Massachusetts Restricts Restrictive Covenants
By: Steven J. Whitehead and Rachael Lee Zichella
On August 10, 2018, Massachusetts’ governor signed into law a bill that significantly changes the Commonwealth’s law on covenants not to compete in the employment/independent contractor context. The law narrows the categories of workers who can be bound by a covenant not to compete, specifies the notice to the contractor or employee and consideration required, and limits the circumstances in which such covenants can be enforced against former employees.
The law applies to employees and independent contractors. It does not apply to employee or customer non-solicitation covenants, or non-disclosure covenants. Under the law, employers are not permitted to impose covenants not to compete on all employees. Employees who are classified as non-exempt under the Fair Labor Standards Act may not be restricted by a non-competition covenant. Employers also may not bind employees 18 years or younger or workers participating in an internship.
In order for an employer to obtain an enforceable non-compete at the inception of employment, it must provide the candidate with a copy of the covenant with the formal offer of employment or ten business days before the beginning of the employee’s employment, whichever is earlier. In-term non-competition covenants are not enforceable unless (a) they are supported by “fair and reasonable consideration” beyond continued employment and (b) notice is given to the current employee of the covenant at least ten days before the covenant is to become effective. Non-competition covenant agreements must contain a clause stating that the candidate or employee has the right to consult with an attorney prior to executing it.
Non-competition covenants may not exceed twelve months unless the employee has breached his/her fiduciary duty or misappropriated the employer’s property. A geographic area that is limited to where the area in which the employee “provided services or had a material presence or influence” within the last two years of employment is presumptively reasonable. Further, if the scope of the covenant is no greater than “the specific types of services provided by the employee at any time during the last two years of employment” it is considered presumptively valid.
An employer may not enforce a non-competition covenant against a former employee who is terminated without cause or laid off. Severance agreements that contain a non-competition covenant are not covered by the law provided that the employee has been given seven days to revoke his/her agreement. Also, to be enforceable, a non-competition covenant agreement must provide for “garden-leave” or severance pay in the form of continued wages in the amount of “at least 50 percent of the employee’s highest annualized base salary” in the last two years of employment. The garden-leave pay must be paid on a prorated basis and the agreement must specify that the employer may not refuse to make the payments unless the employee breaches the agreement.
Courts are specifically permitted to “reform or otherwise revise” non-competition covenants in their discretion. Further, choice of law provisions may not be effective -- Massachusetts law will apply to any covenant agreement signed by an employee who is or within the thirty days prior to termination was a resident or employed in Massachusetts. Any action to enforce the covenant must be brought in the county where the employee resides or, if the employer and employee agree, in Suffolk County.
An invalid non-competition covenant can be severed from a restrictive covenant agreement and does not affect the enforceability of other covenants. Further, non-competition covenants that result from the sale of a business are not covered by the statute where the individual restricted was “a significant owner of, or member or partner in, the business entity who will receive significant consideration or benefit from the sale or disposal [of ownership].”
The new law takes effect on October 1, 2018. Companies who use non-competition covenants should review these agreements and takes steps to ensure they comply with the new requirements.