The new Mass. non-compete law
Richard C. Van Nostrand is a partner at Worcester law firm Mirick O'Connell.
On Aug. 10, Gov. Charlie Baker signed an economic development bill which incorporated significant changes to the law regarding employers' use and enforcement of non-competition agreements. This new and complex law, which took effect Oct. 1, permits the continued use of such non-compete agreements in limited circumstances, but imposes safeguards to help level the playing field and eliminate problematic issues.
Which employees are excluded from non-competition agreements?
Non-competition agreements may not be used and will not be enforced against hourly employees, college student interns and persons less than 19 years old. A non-competition agreement loses its enforceability if the employee is terminated without cause or laid off.
What agreements will remain untouched by the new law?
There are several other common types of restrictive covenants – agreements prohibiting solicitation of a company's customers, vendors or employees, non-disclosure or confidentiality agreements; agreements requiring the assignment of inventions; and agreements arising out of the sale of a business – not affected by the new law. Severance agreements (provided they give the employee seven business days to rescind) also are unaffected.
What are the permissible restrictions?
With exceptions, an employee can be restricted from competing against a previous employer for (a) up to one year, (b) in a geographic area where the employee worked or had a material presence or influence and from (c) providing services previously provided by that employee.
What requirements must the employer meet?
The agreement must be in writing and signed by both the employee and employer. The agreement must expressly state the employee has the right to consult with counsel before signing. The agreement must be supported by consideration provided to the employee. A new employee must be provided the non-competition agreement at the time of the formal offer or 10 business days before the commencement of employment, whichever is earlier.
What compensation must be offered to ex-employees?
The most significant uncertainty in the law is what consideration will be required. The law has received considerable attention in its reference to garden leave. Garden leave (50 percent of the employee's highest annual base salary) is paid to the employee during the time that he is forced to sit on the sidelines. The new law, however, does not require garden leave, but creates the option for other mutually agreed upon consideration. The only area where the new law provides any further guidance is with respect to an existing employee who is asked to sign. In that instance, fair and reasonable consideration must be offered. There is no explanation as to what will be fair or reasonable or how a court will decide that question.
In passing this new law, legislators were contending with two competing interests. Proponents considered non-competition agreements critical to the protection of a company's investment of time, intellectual property, trade secrets, confidential information and goodwill, whereas critics described non-competes as unfair attempts to restrain ordinary competition with the byproduct of stifling innovation and entrepreneurship. So while Massachusetts took a number of steps to address concerns expressed about the use of non-compete agreements, it still left important issues unresolved. While not perfect, the law represents the outcome of a legislative art of the possible.
Richard C. Van Nostrand is a partner at Worcester law firm Mirick O’Connell. Reach him at rvannostrand@mirickoconnell.com and 508.860.1453.
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