How to Comply with Massachusetts’ New Restrictions on Employee Noncompetition Agreements

09/07/2018
Client Alert

On August 10, 2018, Massachusetts’ Governor signed into law the Massachusetts Noncompetition Agreement Act (the “Act”), establishing strict new requirements for noncompetition agreements with employees entered on or after October 1, 2018. Although noncompetition agreements are still permitted for most employees, the Act requires employers to take a new approach to drafting, implementing, and enforcing those agreements.

Key highlights of the new law include:

  • Limiting the duration of post-employment noncompetition agreements to 12 months, although that period may be extended for up to 24 months in certain situations;
  • Requiring companies to provide “garden leave” payments during the post-employment noncompetition period equivalent to 50% of the former employee’s base salary unless “other mutually agreed upon consideration” is provided;
  • Prohibiting noncompetition agreements for certain categories of employees as well as any employees who are terminated without cause or laid off;
  • Imposing these requirements on noncompetition agreements with independent contractors;
  • Mandating certain drafting and procedural requirements; and
  • Requiring all actions to enforce noncompetition agreements be filed in the employee’s county or in Suffolk County’s Business Litigation Session.

The significant restrictions and limitations of the Act, however, do not apply to:

  • Noncompetition agreements executed before October 1, 2018;
  • Noncompetition agreements entered 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, for “significant” owners who will receive “significant” consideration or benefit from the sale or disposal;
  • Noncompetition agreements entered upon separation of employment, as long as the employee receives 7 business days to revoke acceptance of the agreement;
  • Nonsolicitation agreements (both employee and customer); and
  • Nondisclosure agreements.

Scope and Duration

The Act codifies existing case law that a noncompetition agreement “must be no broader than necessary” to protect an employer’s legitimate business interests, which the Act defines as the employer’s trade secrets, confidential information, or goodwill. Noncompetition restrictions are presumed reasonable where: (1) they are limited to “only the specific types of services provided by the employee at any time during the last 2 years of employment”; or (2) they are “limited to only the geographic areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence.”

The new law prohibits any noncompetition agreements that exceed 12 months post-employment. The 12-month duration can be extended for up to 2 years post-employment if the employee “has breached his or her fiduciary duty to the employer” or taken “property belonging to the employer.”

Consideration

The Act provides two methods for employers to show the consideration necessary to enforce noncompetition agreements. First, an employer can include a garden leave clause where it agrees to pay ex-employees during the time that he or she is restricted from competing. Employers opting for garden leave must pay employees “on a pro-rata basis during the entirety of the restricted period, of at least 50 percent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding the employee’s termination.” Employers can halt payments if the restricted employee breaches the agreement or unlawfully takes the employer’s property. Second, employers can provide other “mutually agreed upon consideration” that is specified in the noncompetition agreement. Because the Act is silent as to what constitutes satisfactory “mutually agreed upon consideration,” it is unclear whether an initial offer of employment is adequate consideration to support enforcement of a noncompetition agreement entered at the start of employment or if monetary payments, such as signing bonuses, or other forms of consideration are necessary.

The Act also changes Massachusetts precedent by making continued employment insufficient consideration to enforce a noncompetition agreement. Instead, those agreements must be supported by “fair and reasonable consideration” other than continuation of employment. Although it is clear that the consideration must be more than de minimis, what constitutes “fair and reasonable consideration” is undefined.

Applicability to Certain Employees and Independent Contractors

For the first time, the new law precludes employers from entering noncompetition agreements with the following categories of employees:

  • Employees who are classified as non-exempt from the Fair Labor Standards Act;
  • Undergraduate or graduate employees working as interns or another category of short-term employment;
  • Employees aged 18 years or younger; and
  • Employees that have been terminated without cause or laid off.

The Act, however, applies to noncompetition agreements with independent contractors.

Drafting and Procedural Requirements

The Act imposes the following drafting and procedural requirements for noncompetition agreements:

  • Must be in writing and signed by both the employee and the employer;
  • Expressly state that the employee has the right to consult counsel before entering into the noncompetition agreement;
  • Agreements entered into at the start of employment must be provided to the employee “by the earlier of a formal offer of employment or 10 business days before the commencement of the employee’s employment”; and
  • Agreements entered into after employment has already begun must be provided at least 10 business days before they are set to go into effect.

Choice of Law and Forum Selection

Employers cannot try to avoid the Act’s requirements by selecting the law of another jurisdiction in the noncompetition agreement. The Act voids any choice of law provision that assigns jurisdiction outside of Massachusetts for employees that are residents of or have been employed by their employer in Massachusetts for at least 30 days immediately prior to the end of their employment. Additionally, the Act requires all civil actions to enforce covered noncompetition agreements be brought in the employee’s county of residence or, if mutually agreed upon, in the Suffolk County Business Litigation Session of the superior court. This requirement is especially important for employers headquartered outside of Massachusetts but employing people within the state.

Blue Penciling and Severability

Massachusetts courts will continue to have discretion to blue pencil, or modify, noncompliant or overbroad noncompetition agreements to render them enforceable to the extent necessary to protect the employer’s legitimate business interests under Massachusetts law. The Act also clarifies that a judicial determination that a noncompetition provision in a contract is unenforceable has no impact on the remaining provisions of that agreement.

Practical Steps for Compliance

Although the Act largely codifies existing Massachusetts common law standards, it creates new restrictions and procedures on noncompetition agreements that employers will need to consider. With less than a month before the Act goes into effect, employers should consider taking the following steps:

  • Overhaul Noncompetition Agreements: New noncompetition agreements entered with Massachusetts employees should be drafted to comply with the Act. For example, employers will need to ensure that those agreements expressly state that the employee has a right to consult with counsel before executing the agreement, specifically identify the consideration supporting the agreement, and include a Massachusetts choice of law provision. In addition, despite some Massachusetts courts previously enforcing post-employment noncompetition periods of 2 years and sometimes longer, the new law effectively requires employers to reduce the duration of all post-employment noncompetition restrictions to 12 months, even for C-Suite executives. Employers who have all employees sign form noncompetition agreements will now have to strategically think about which employees should sign those agreements given the prohibition on noncompetition agreements for certain categories of employees. Although the Act does not apply to noncompetition agreements entered before October 1, 2018, employers should also consider having employees with preexisting noncompetition agreements enter new agreements. Noncompetition agreements that comply with the Act might provide employers with more predictability of enforcement as the Act largely follows current Massachusetts common law. Employers, however, will need to carefully consider whether new agreements make sense for all employees, particularly for key employees with preexisting agreements.
  • Update Processes for Entering Noncompetition Agreements: Employers should review their processes for entering noncompetition agreements with employees. Hiring processes and documentation must be updated to ensure that noncompetition agreements are properly executed at the beginning of employment. In addition, employers might also rethink the timing of employees’ executing noncompetition agreements. For example, the Act does not apply to noncompetition agreements entered in connection with the termination of employment, but would require “fair and reasonable” consideration and a ten business day notice period for noncompetition agreements entered during employment.
  • Continue to Monitor Open Issues under the Act: There are a number of open issues under the Act that employers should continue to monitor. For example, what constitutes mutually agreed upon consideration, how “cause” will be interpreted, whether partners in limited partnerships or members of limited liability corporations would be considered “employees” under the Act, and the scope of the sale-of-business exception are all uncertain. It is also unclear whether Massachusetts can legally apply the Act to an out-of-state employer with limited contacts with Massachusetts merely because it employs a Massachusetts resident.
  • Evaluate Company-Wide Strategy In Light of Laws Limiting Noncompetition Agreements:  Companies with operations in multiple jurisdictions will need to consider their strategies for noncompetition agreements given the recent trend of enacted or proposed state laws limiting the use of noncompetition agreements. Massachusetts is just one of many states, including Illinois, Colorado, and Nevada, that have recently passed laws restricting the ability of employers to use noncompetition agreements. Some states, such as Pennsylvania, are currently considering banning noncompetition agreements altogether. Employers who operate in multiple states will need to consider how to navigate the different (and sometimes conflicting) state laws.

We will continue to monitor developments related to the Act and similar laws and will provide updates as needed.

Email Disclaimer

Unsolicited e-mails and information sent to Morrison & Foerster will not be considered confidential, may be disclosed to others pursuant to our Privacy Policy, may not receive a response, and do not create an attorney-client relationship with Morrison & Foerster. If you are not already a client of Morrison & Foerster, do not include any confidential information in this message. Also, please note that our attorneys do not seek to practice law in any jurisdiction in which they are not properly authorized to do so.

©1996-2018 Morrison & Foerster LLP. All rights reserved.