricted period is extended beyond 12 months due to the employee’s breach of the agreement, the employer does not have to provide payments during the extended period of time. The act does not define “other mutually-agreed upon consideration,” so it begs the question as to whether it has to be equal to or greater than the garden leave amount, or if something such as an additional bonus may be adequate.
It is also important to note that even if a non-competition agreement meets the foregoing requirements, it still cannot be enforced against employees who are nonexempt under the FLSA, interns, employees who have been terminated without cause or laid off, or employees who are 18 or younger.
And while all of that seems to be incredible restrictive, it is merely a reflection of the fact that a noncompete agreement literally prevents an employee from earning a living in their chosen profession/geographical area and that kind of restriction should be limited to only a select few. For all other employees, agreements preventing solicitation of employees/customers and prohibiting the use of the employer’s confidential information and IP are the most important.
Learn more: If you are an employer and you don’t have those agreements in place, contact Jean Harrington here.