There is generally a gnashing of teeth when a key employee leaves for a competitor, and that gnashing may evolve into weeping when an employer finds that its noncompetition protections are unenforceable. Massachusetts has long followed most states by enforcing noncompetition agreements that are narrowly-tailored to protect the company’s legitimate business interests, without being over-broad.
The Massachusetts 2018 Noncompetition Agreement Act (the “Act”) has changed the noncompetition landscape by setting a high bar for such employee agreements entered into on or after October 1, 2018. Interestingly, the new law extends to forfeiture-for-competition agreements, as well as stock awards and plans that include such provisions or restrictive covenants.
Although the Act does not apply to agreements executed prior to October 1, 2018, those agreements must nevertheless pass reasonableness muster to be enforceable. They are, consequently, worth updating as part of any exercise that involves assuring the adequacy of an employer’s noncompete protections.
With respect to agreements that are subject to the Act, there are several hurdles that must be satisfied in order for them to be enforceable (noting that forfeiture-for-competition may nevertheless result in lost benefits under a plan covered by ERISA). For instance, the employee must be given a 10-day consideration period, and be advised in writing about the right to consult with an attorney before signing the agreement. There must also be a provision for paid “garden leave” (per a formula that roughly equates to 50% of wages), reasonable restrictions, and litigation only in Massachusetts. Employers cannot enforce noncompetition agreements against employees who are laid-off or terminated without cause, but those protections are possible through a carefully designed severance agreement.
On Monday October 1, 2018, Massachusetts became the first state to incorporate a “garden leave” provision to non-compete contracts entered into with Massachusetts employees and independent contractors. The Act enables workers who have signed non-compete agreements to be paid up to 50% of their previous salary during the duration of their non-compete. The garden leave clause of the Act includes certain limitations such as a one-year durational restriction and exemptions for select categories of employees, namely most hourly wage employees. Non-competes in Massachusetts will now be supported by the garden leave provision or “other mutually-agreed upon consideration” as a substitute. This allowance is predicted to generate litigation as the legislature has not succinctly defined what might constitute such “fair and reasonable” alternative consideration between the employer and the employee.
Overall, this is the season in which Massachusetts employers should consider reviewing and shoring-up their non-competition protections. Stock awards are often an effective vehicle for this because they may both serve as new consideration for changes, and also extend the risk of violation to designated prior awards (through a look-back). Whatever the strategy, noncompete protections generally work only if they are solidly documented and secured while the employment relationship is well grounded. Of course, this must be done before a crucial employee contemplates leaving or competing. For reference, the full text of the new law may be accessed here: Mass. Gen. Laws Chapter 149, § 24L.
For further information about the Act or related noncompetition questions, please contact David Gabor or Katherine Brustowicz. For stock plans and awards information, Mark Poerio is happy to assist.