Restrictive Covenants

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An economic development bill passed on August 1, 2018 at the close of the Massachusetts Legislature’s 2018 session sets limits on non-compete agreements after a nearly 10 year debate on non-compete reform. The bill, titled, “An Act relative to the judicial enforcement of non-compete agreements,” expected to be signed into law by the governor, will take effect on October 1, 2018.  The bill’s sponsor says it represents a “consensus” piece of legislation based on discussions with legislators, workers and businesses. The new law imposes new limits on non-competes and codifies existing common law, providing a consistent set of standards for enforcing non-competes and ending practices that overreach. The following are the highlights of the new requirements and restriction imposed on non-compete agreements in Massachusetts.

Who is covered: employees and independent contractors who are residents of Massachusetts or employed in Massachusetts least 30 days prior to termination.

Which agreements are covered: traditional non-competition agreements which prohibit competition after employment ends and “forfeiture for completion agreements” which impose financial penalties for post-employment competition such as forfeiture of benefits. The statute does not cover other types of restrictive covenant such as non-disclosure and non-solicitation agreements pertaining to employees, customers, vendors or clients.  Notably,  excluded from coverage are non-competition terms in separation agreements, provided employees are afforded a 7 day right of rescission (consistent with similar rights for persons over 40 in entering into a release of claims).

New Requirements:

  • Non-competition agreements are limited to 12 months (absent malfeasance such as theft of proprietary information or breach of fiduciary duties)
  • Non-competition agreements entered into at the commencement of employment, must be signed by both the employer and employee and state that the employee has the right to consult counsel prior to signing. The agreement must be provided by the earlier of the time of the formal offer or ten business days before commencement of employment.
  • Continued employment alone will not be sufficient consideration for a non-compete entered into after employment; “fair and reasonable consideration” is required. (The other requirements for non-competes entered into at the time of commencement of employment also apply, i.e., ten business days’ notice, signed by both parties, and notice of the right to obtain advice of counsel.) “Other mutually-agreed upon consideration” is not defined, but must be specified in the agreement.
  • Garden leave (the concept of paying someone during the period that they are restricted by the non-compete) or “other mutually-agreed upon consideration” is required for a non-compete. Garden leave requires at least 50% of the employee’s highest annualized base salary within the preceding two years to be paid on a pro rata basis during the restricted period
  • Non-competes are not enforceable against the following categories of employees:
    • Non-exempt employees under the Fair Labor Standards Act (FLSA);
    • Undergrads and grad students who are not working full time;
    • Employees who are terminated without cause or laid off; and
    • Anyone 18 or younger.

Common Law Principles Codified

The new law incorporates long-standing common law requirements, including that the agreement must be no broader than necessary to protect an employer’s trade secrets, confidential information and/or good will.  A non-compete is presumed to be necessary where these interests cannot be adequately protected through other restrictions.  In addition, the restriction must be reasonable in geographic scope.  If the scope is defined as the areas in which the employee “provided services or had a material presence or influence” during the past 2 years, it will be considered presumptively reasonable.  The agreement also must be reasonable in the scope of the prohibited activities in relation to the interests protected.  It will be presumptively reasonable if it is limited to only the specific types of services provided by the employee during the last 2 years of employment.

Jurisdiction

All actions to enforce a non-compete must be brought in Massachusetts in the employee’s county or Suffolk County’s Business Litigation Session.

Practice Tip

Massachusetts employers should review their existing noncompetition agreements, hiring documents and separation documents to ensure compliance with the new law before October 1, 2018.

Non-disclosure agreements are a standard tool for employers to protect against the release of trade secrets or confidential information by their employees. On the heels of the recent Hollywood sexual harassment allegations, these agreements may become subject to a new law in the settlement agreement context if two New York lawmakers have their way. The bill was introduced earlier this year by State Senator Brad Hoylman and Assemblywoman Nily Rozic.

Following the recent sexual harassment allegations against Hollywood movie producers, Hoylman and Rozic added new language to the bill specifically targeting sexual harassment claims in the workplace. If signed into law, the bill would nullify non-disclosure provisions in separation and settlement agreements that conceal claims of harassment, discrimination, retaliation or non-payment of wages.  While Hoylman has yet to officially submit the new language to the bill as the state legislature does not meet until January, a debate is likely to ensue between proponents of this bill who believe this will help curb toxic corporate cultures, and opponents who feel that the bill may actually make it harder for victims of sexual harassment to receive adequate compensation in a settlement because there is sometimes a price paid for confidentiality.

The issue of sexual harassment in the workplace has occupied much of the news for the past several months, and legislators seem eager to respond. In fact, California has already implemented limits on confidentiality agreements involving felony sexual assault and child sex abuse, and is considering next year to bar settlement in harassment cases.

In any event, New York employers should be sure to keep an eye out as the bill progresses through debate.