Massachusetts Imposes Significant Restrictions on Post-Employment Non-Competition Covenants
August 27, 2018
Massachusetts has joined a growing list of states, including Colorado, Georgia, Hawaii, Oregon, and Utah, among others, with statutes placing limits on the permissible terms and scope of agreements prohibiting employees from engaging in competitive activities after the termination of their employment. This alert summarizes the key substantive provisions of the Massachusetts Noncompetition Agreement Act (the act), which was signed into law on August 10, 2018, and outlines steps that employers should take prior to the act going into effect on October 1, 2018.
What Agreements Are Covered By the Act?
The act applies to any agreement between an employer and an employee or independent contractor entered into at the outset of the relationship, or during the course of such relationship, in which the individual agrees not to engage in certain competitive activities after the end of his or her relationship with the company. Such an agreement is also known as a non-compete. The act specifically exempts from its coverage other typical agreements between employers and employees, such as employee and customer non-solicitation covenants, invention assignment agreements, and confidentiality or non-disclosure agreements.
Which Employees May Be Subject to a Non-Compete Agreement?
Employers in Massachusetts may no longer enter into a non-compete with employees who: (1) are not classified as exempt under the Fair Labor Standards Act1; (2) are undergraduate or graduated students in an internship or other short term employment while enrolled at an educational institution; (3) have been employees who have been laid off or terminated without cause; or (4) employees under the age of 18.
What Are the New Substantive Requirements for Non-Compete Agreements?
Under the act, a non-compete will be enforceable only if it:
- is in writing signed by both the employer and employee;
- expressly states that the employee has the right to consult with counsel prior to signing;
- is no broader than necessary to protect the employer's legitimate business interests (which the act recognizes only as trade secrets, confidential information, or the employer's goodwill);
- lasts no longer than one year from the date of termination of the individual's relationship with the company;
- is limited in geographic scope related to the interests protected2;
- is reasonable in scope of the proscribed activities in relation to the interests protected3; and
- provides for either garden leave or other mutually agreed upon consideration.
When Does the Company Need to Provide the Non-Compete Agreement to the Employee?
If the parties enter into a non-compete in connection with the start of an employment relationship, the employer must provide the agreement to the individual before the earlier of the date of the employer's formal employment offer or 10 days prior to the start of employment (or in the case of a contractor, the start of the parties' relationship). Any non-compete entered into after the individual has started providing services must be supported by consideration that is independent of the mere continuation of the relationship between the parties and the individual must receive the consideration at least 10 business days before the non-compete becomes effective.
Can Employers Avoid the Act's Requirements by Choosing Another State's Governing Law?
No. Employers will not be able to enforce a choice of law provision applying the law of a state outside of Massachusetts if the employee is a resident of Massachusetts or employed in Massachusetts at the time of termination, and the employee was employed in the Commonwealth or resided in the Commonwealth for at least 30 days immediately preceding the termination. Employers should be careful about requiring California-based employees to sign a non-compete governed by Massachusetts law, however, as that may run afoul of statutes such as California's Labor Code.
How Should the Hiring Considerations of Massachusetts Employers Change?
In the short term, Massachusetts employers are unlikely to notice an effect on hiring, as the act applies only to non-competes entered into after October 1, 2018. Over time, however, employers should have greater leeway to engage employees and independent contractors without the threat of a dispute over non-competes. This is particularly true as it relates to lower level, non-exempt employees.
In addition, one primary anticipated effect is that employers will not be prevented from hiring employees who have been laid off or whose employment was terminated without cause. Even where an employee represents that they may be free to work for the company, caution is still warranted in relying on an employee's representations about the termination of his or her employment. The act does not define "cause" and the employee's former employer may have a different interpretation of the circumstances of the employee's departure such that employers should not assume they are in the clear upon learning from an employee that the employee's employment was terminated without cause. The act also gives employers clear guidelines on how to create an enforceable non-compete such that hiring companies can more readily spot deficiencies that render an agreement unenforceable. Finally, given the burden associated with paying for garden leave, and the uncertainty surrounding what other consideration is sufficient to create an enforceable non-compete, companies may opt against including a non-compete provision in their agreements with employees. Employers should be aware, however, that the incoming employees will likely still be bound by non-solicitation and non-disclosure covenants, and that even if an agreement contains an unenforceable non-compete agreement, those other provisions will not be rendered invalid. Significantly, the act does not cover non-competes secured in connection with the sale or acquisition of a business, so it is incumbent upon the employer to understand whether such circumstances exist.
What Should Employers with Employees in Massachusetts Do Now?
Prior to the act's effective date, employers should review their agreements with Massachusetts employees and contractors that contain a non-compete to determine whether the act requires a revision of the company's standard non-compete form. Employers will also want to carefully review their policies with respect to which employees are asked to sign a non-compete and when the agreements are provided to those employees. Those employers not presently using non-competes may wish to consider whether they should do so.
Most employers will want to first consider whether to offer garden leave in connection with the non-compete. Generally, a garden leave refers to a period of time during which the employee may not compete, but in return, the employer pays the employee some consideration. Such a practice is common in the financial services industry. Under the act, a garden leave provision must provide for the payment of at least 50 percent of the employee's highest annualized base salary within the two years preceding the employee's termination for the duration of the non-compete period. Employers will not be permitted to discontinue the garden leave payments unless the employee breaches the agreement. In lieu of garden leave, employers can provide "other mutually agreed upon consideration" with the non-compete. The act itself does not provide any guidance as to what amount or form of consideration will be sufficient to create an enforceable non-compete without garden leave, or when such consideration may be provided, e.g., a signing bonus. Until Massachusetts or litigated cases offer some direction as to what consideration will meet the requirements of the act, employers can only ensure enforceability of non-competes by providing for garden leave.
Employers should also review the substantive non-compete terms with a critical eye and assess seriously whether the geographic scope and the scope of prohibited conduct are truly necessary to protect one of the three legitimate interests identified in the act. In addition, employers should consider whether to define "cause" in the non-compete, especially where the concept of a termination for cause is otherwise irrelevant. Including a "cause" provision in a non-compete for a contractor may also influence the analysis as to whether the contractor is correctly classified.
WSGR expects that the act will result in an increase in the number of challenges to non-competes, and that Massachusetts courts will more closely scrutinize non-compete terms once the statute goes into effect. As a result, the courts may demonstrate a greater willingness to limit covenants that they view as not conforming to the statute's requirements. Under the statute, courts are expressly permitted to revise non-compete covenants to the extent reasonable to protect the employer's valid business interests but employers should not rely on courts to exercise this discretion or reform the covenant in a manner that satisfies the company.
Wilson Sonsini Goodrich & Rosati's employment and trade secrets litigation practice will be actively monitoring any further developments relating to this statute, including any interpretations from state administrative agencies as to the statute's provisions. The team is also following developments around the country with respect to non-competition agreements, and other restrictive covenants, and the firm is available to assist companies, employees, newly formed businesses, and investors with every aspect of employment and trade secret litigation. For more information, please contact Rico Rosales, Marina Tsatalis, Jason Storck, Matt Gorman, or another attorney in the firm's employment and trade secrets litigation practice, or the firm's Boston office.