Overview of the Noncompetition Agreement Act
In August 2018, the Massachusetts Noncompetition Agreement Act (MNA), a comprehensive new statute governing nonsolicitation agreements, noncompetes, and garden leave clauses, took effect. Essentially an update of the 1888 statute regulating noncompetes in Massachusetts, the act was introduced in part as a response to employee mobility issues and what many believed was a need for employee protection in Massachusetts. With many lawyers claiming that the 1888 statute was outdated given the current job market in which most employees can expect to work for numerous employers throughout their career, the MNA was meant to protect employees from anti-competitive noncompete agreements, which many saw as too onerous even when lawful.
The MNA provides greater protection for employee mobility relative to the 1888 statute by limiting enforceable noncompetes and codifying unique exceptions to enforcement. Both the 1888 statute and the act render noncompete agreements void if they are executed more than one (1) year after termination of employment . In addition, the MNA (with certain exceptions) requires noncompetes to be supported by some consideration. The consideration requirement is stricter than under the 1888 statute in that the MNA mandates that an employee be provided with consideration in order to continue employment, whereas the 1888 statute solely required independent consideration for a noncompete executed at the inception of employment or as a condition of going to work.
The MNA also limits the circumstances in which a durable noncompete agreement may be enforceable. Unlike the 1888 statute, the MNA does not permit enforcement in the case of noncompetes against employees earning less than 52,000 dollars (as of 2018) as well as employees who are laid off or terminated without cause. The MNA also codifies legally unenforceable noncompetes for (1) individuals 18 years of age or younger; (2) employees who are not competent to contract; and (3) employees who are interns under the age of 18 who do not receive compensation, academic credit, or otherwise under the supervision of a school, employer, or other entity.
Noncompetition Agreement Act Key Provisions
The Massachusetts Noncompetition Agreement Act codifies Massachusetts common law by (i) limiting the term of noncompetes to 12 months from the date the employment ends, (ii) limiting the geographic scope of noncompetes to that which the employee will work for his or her employer (except for salespersons, sales representatives, or employees whose primary duties are selling products or services away from the employer’s place of business), and (iii) restricting the circumstances in which noncompetes will be enforceable. The Act further stipulates that a noncompete signed in connection with the sale of a business must be (i) purchased by the seller, (ii) supported by independent consideration, and (iii) limited to a time period of no more than seven years.
However, the Act also disrupts Massachusetts common law by making any noncompete signed by an employee who is classified as a "nonexempt" employee under Massachusetts’ state wage and hour laws – either paid on an hourly basis or in the event he or she is not otherwise exempt from overtime compensation requirements. An exception applies if the agreement is made in connection with the severance of employment and signed by the individual at least seven days after the employee’s employment ends.
The Act further limits the ability of employers to obtain noncompetes from their employees by restricting the remedies available to an employer if it seeks to enforce a noncompete that contains provisions that do not comply with one or more of the Act’s requirements. First, an employer may only receive a remedy of "reformation" (i.e., a judge may revise the terms of an agreement to make it compliant with the Act’s requirements, to the extent possible). Second, the employer may only receive damages and attorneys’ fees if (i) the employee’s refusal to sign the agreement, or (ii) the employee’s breach of the agreement does not substantially contradict Massachusetts’ public policy.
One other noteworthy provision of the Act provides that for "garden leave," neither the granting of discretionary severance during the restricted period nor the commencement of payments during the restricted period counts towards the duration limit.
Employee Applicability and Exempt Employees
The Act applies to employees, regardless of whether or not the employee has a college degree. The primary category of employees covered by the Act is those working for non-exempt entities – in other words, those that do not include a 501(c)(3) tax-exempt organization, a government entity, or one with an annual gross revenue of less than $10 million, or with fewer than the greater of 50 employees or $25,000,000 in annual revenue. An employee does not have to work for any particular company size to be eligible. M.G.L. c. 149, § 198(c).
Other than the exemption for certain employer entities, certain employees are also expressly excluded from coverage under the Act, namely, (i) employees who earn less than $100,000 annually (unless they are classified as one of the "service" employees exempted from the overtime requirements, in which case they must earn at least $110,000 annually), (ii) employees who are terminated by their employer without cause before any threatened enforcement action, provided the threatened enforcement action is based on the use or disclosure of trade secrets or confidential information and the employee is afforded the opportunity to return property and/or pay for damages and costs to adequately remedy any harm to the employer, or (iii) employees who voluntarily terminate their employment with the employer before any threatened enforcement action based on the use or disclosure of trade secrets or confidential information, provided the employee is afforded the opportunity to return property and/or pay for damages and costs to adequately remedy any harm to the employer. M.G.L. c. 149, § 198(d).
Effect of the Act on Employers and Employees
For employers, the Act provides long-overdue clarity on the enforceability of noncompete agreements in Massachusetts. Many companies forego a noncompetition agreement with an employee because they are uncertain whether the agreement will be enforceable. By compelling the parties to negotiate terms, the Act contributes to efficiency and predictability by making this issue clear from the outset. The Act presents employers with challenges as well. Many employers will need to update their noncompete agreements to comply with the restrictions imposed by the Act. These restrictions may require revising the parameters of the noncompliance agreement itself to fall within the confines of law. Employers will also need to consider expanding severance and compensation policies, restructure payment practices, and develop a more sophisticated understanding of how their practices are impacted by the new restrictions on noncompete agreements. For employees, the Act provides welcome protections and predictability in negotiating a noncompete agreement with an employer. And, unlike employers, the limited ability of an employee to negotiate a benefit or consideration guarantees a modicum of predictability for employees entering an employment agreement with a noncompete.
Comparison with Other States
When comparing the Massachusetts Noncompetition Agreement Act to noncompete laws in other states, the Massachusetts law stands out as one of the most progressive and employer-friendly noncompete statutes in the country. For example, enough payments for the restricted period is only a couple hundred dollars (for most employees), whereas California has no fixed duration for the life of a noncompete or payment in exchange for the noncompete. In other words, noncompetes in California last forever, unless it can be shown that the purpose of the noncompete is, in effect, to rob the employee of their statutory right to work. Other states, like Colorado, have time parameters for the life of the agreement. All other states base their noncompetes on years of service with the employer, so an employee who works at a company for three years may have a two-year noncompete with an agreement that the noncompete runs for two years after employment or upon termination (whichever occurs first). Nevertheless, this is not the case in Massachusetts . Under the new legislation, the noncompete runs for one year after the employee no longer works for the employer. The only nondeductible time from the noncompete would be the time during which an employer ceases to operate or the employee is on paid leave (but not paid time off, like vacation). One year of restrictive trade is quite short when you compare it to the length of time that current employees take to transition from one company to another. There is a 10- to 15-month curve from the time an employee decides to leave until they actually start at the new company (especially in the tech space). It can take that long just to formalize an offer (or to finalize negotiations), and it takes time (typically a month or more) to wrap up the employee’s projects. Even though the statute allows for a time-limited, 12-month executed noncompete, it remains to be seen if corporations will be able to enforce their existing noncompetes in Massachusetts to current employees that are transitioning to another company.
Recent Changes and Developments in the Law
In 2020, Massachusetts became the second state, and Boston the only major city, to enact a law regulating noncompetes. The statewide statute went into effect on October 1, 2018.
In Thomas & Sons Bakery, Inc. v. Smith et al., No. 18-P-1369, — N.E.3d —-, 2019 WL 4017982 (Mass. App. Ct. Aug. 26, 2019), Massachusetts’ highest court held that noncompete agreements signed after resignation or forbearance of legal action are unenforceable unless there is consideration beyond continued employment. The employee in Thomas was first hired in 2004, but was not required to sign a noncompete agreement until 2014 after she threatened legal action against her employer for unpaid wages. The Court held that continued at-will employment is insufficient to constitute proper consideration for a valid noncompete agreement in these circumstances. The case was sent back to the trial court to determine if there was consideration beyond continued employment.
Recent enforcement actions brought by the Massachusetts Attorney General have also shed light on its interpretation of the Massachusetts Noncompetition Agreement Act: The Massachusetts plans to continue to aggressively enforce the new law. This is evidenced by recent Attorney General actions against businesses that improperly used noncompete agreements to restrict employees deemed low-paid "hourly workers," which was prohibited by the statute. Attorney General Maura Healey is also reportedly pursuing similar actions against other employers who have not complied with the statute.
Given the frequent changes to the noncompetition statutory landscape in Massachusetts, employers should consult with legal counsel to obtain the most up-to-date advice on drafting their noncompete agreements.
Best Practices for Employers
Employers should consider steps to comply with the Massachusetts Noncompetition Agreement Act before the law’s scheduled September 1, 2018 effective date. In particular, employers should review any noncompete agreements that they may have and, if necessary, work with legal counsel to ensure that those agreements comply with the Act. Even if your company lacks an existing noncompete agreement, the Act establishes new requirements for employers in order to obtain a valid noncompete agreement from a first-level employee.
As we discussed in our post on the Act’s limitations, many current noncompetes will need to be amended so that they are no longer inconsistent with the Act. Existing noncompetes that contain notice provisions purporting to "notify" employees of their potential enforceability in another state, for example, will need to remove those provisions. Similarly, existing noncompetes that provide that Massachusetts courts have exclusive jurisdiction over questions regarding enforceability of the noncompete where the employee has left Massachusetts will need to be revised. Employers should also consider amending all of their noncompetes to include language explaining why a noncompete agreement is necessary to protect a legitimate business interest or to address whether the agreement restricts a former employee from working in a particular geographic area.
Conclusion
This article began by noting that noncompetition agreements are gaining popularity in Massachusetts. It also noted that many lawyers remain confused as to the scope and applicability of the Mass. Noncompetition Agreement Act, which was adopted in 2018, and how it relates to "common law" noncompetition provisions. There is now decade of case law addressing the Monette rules, some of which are not clearly addressed in the statute . Chief among the important questions which the courts have addressed includes: (1) Does the Act apply to all agreements which have a noncompetition component? (2) Can an employer employee agree to be governed strictly by "common law" traditional rules and not the Act, or vice versa? (3) What consideration must the employer provide in order to support an otherwise valid noncompetition agreement, and; (4) What are the prerequisites for an ex-employer to obtain a preliminary injunction preventing an ex-employee from commencing employment with a competitor in violation of a non-competition covenant? The final answer to these and other questions is that noncompetition law is complicated and evolving; the certainty that existed prior to 2018 has been shaken a bit, and both employers and employees must be more vigilant than ever in order to avoid commit noncompete missteps which are now more costly than ever.