Massachusetts Legislature Passes Noncompetition Statute that Brings an Array of New Rules to the Employment Arena

It took years and came down to the last minutes of the current session, but the Massachusetts Legislature finally passed a noncompetition law on July 31, 2018. If signed by Gov. Charlie Baker, as it presumably will be, the statute will take effect on October 1 and will bring a number of major changes to this rather complex area of employment law.

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Massachusetts Legislature finally passed a noncompetition law on July 31. If signed by Governor Baker, a number of major changes to this area of employment law will be affected.

Of note is the requirement that non-compete forms be presented to new employees at least 10 days prior to the start of work. When an employer asks existing workers to sign noncompetition agreements, it must provide them something of value – a pay raise, e.g., or perhaps a promotion. Enforceable agreements must be in writing and signed by both parties, a seemingly simple requirement that is often unsatisfied under current noncompetition practice. The parties’ contract must state expressly that a worker has a right to consult with counsel before signing. It must also provide for pay during the noncompetition period equal to at least 50% of the worker’s average annual salary during the prior two years. For workers who are entitled to overtime under federal law, non-competes are unenforceable. Neither can they be used for students engaged in short-term employment, workers under 18, and, notably, anyone who is laid off or fired without cause.

While these requirements apply to employees and independent contractors alike, they have nothing to do with other forms of restrictive covenants that are commonly used in the Commonwealth and almost always bundled together with noncompetition agreements. The law applies only to contracts that ban employees from competing with their former employers. That leaves employers free to create agreements that might ban workers from soliciting their employees or customers and, of course, from disclosing confidential data. As to this latter issue, the noncompetition statute also includes enactment of a form of the Uniform Trade Secrets Act, which protects a company’s trade secrets from misappropriation. The new law will not apply to noncompetition agreements signed before it takes effect in October, saving employers and the courts the trouble of figuring out what to do with existing agreements.

Noncompetition Agreement Legislation Appears No Closer to Passage in Massachusetts

The effort to regulate the use of noncompetition agreements continues to languish in a legislative committee, where most of several competing proposals were referred early in 2017. Alongside them – or, as it were, within the same proposed bills – sits the uniform trade secrets act, a law aimed at protecting the advantage businesses enjoy from confidential trade information.

No fewer than six bills are now being considered by the Massachusetts Legislature’s joint committee on labor and workforce development. One proposed law would void restrictions on post-employment competition contained in written employment agreements while permitting limitations on solicitation of customers or employees in those same contracts to be enforced. Another would permit noncompetition agreements under specifically prescribed conditions, including 10-day advance notice for employees, opportunities to consult with counsel, and payment of wages during any restricted period of time. Some versions of the proposed law would ban noncompetes for lower level workers and limit them to time periods of between three and 12 months. Two bills require renewal of noncompetition agreements at regular intervals, and some permit enforcement of them only in the county where an employee resides.

It’s unclear whether or when the state Senate and House of Representatives will agree on and pass a version of noncompetition legislation or, if they ever do, whether the governor will sign it into law. Given the long history of failed efforts to ban these contracts, it seems most likely that, if any legislation is ever to become law, it will impose conditions on noncompetition agreements while permitting businesses to continue to enforce them where they are essential. Such enforcement might very well require that employers pay at least a portion of the wages their former workers will lose as a consequence of a noncompetition restriction.

New Year Brings Renewed Efforts to Pass Non-compete Legislation in Massachusetts

Proponents in the Massachusetts Legislature may have lost several battles, but they have not given up the war. Early in the current legislative session, no fewer than six proposed laws to regulate noncompetition agreements were introduced. All were referred to one committee or another, where each is now under review. Given the past history of legislative failure and the varied approaches sponsors are taking in 2017, it’s hard to say whether a law on noncompetition agreements will ever be reported to the House or Senate floor for an up or down vote. If one is, it will likely contain several of the following limitations, each of which appears in one proposed law or another.

  • A requirement that noncompetition agreements be written between employers and employees only, and that workers receive them at least 10 business days before beginning a job.
  • If a non-compete is signed after employment begins, payment to the employee of something more than continued work.
  • Expiration of agreements that are not reviewed and renewed at least every three or five years.
  • A limit on restrictive periods to anywhere from 3 months to one year, with exceptions, perhaps, for bad actors that could extend restrictive terms to two years.
  • A requirement of formal written notice to employees of an intent to enforce a covenant no later than 10 days after employment ends.
  • Limits on classes of workers against which noncompetition agreements can be enforced.
  • Rules requiring that employees be paid during any noncompetition period.

One proposal is an outlier and would ban noncompetition agreements altogether. It would not, however, restrict employers from enforcing covenants that restrict solicitation of employees or customers. Neither would it limit non-disclosure agreements, forfeiture agreements, or non-competes that are formed in connection with the sale of a business.

Legislators Work to Revive Noncompetition Law

Recent reports suggest that Massachusetts legislators are continuing to work on a compromise noncompetition law that will garner enough support to become law. Earlier this year, both the House and Senate passed versions of a proposed statute that would have imposed rules on noncompetition agreements, which are currently governed by judges without direction from a formal statute. Because the House and Senate could not reach a compromise over differences in the bills each passed, the proposed statute died with the end of the legislative session on July 31, 2016.

Indications are that, this and other failures notwithstanding, Massachusetts will soon enact a law to govern the uses of noncompetition agreements. Among the provisions now being discussed are ones that would require advance notice to employees, limit the duration and applicability of restrictive covenants, and require employers to continue to pay some portion of a former employee’s salary as a condition to enforcement. If no deal is reached informally this month, legislation will almost certainly be reintroduced when the House and Senate reconvene in January 2017. Any bill they pass must, of course, be signed by the governor.

MA Legislature Again Fails to Pass Noncompetition Law

Though it was closer this time, there’s no solace for those hoping to finally see noncompetition legislation in Massachusetts. Despite passing two bills that would have brought clear rules to this area of law, hopes were dashed this week when the House and Senate were unable to bridge differences in their versions of the proposed law. Because they could not reach a compromise by July 31, the legislation will need to be introduced anew and start the legal process over again in 2017.

The legislative failure leaves noncompetition law a matter of judicial discretion. Under current rules, employers can enforce reasonable restrictive covenants that are part of valid written agreements. They can only do so, however, if they have legitimate business interests to protect. The most common enforcement strategy is to commence litigation seeking an injunction that bars former employees from violating contractual terms. The fact-specific nature of such litigation means that suits are normally argued in court and outcomes are uncertain. The result, of course, is often expensive litigation.

The House and Senate bills sought to bring clarity to noncompetition issues. For details on their specific terms, see the July 8 and July 20 posts on this page.

Senate Action on Noncompetition Bill May Lead to its Failure in MA Legislature

The Massachusetts Senate recently followed the lead of the House of Representatives by passing a comprehensive bill to regulate noncompetition agreements. While this seems to be progress toward a final re-writing of laws that govern these often troublesome employment agreements, the Senate version of the bill varies significantly from the one unanimously passed last month by the House. That means, of course, that the two legislative bodies must huddle together and work out their differences. If they can do so and garner approvals of any agreed form in both the Senate and House, a noncompetition bill would be presented to the Governor for his signature. Because the current session ends July 31, the Senate and House need to move quickly.

Massachusetts House Passes Noncompetition Bill with Substantial Limits — Unanimously

The Massachusetts House of Representatives recently passed a bill that imposes rules for noncompetition agreements. While the bill has yet to become law – it is now being considered by the Senate, which will have to pass it before it can become law, an event that will also require the governor’s signature or, in the alternative, further legislative action – it certainly represents progress on an issue that has long been considered in Massachusetts.

In what may be an indicator of the ultimate passage of the bill into law, it passed unanimously, 150-0. Rules on noncompetition agreements imposed by the bill include the following:

  1. All agreements must be written and signed by employer and employee. Employers must provide them to prospective employees at least 10 days before work begins, and noncompetition forms must inform employees of their right to consult counsel before signing;
  2. Noncompetition agreements for existing employees must meet the same criteria. In addition, employees must receive some form of consideration – money or other material benefit – in addition to continuing employment;
  3. Noncompetition agreements must be narrowly tailored to protect an employer’s trade secrets, confidential information, and/or customer goodwill – that is, a business’s positive relationships with its customers or its positive reputation;
  4. The maximum restricted period is 12 months in most cases, and geographical reach must be reasonable; and
  5. Compensation to affected employees must be provided in the form of pay equal to at least half their highest annual base salary during the two years that precedes employment termination, unless employer and employee agree to compensation in some other form.

The bill would also bar enforcement of noncompetition agreements against employees who are not exempt from federal overtime pay requirements; those under 18; and employees fired without cause or laid off. It includes a provision for enactment of the Uniform Trade Practices Act.

Enforcing Noncompetition Agreements Requires Advance Planning, Strong Evidence

In a case that points up the difficulties employers often have enforcing noncompetition agreements while simultaneously highlighting how potentially damaging the restrictions can be to employees, a superior court judge recently denied an attempt by a hair salon to block two of its employees from moving to a competitor. It’s not the first time Massachusetts courts have refused to apply noncompetition agreements to hair stylists, whose work involves personal customer relationships that employers have difficulty penetrating even if otherwise valid restrictive covenants are in place.

In Elizabeth Grady Face First, Inc. v. Garabedian, et. al., the Middlesex Superior Court refused to block the employees’ use of the so-called ‘Elizabeth Grady Way’ for competitor Sofia E. Day Spa. It found that the plaintiff did not meet its noncompetition burden of submitting evidence that its way of doing business was proprietary or confidential. On the contrary, the court found, Elizabeth Grady trains both employees and non-employees at its schools, and the latter are free to take what they learn and compete in the marketplace. The court concluded that enforcing a noncompetition agreement against employees with only this sort of job knowledge would stretch the reach of restrictive covenants beyond what’s permitted by Massachusetts law. Notably, the court found, there was no allegation that the employees improperly solicited Elizabeth Grady’s customers. The contractual restriction against the employees working for a competition within 25 miles of their former employer was thus not likely to succeed.

The case is instructive to employers and employees alike. For businesses, it points up the need to amass a full and complete record when seeking to enforce noncompetition agreements. It is the employer’s burden in all such cases to demonstrate that their former workers are acting unfairly – cheating, if you will. The failure to do so is among the most common reasons that restrictions against competitive employment are denied by courts in Massachusetts, and employers should remember that simply having a valid contract with specific work restrictions is not enough to justify enforcement. For employees, the Elizabeth Grady case sends an equally important message: be wary what you sign. Regardless of the outcome in this and other cases, the defense of even a failed effort to enforce a noncompetition agreement is costly, time-consuming and stressful. It almost always drains valuable resources that are better spent elsewhere. Whenever possible, employees should decline to sign noncompetition forms or, if that’s not possible, seek to modify them in reasonable ways.

State Legislators to Renew Effort to Enact a Noncompetition Law

Though they’ve failed in several tries to reach a compromise on legislation to regulate the use of noncompetition agreements, the Massachusetts legislature is poised to try again. This time, House Speaker  Robert DeLeo seems willing to lead an effort that will include several specific components.

Mr. DeLeo said as much on March 2, according to Massachusetts Lawyers Weekly, when speaking with local business people. He reportedly highlighted three major components that might be part of 2016 noncompetition legislation:

  1. A limit on restrictive covenants to a maximum of 12 months after employment ends;
  2. A requirement that employees get advance notice of noncompetition agreement requirements before they accept a new job; and
  3. A restriction against using non-competes for workers in low wage jobs.

Time will tell whether these ideas or others can become reality in Massachusetts. The notion of noncompetition legislation has been around for some time but has never gained traction in the legislature. Prior to his departure as governor, Deval Patrick made several pushes to enact a bill with varying terms. Because no law on the topic exists, judges are left to decide on a case-by-case basis when restrictions on work are enforceable and to what extent they are valid. That approach commonly leads to expensive litigation as employers fight with their former employees about what they can and cannot do at their new jobs and, sometimes, whether they can work at them at all.

Maintaining Enforceable Noncompetition Agreements Requires Diligent Effort

Enforcing noncompetition agreements and other restrictions on post-employment activities is always a challenge in Massachusetts courts. Among the various issues employers must consider before attempting to do so is one that is often overlooked – the question whether a valid and enforceable contract even exists.

The general rule has long been that older contracts are eviscerated  by new ones covering the same subject matter. This is true in noncompetition situations as elsewhere and can become an issue when an employee is promoted or otherwise enters a new employment agreement. Unless a previously signed restrictive covenant is expressly referenced or restated in the new contract, it may be null and void. This principle was recently restated in a U.S. District Court case, where a  2005 noncompetition agreement was nullified by a 2012 employment contract.

Best practices in the noncompetition area demand diligence on this and related issues. Whether or not a  new writing is created for an employee – remember, even oral contracts can be enforced in this area if real job changes occur – companies that may wish to enforce restrictive covenants against former employees should institute a regular review program. Each time an employee is promoted or gets substantive new duties, a new noncompetition form should be executed. The same makes sense after the simple passage of time, which can bring smaller, incremental changes that might threaten an employer’s ability to enforce older covenants.