Executive Summary

Over the summer, Massachusetts enacted a new economic development and trade secret law that contains significant changes to the use of non-compete agreements in the Commonwealth. The law applies to all employers with Massachusetts based employees and fundamentally alters both how these agreements need to be structured and how they will be enforced. In short, the changes make these provisions much more difficult to enforce and place new burdens on employers that make non-competes impractical and expensive in many cases.

The law goes into effect October 1, 2018 and applies to all agreements that are entered into after that date. It does not apply retroactively. Companies should consider taking the following actions prior to that date: first, review and revise all existing non-compete agreements so that they will comply with the law going forward (almost all current forms will require changes) and, second, take a strategic look at when non-competes are really necessary.

Scope and Requirements

• The law applies to all Massachusetts employees and independent contractors. Employers, even when located outside of the Commonwealth, cannot avoid the law with choice of law provisions. The legislation has no impact on other restrictive covenants like non-solicitation clauses, non-disclosure agreements, and assignment of rights provisions.
• Non-competes are not enforceable against “non-exempt” employees (part-time and employees eligible for overtime), students, employees who are laid off or terminated “without cause”, or employees age 18 or younger.

One of the most significant changes in the new law centers around terminations without cause. Put simply, this means that the provisions are not enforceable in a termination where the employer is simply exercising the “at-will” right to end the relationship. The Act does not define “cause” so employers will need to define this in their agreements going forward. It is unclear whether these definitions will be upheld when they are tested in court so this change carries a great deal of uncertainty.

New Signing Requirements

For new employees – Agreements:
• Must be signed by both employee and employer.
• Must state that the employee has a right to consult with legal counsel prior to signing.
• Must be provided to the employee by the earlier of (a) formal offer of employment or (b) 10 business days prior to hire date.

For existing employees – Agreements:
• Must be signed by both employee and employer.
• Must state that the employee has a right to consult with legal counsel prior to signing.
• Must be provided to the employee with 10-business days prior notice.
• Additional “fair and reasonable” consideration is required.

Best Practice: to avoid any issues with the 10-day notice period you should provide both new and existing employees with a full package of documents they will need to sign to document the employment relationship. Employers should avoid delivering non-competes separately from the offer and all offer letters need to be reviewed to make sure they contain language that makes the written offer superseding to any previous offers (oral or written).

Substantive Requirements

• Duration cannot exceed 12 months – unless the employee unlawfully takes property from the employer in which case it can extend to 24 months.
• The provision must be reasonable in scope – no broader than necessary to protect the employer’s trade secrets, confidential information, and/or goodwill.
• Considered presumptively reasonable if limited to specific types of services provided by the employee during the last 2 years of employment.
• Considered presumptively reasonable if the geography is limited to the area where the employee was present or provided services.

There appears to be some latitude for “worldwide” applications if, for example, the employee plays a key role in the development of a product or technology that are available on a worldwide basis. A conservative approach, however, would limit the geography.

Garden Leave

Another major change in the Act is the requirement for a “garden leave” provision.
This requires the employer to pay the employee 50% of the employee’s highest annualized base salary within the proceeding two years or other mutually agreed upon consideration for the duration of the restricted period.

The Act does not define “other mutually agreed to consideration” so employers’ best practice is to incorporate the 50% of base salary into their agreements. This dramatically increases the cost of a non-compete in MA and employers should look carefully at whom they ask to sign one.
Employers cannot unilaterally decide to stop paying garden leave.

Separation Agreements

The new law specifically excludes from coverage “an agreement made in connection with the cessation of or separation from employment” provided that the employee is given 7 days to rescind acceptance.

This allows for an opportunity to enter into a non-compete with employees who are terminated without “cause” and can play a role in a broader strategy in which employer’s ask fewer employees to sign non-competes at the outset of employment.

A best practice in many cases would be to not include the provisions at the outset or with a promotion and to attach them to a separation package. It is not clear whether this also requires additional consideration, but we would strongly recommend including additional consideration that mirrors the garden leave requirements set forth above.

Final Thoughts

The Act presents real challenges to companies who use non-competes. The legislature did not go as far as an outright ban, but the hurdles presented in this piece will make the use of these provisions impractical in many cases.

Please feel free to contact us at 888/348-1788 or tim@moynihanpartners.com if you would like additional information.