On October 1, 2018, Massachusetts’ new noncompete law (G.L. ch. 149, § 24L) goes into effect. While the new law largely codifies existing common law, it also alters the legal landscape in significant ways that will pose traps for unwary and overprotective employers. Particularly, although the law offers enforceability incentives for narrowly drafted noncompetes, it also makes enforcement more expensive. The statute’s requirements are replete with ambiguous and undefined language that will cost employers time and money as they wait to see how Massachusetts courts interpret and apply the new law’s guiding principles.
What Employers Need to Know
The new law’s key provisions are the following:
“Garden Leave.” To enforce a noncompete employers must either: (1) pay a restricted employee during the entire noncompete period in an amount equal to at least 50% of their highest base salary during their last two years of employment; or (2) provide “other mutually-agreed upon consideration.” The new law does not define or specify what constitutes “other mutually-agreed upon consideration.”
Prohibited Employees. Employers may not enforce noncompetes against: (1) non-exempt employees; (2) undergraduates or graduate students engaged in short-term employment; or (3) employees 18 years or younger.
Layoffs and Termination Without Cause. Unless negotiated as part of a written separation agreement, employers may not enforce noncompetes against employees who the employer has either: (1) terminated without cause; or (2) laid off. The new law does not define or specify what constitutes “cause.”
One-Year Duration. Unless an employee has either breached a fiduciary duty or unlawfully taken employer property (which extends the restricted period to up to two years), noncompetes are limited to one year after separation.
Reasonable Geographic Restrictions. The new law requires noncompetes with geographic restrictions (i.e., that a former employee may not work in a particular geographic area) to be “reasonable” in relation to the employer interests being protected. Geographic restrictions are presumed reasonable if they prohibit employment only in geographic areas in which the employee, during the last two years of employment, either: (1) provided services; or (2) had a “material presence or influence.” The new law does not define or specify what constitutes a “material presence or influence.”
At vs. After Commencement of Employment. The new law distinguishes between noncompetes entered into at vs. after the commencement of employment. Unlike at-commencement noncompetes, after-commencement noncompetes must be supported by “fair and reasonable consideration independent of the continuation of employment.” In other words, continued employment is now insufficient consideration for noncompetes entered into after an employee starts working. The new law does not define or specify what constitutes “fair and reasonable consideration.”
Anti-Circumvention. The new law requires that Massachusetts law (i.e., G.L. ch. 149, § 24L) apply to employees residing or employed in Massachusetts at the time of the employee’s separation. This prevents employers from using choice-of-law provisions to circumvent the new law.
What Employers Can and Should Do Right Now
Employers should immediately review, and redraft as necessary, their current noncompete agreements to ensure they conform to the specific statutory requirements detailed above. The statute will apply to all noncompetes entered into on or after October 1, 2018. Employers should also review, and perhaps reconsider, their approach to noncompetes generally. Given the heightened enforcement expense, particularly “garden leave” pay, employers may find business sense in considering a more targeted approach, requiring noncompetes only for key employees, who, if they joined a local competitor, would be worth the expense of enforcing a noncompete.