On August 10, 2018, Governor Baker signed a bill into law, which governs noncompetition agreements. The new law, to be codified at G.L. c. 149, § 24L, is effective October 1, 2018. The statute, which is the result of nearly a decade of legislative action, codifies – for the first time in Massachusetts – the law governing noncompete agreements in employment. While it largely tracks many aspects of existing common law (developed over time in court decisions), it also includes significant changes that employers, such as management companies, will need to keep in mind when requesting employees execute a noncompete agreement.
The condominium unit owner, Pamela Walsh, allowed her tenant, Cheryl Hardnett, to keep a dog in the unit and common areas of the condominium – in violation of a restriction in the condominium’s master deed.
The statute defines a noncompetition agreement, in relevant part, as “an agreement between an employer and an employee ... under which the employee … agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.” The law expressly provides that an “employee” includes independent contractors.
A noncompetition agreement may be entered into either (1) in connection with the start of employment, or (2) during employment. If entered into at the start of employment, the agreement must be in writing, signed by both the employer and employee, expressly state that the employee has the right to consult with counsel prior to signing, and must be provided to the employee by the earlier of a formal offer or ten (10) business days prior to the commencement of employment. If a noncompetition agreement is entered into during employment, it must be supported by fair and reasonable consideration independent from continuation of employment and notice must be provided at least ten (10) business days prior to the effective date of the agreement. In addition, any agreement executed during employment must be in writing, signed by both the employer and employee, and expressly state that the employee has the right to consult with counsel prior to signing.
In addition to the foregoing, all noncompetition agreements must have the following attributes:
▪ No broader than necessary to protect the legitimate business interests of the employer;
▪ Restricted period cannot exceed one (1) year, subject to an exception in the event an employee breaches his or her fiduciary duty to the employer or has taken property belonging to the employer, in which case the duration may not exceed two (2) years from the date of cessation of employment;
▪ Reasonable in geographic reach in relation to interests protected; and
▪ Reasonable in scope of proscribed activities in relation to the interests protected.
The new law also includes a requirement that noncompetition agreements be supported by a garden leave clause or other mutually agreed upon consideration. A garden leave clause is “a provision within a noncompetition agreement by which an employer agrees to pay the employee during the restriction period.” The garden leave clause must provide for payment on a pro-rata basis during the entirety of the restriction period of at least 50% of the employee’s highest annualized base salary within the two (2) years prior to termination of the employee.
The statute also provides that a reviewing court may, in its discretion, reform or otherwise revise an agreement to render it valid and enforceable; that any litigation to enforce an agreement must be brought in the county in which the employee resides; and, importantly, that the new law is not retroactive and is only applicable to new agreements entered on or after October 1, 2018.
The statute codifies, for the first time in Massachusetts, the law relative to noncompetition agreements. While case law has developed over the years to help define what is and is not lawful, the statute sets forth clear requirements with which a noncompete agreement must comply in order to be deemed valid. In some respects, this codification reflects a change in the law. For example, pursuant to the statute, and subject to limited exception, the restricted term may not exceed one (1) year. This represents a departure from existing law, as courts have historically recognized noncompetition agreements for a duration of two (2) years, or even more, as appropriate in certain circumstances.
The new law provides added “bargaining power” to employees in an area that may historically have been perceived as draconian and contrary to the employee’s interests. The statute sets forth requirements for noncompete agreements signed both prior to and during employment and expressly provides that an employee must have an opportunity to review the provisions of any agreement with counsel of his or her own choosing.
In addition, by including a requirement that an agreement contain a garden leave clause, the new law is likely to encourage an employer to take a hard look at the duration of any noncompete agreement to assess whether it is a sound business decision – that is, whether the benefit of restricting the former employee at a cost of at least 50% of his or her most recent salary outweighs the benefit of competing with the employee.
Like any legislation, the statutory language raises some questions that will need to be addressed by decisional law. For example, the statute provides that noncompetition agreements signed during employment must be supported by additional “fair and reasonable consideration” beyond continued employment. What would constitute such “fair and reasonable consideration” will likely not be clear until case law develops.
In addition, while the statute is expressly applicable only to new agreements, it would be advisable for management companies and the like to review existing agreement to assess their compliance with the new law and to consider making changes to the provisions of same to bring them into compliance with the statute.