Employment Law Alert
Will We See Non-Compete Reform Enacted This Year?By: Scott J. Connolly
June 28, 2016
For the past eight years, legislative efforts to prohibit or reform the use of post-employment noncompetition agreements in Massachusetts have failed. This year may be different. House Speaker Robert A. DeLeo has signaled his support for H. 4323 and there is buzz that a non-compete bill may land on Gov. Baker’s desk before the legislative session ends in July.
The key components of H. 4323, entitled “Massachusetts Noncompetition Act,” follow. To be valid and enforceable, a noncompetition agreement must meet these minimum requirements:
- If the agreement is entered into in connection with the commencement of employment, it must be in writing and signed by both the employer and employee and expressly state that the employee has the right to consult with counsel prior to signing. The agreement must be provided to the employee by the earlier of a formal offer of employment or 10 business days before the commencement of the employee’s employment.
- The agreement must be no broader than necessary to protect one or more of the following legitimate business interests of the employer: (a) the employer’s trade secrets; (b) the employer’s confidential information that otherwise would not qualify as a trade secret; or (c) the employer’s goodwill.
- The restricted period may not exceed 12 months from the date of cessation of employment, unless the employee has breached his or her fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer, in which case the duration may not exceed 2 years from the date of cessation of employment.
- The agreement must be reasonable in geographic reach in relation to the interests protected. A geographic reach that is limited to only the geographic areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence is presumptively reasonable.
- The agreement must be reasonable in the scope of proscribed activities in relation to the interests protected. A restriction on activities that protects a legitimate business interest and is limited to only the specific types of services provided by the employee at any time during the last 2 years of employment is presumptively reasonable.
- The noncompetition agreement shall be supported by a “garden leave” clause, meaning that the agreement must provide for the continued payment of wages on a pro-rata basis during the entirety of the restricted period of at least 50 percent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding the employee’s termination.
- A noncompetition agreement shall not be enforceable against: (a) an employee who is classified as nonexempt under the Fair Labor Standards Act; and (b) employees who have been terminated without cause or laid off.
- No court may reform or otherwise revise a noncompetition agreement so as to render it valid and enforceable to the extent necessary to protect the applicable legitimate business interests.
The most controversial proposed requirement is the so-called “garden leave” provision, which requires an employer to pay a departed employee to remain sidelined during the non-compete period. Employer-side advocates point out that employers already pay higher salaries in part to obtain the protections of a non-compete and that this requirement significantly disadvantages smaller companies.
One of the motivations behind the proposed law is to end perceived abuses by employers against low-level workers and this is reflected by the enforcement prohibition against non-exempt employees and those terminated without cause. But many non-exempt workers are given access to trade secrets, confidential information, and customer goodwill and, historically, the reason for employment termination has not factored in to whether an agreement should be enforced.
Also of interest is the prohibition against judges modifying agreements to make them enforceable. This eliminates judicial discretion and places the burden on employers to carefully draft agreements so that they comply with the new requirements. On the other hand, if the employer does so, it should be able to expect the court to enforce its agreement as drafted.
We will be monitoring this situation closely and advise clients of new developments. Even if H. 4323 is enacted without the “garden leave” provision, employers will have to quickly and carefully revise their employee restrictive agreements to comply with the new law. For questions about this topic, please contact Scott Connolly.