Massachusetts Noncompetition Agreement Act Update

By Dana Etra, Edward Smith

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On Friday, August 10, Massachusetts Governor Charlie Baker signed a $1.1B economic development bill, which included The Massachusetts Noncompetition Agreement Act. The Act, effective October 1, 2018, limits the use and form of non-compete agreements for employees in Massachusetts (regardless of where the employer is headquartered), and applies to non-competes executed on or after October 1, 2018.

Key provisions of the Act are as follows:

  • Limits duration of non-competes to one year (subject to certain limited exceptions)
  • Bans use of non-competes with certain employees (hourly eligible for overtime, full-time students, workers 18 and under, and employees fired without cause (which is undefined) or laid off – this means a non-compete may be void depending on the reason for separation)
  • Applies to independent contractors as well as employees, subject to exceptions described above
  • Requires employers to provide notice of a non-compete at least ten days before a prospective employee’s first day on the job, and includes other technical distinctions between non-compete agreements entered into at the start of employment versus those entered into during employment
  • The non-compete must be reasonably tailored with respect to covered interests and geographical scope
  • Requires businesses to offer “garden leave” (i.e., severance) in exchange for the non-compete, paying at least 50% of the employee’s highest salary over the prior two years while the agreement is enforced (or “other mutually-agreed upon consideration”)
  • Does not apply to non-competes entered into upon a termination of employment, provided employee is given seven business days to rescind his or her acceptance of the agreement

At the executive level, non-compete agreements are used at about one third of companies, according to a recent FW Cook study (the prevalence would likely be higher if non-competes were enforceable in every state). The implications of the new Act at the executive level will be relatively minimal as most companies entering in to non-compete agreements with executives already provide for cash severance benefits to those executives (and generally at a higher rate than 50% of salary). Likely the most notable effect the Act will have on executives is to limit non-competes to one year, whereas the current practice is typically for restrictive covenants to apply for the same period of time as the executive receives severance, generally ranging from one to two years.  

For non-executive employees the effects could be more substantial, and the potential added cost of severance obligations may result in companies decreasing the use of non-compete agreements or presenting substitute compensation arrangements if the parties can agree to “other mutually-agreed upon consideration” (another concept that is undefined in the Act). For example, we may see companies using some additional pay or benefit, such as a signing bonus or vesting acceleration, to incent prospective employees to agree to lower severance. However, it is unclear whether other consideration must be equal in value to the otherwise required 50% severance; as such, employers should seek advice of counsel or other advisors until there is more certainty around this alternative.

Finally, Massachusetts will not honor choice of law provision for any employee who is a resident of or employed in Massachusetts at the time of termination (and for at least 30 days prior). To the extent applicable to current or future employees, HR and Legal teams should review existing templates for employment agreements, equity award agreements, retirement benefits, and any other programs containing restrictive covenants to ensure compliance with the Act.


Dana Etra
Principal

Dana advises boards and management teams across industries and has broad experience consulting to companies in varying stages of the business cycle on executive and board compensation. She works with clients on all aspects of compensation strategy and program design, including corporate governance considerations and tax, accounting, securities law, and other regulatory implications.


Edward Smith
Consultant

Edward Smith joined the firm in 2018. During his college years, he earned dual majors in economics and psychology with a focus in behavioral economics. Edward has experience working on Capitol Hill and in the automotive industry.


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