Massachusetts recently enacted a non-compete reform law that will impact all non-competition agreements entered into after October 1, 2018. Starting in October 2018, all non-competes must meet the following criteria:
- Maximum duration of one year;
- Reasonable geographic limitations, which should be linked to the areas where the employee worked or had influence during their last two years of employment;
- Be in writing, signed by both the employer and the employee;
- Explicitly state that the employee has the right to consult an attorney; and
- Additional compensation beyond wages. This compensation may be (1) “garden leave,” meaning pay during the non-compete period of at least 50% of the employee’s highest annualized base salary during the two years prior to termination, or (2) other “mutually-agreed upon consideration.” The law does not define this consideration, but employers should be prepared to offer departing employees something more than de minimis compensation in exchange for a non-compete.
Non-Competes Barred for Certain Employees
The new law bans non-competes for certain employees, including:
- Non-exempt (hourly) employees
- Student interns or temporary employees
- Anyone 18 years old or younger
Independent contractors are treated as employees under the new law and may be parties to non-compete agreements, as long as all other requirements are satisfied.
Significantly, employers now cannot enforce non-competes with employees who are laid off or terminated without cause. The law does not define “cause,” and we encourage employers to include a “termination for cause” provision in their non-compete agreements moving forward to avoid any ambiguity.
Rules for New and Current Employees
In a significant departure from current law, the new non-compete law requires employers to offer additional “fair and reasonable” consideration to current employees who are asked to sign a new non-compete. Continued employment is no longer sufficient consideration. The new law does not define fair and reasonable consideration, but employers should be prepared to offer current employees additional compensation, bonuses, or other benefits in exchange for signing new non-competes.
For new employees, employers must provide non-compete agreements to new hires either before a formal offer letter or 10 days before the new employee’s start date, whichever is earlier.
Non-Solicits Not Affected
The new law only impacts non-competition agreements. Other restrictive covenants are not affected. Non-solicitation agreements that prohibit former employees from soliciting their employer’s clients, customers, vendors, or employees are not subject to these restrictions. The new law also does not apply to confidentiality, non-disclosure, and patent and invention agreements. Moving forward, many employers can sufficiently protect their intellectual property and goodwill with non-solicitation and intellectual property agreements alone and may not want the additional restrictions and obligations of non-compete agreements.
Non-Competes are Still Enforceable in Sale of Business and Separation Agreements
The new law does not apply to non-competes contained within agreements made in connection with the sale of a business or made in connection with separation from employment. However, if a separation agreement includes a non-compete, the employee must be given seven days to rescind acceptance.
When drafting non-compete agreements, employers must keep the following requirements in mind:
- Agreements must be as narrow as possible and must be designed to protect one of the following legitimate business interests: (1) trade secrets; (2) confidential information, or (3) employer goodwill.
- Agreements must be reasonable in geographic scope. There is a presumption in the statute that a geographic restriction limited to the region(s) where the employee worked, provided services, or had a material presence/influence for the last two years of employment is reasonable.
- Agreements must be reasonable in the terms of proscribed activities. Like geographic restrictions, employers should aim to limit the employee’s restricted activities to the specific type of services the employee provided in their last two years of employment.
The new law does not eliminate the ability of a court to revise or “blue pencil” a non-compete provision that overreaches. Employers should still strive to draft their agreements as narrowly as possible while still achieving their goals.
Additional Considerations for Multi-State Employers
Multi-state employers with Massachusetts employees cannot escape the new law with choice-of-law provisions designating other states. The law applies to any employee who has either lived or worked in Massachusetts within 30 days of their termination date.
TO DO: We strongly advise all employers to update any new non-competition agreements and offer letters prior to October 1, 2018 to meet the requirements of the new law. In addition, we encourage our clients to contact us to discuss their options for protecting their intellectual property and goodwill in light of these changes.
As always, please feel free to contact us if you have any questions or need assistance with updating your non-competes to comply with the new law.