New Massachusetts Law Limits the Scope of Employment Noncompetition Agreements in the State
Massachusetts has enacted legislation regulating the use and enforcement of noncompetition agreements in the private sector. The statute, entitled “An Act Relative to the Judicial Enforcement of Noncompetition Agreements,” takes effect on October 1, 2018.
The act limits the ability of employers to enter into and ultimately enforce noncompetition agreements with employees living in or employed in Massachusetts. The definition of “employee” includes independent contractors.
A “noncompetition agreement” is defined as “an agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that the employee will not engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended.”
As an initial matter, the act prohibits the enforcement of noncompetition agreements with the following types of employees:
- Employees who are classified as non-exempt under the Fair Labor Standards Act
- Undergraduate or graduate students who are engaged in short-term employment
- Employees who have been terminated without cause or laid off
- Employees who are 18 years of age or younger
For those employees and independent contractors with whom employers may have noncompetition agreements, any such agreements entered into on or after October 1, 2018, must:
- Be no broader than necessary to protect a legitimate business interest. The act recognizes three “legitimate business interests”: 1) the employer’s trade secrets, 2) the employer’s confidential information that otherwise would not qualify as a trade secret, and 3) the employer’s goodwill.
- Be limited to one year in duration, with some exceptions, e.g., where an employee is shown to have breached a fiduciary duty to the employer or has unlawfully taken, either physically or electronically, property belonging to the employer, in which case the exception allows the restricted period to be up to two years from the date of cessation of employment.
- Be reasonable in geographic scope. Under the act, the geographic scope will be presumed reasonable if it is limited to the geographic areas in which the employee, “during any time within the last two years of employment, provided services or had a material presence or influence.”
- Be reasonable “in the scope of proscribed activities in relation to the interests protected.”
There are additional statutory requirements for noncompetition agreements under the new law, including that the act requires the payment of “garden leave pay” or some “other mutually agreed upon consideration.” The act does not specify the amount of such consideration or the timing of any payment.
The act imposes other structural requirements on noncompetition agreements entered into both at and after the commencement of employment. All such agreements must:
- Be in writing
- Be signed by both the employer and employee
- Expressly affirm the employee’s right to consult with counsel prior to signing
The new act’s requirements differ based on the timing of execution of the noncompetition agreement. First, if a noncompetition agreement is signed at the commencement of employment, it must be presented to the employee at the time the offer of employment is made or 10 days before the commencement of employment, whichever is earlier. Second, the act requires that a noncompetition agreement signed after the commencement of employment be “supported by fair and reasonable consideration independent from the continuation of employment.”
The new law also identifies certain covenants that fall outside of the definition of a “noncompetition agreement.” Such covenants, which will continue to be evaluated under Massachusetts common law, include:
- Noncompetition agreements made in connection with the sale of a business
- Noncompetition agreements made in connection with the cessation or separation of employment, provided the employee is given seven business days to rescind acceptance
- Employee nonsolicitation covenants
- Customer, client, and vendor nonsolicitation covenants
- Nondisclosure-of-confidential-information agreements
The act requires that claims to enforce or challenge a noncompetition agreement be brought in Massachusetts in the county where the employee resides or, if the parties mutually consent, in Suffolk County. The act further requires that any actions in Suffolk County must be brought in the state-level “superior court or the business litigation session of the superior court.”
Employers who maintain noncompetition agreements for individuals living or working in Massachusetts should consult with qualified employment counsel to determine how to ensure their agreements are in compliance with the requirements of the act. Employers should also carefully review their current policies and practices because the new law places significant limitations on the scope of noncompetition agreements. For example, with respect to employees classified as non-exempt under the Fair Labor Standards Act, employers should consider ensuring they have confidentiality agreements signed by those employees to protect confidential information. In addition, multistate employers should note that, under the act, they cannot have a choice-of-law provision that applies another state’s law to noncompetition agreements for employees who are covered under the Massachusetts law.
Further, while the act will apply only to agreements entered into on or after October 1, 2018, employers may wish to have current employees execute new restrictive covenants in compliance with the act for more predictability as to potential enforcement in the future.
If you have questions regarding the information presented in this alert, please contact Carolyn Marcotte, counsel, at email@example.com or Brian Whiteley, Commercial Litigation Practice Group Leader, at firstname.lastname@example.org.