Doing Business in Massachusetts? Time to Revisit Your Non-Competes.
I have been a member of the Massachusetts Bar for 20 years and, even though I have lived in Texas since 2005, I still get calls about Massachusetts non-compete agreements from time to time. In the wake of the state’s recent passage of a lengthy — but not entirely clear — non-compete statute, I expect those calls will become more frequent.
While the new law will make enforcing non-competes more difficult (and sometimes impossible) in some situations, it’s notable what agreements are not subject to the statute. Confidentiality agreements, employee non-solicitation agreements, and even restraints against customer solicitation — which most states evaluate with the same scrutiny as a non-compete — are all exempted from the new law. So, Massachusetts employers may be able to prevent unfair competition through agreements that aren’t evaluated under the new statute at all.
The new law prohibits non-competes that last more than 12 months post-employment. It also prohibits non-compete agreements against employees who are non-exempt under the Fair Labor Standards Act, and prevents an employer from enforcing a non-compete against employees who have been laid off or terminated without cause (a term that isn’t defined). It also creates a host of new procedures for employers seeking to implement non-compete agreements. Agreements with new employees must be provided by the earlier of: i) the time a “formal offer” of employment is made; or ii) 10 days before employment starts. Existing employees must be given at least 10 business days to consider whether to accept new non-competes, and continued employment is no longer sufficient consideration for those mid-employment non-competes. Instead, new consideration that is “fair and reasonable” must be provided to support new restrictions.
Another notable aspect of the new law is that all non-competes now need to be supported by either a “garden leave” clause that provides departed employees with at least 50% of their highest annualized base salary paid in the 2 years pre-termination or “other mutually agreed-upon consideration” specified in the non-compete agreement. The statute doesn’t provide guidance on what is required for this garden leave alternative to be sufficient.
The law takes effect October 1, 2018, and applies to all non-compete agreements entered into on or after that date. In advance, all employers with a workforce in Massachusetts should be evaluating any agreement, policy or plan that has a non-compete or forfeiture-for-competition element. Employers should begin to incorporate new language that the statute suggests will help establish “reasonableness,” and thus enforceability. Then, employers will need to keep a close eye on the courts, as there are many questions that the judiciary will be called upon to answer in interpreting the new law: What is a “cause” termination that will allow an employer to enforce a non-compete against a terminated employee?; What is a “formal offer” that triggers the requirement to show a non-compete to a prospective hire?; What is “fair and reasonable” consideration to support a mid-employment non-compete?; What “agreed-upon consideration” short of 50% of base salary can justify a non-compete?; What does a non-compete agreement need to look like to be consistent with “public policy,” as the statute requires?
While these answers will come in time, Massachusetts employers need to start thinking about these issues today.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.