Share Page

Are Your Non-Compete Agreements Legal?

August 27, 2019
 
Massachusetts last year adopted a law governing non-compete agreements (NCA), superseding in the process the long-standing practice of NCAs being interpreted and enforced through the courts. The law has significant implications for employers.
 
NCAs limit the ability of an employee to take information from a company he or she left and provide it to a new company he or she joined to compete against the former employer.” 
 
The common-law view of NCAs typically asked whether the NCA was reasonable in purpose, geography and time. Each NCA was considered on its own merits. The new law reframes the discussion by limiting the scope of the purpose, geography and time criteria of all NCAs.    
 
Key provisions of the Massachusetts law include the definition of a non-compete agreement, specific limits on duration and geography, a “garden-leave” provision and a limitation on the categories of employees subject to an NCA. 
 
An NCA is defined in the law as an agreement between an employer and an employee in which the employee agrees that he or she will not engage in competitive activities with the employer after the employment relationship has ended. In return, the employer provides consideration (defined below) to the employee.  
 
To be valid and enforceable, an NCA must meet the following requirements: 
  1. New employees - It must be in writing and signed by both the employer and the incoming employee and must expressly state that the employee has the right to consult with counsel prior to signing. It must be provided to the incoming employee by the earlier of the following: a formal offer of employment or 10 business days before the commencement of the employee’s employment.
  2. Existing employees - It must be in writing, signed by both parties, and supported by fair and reasonable consideration (something of value) apart from continued employment. Notice of the agreement must be provided at least 10 business days before the agreement is to be effective. It must include language stating that the employee has the right to consult with counsel prior to signing.
  3. Purpose - It must be limited to what is necessary to protect one or more of the following legitimate business interests of the employer: the employer’s trade secrets, as defined by state law; the employer’s confidential information, which would otherwise not qualify as a trade secret; or the employer’s goodwill. It will be presumed necessary in cases in which the legitimate business interest can’t be protected any other way.
  4. Duration - An NCA is capped at 12 months from the end of employment. It can be extended to up to 24 months if the employee has breached fiduciary duty to the employer or has unlawfully taken property belonging to the employer.
  5. Geography - It must be limited to the areas in which the employee has provided services to the company or had a material presence during the previous two years of employment.
  6. Period of covered employment - It must be reasonable in scope to protect a legitimate business interest and is limited to the specific types of services provided by the employee at any time during the previous two years of employment.
  7. Consideration - It must be supported by a garden-leave clause or another mutually agreed upon consideration between the employer and the employee. The garden leave must provide for the payment of at least 50 percent of the employee’s highest annualized base salary paid within the two years preceding the employee’s termination and not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments unless the period has been increased beyond 12 months due to a breach (see number 4 above). 
  8. The agreement must be consonant with public policy.
The limitations on NCAs do not include:
  1. Covenants not to solicit or hire employees of the employer;
  2. Covenants not to solicit or transact business with customers, clients, or vendors of the employer;
  3. NCAs made in connection with the sale of a business entity, or substantially all of the operating assets of a business entity or partnership, or the disposal of the ownership interest of a business entity or partnership (or division or subsidiary thereof) when the party restricted by the noncompetition agreement is a significant owner of, or member or partner in, the business entity that will receive significant consideration or benefit from the sale or disposal;
  4. Non-competition agreements outside an employment relationship; 
  5. Forfeiture agreements;
  6. Non-disclosure or confidentiality agreements; 
  7. Invention assignment agreements;  
  8. Garden-leave clauses; 
  9. Non-competition agreements made in connection with the cessation of or separation from employment if the employee is expressly given 7 business days to rescind acceptance; or
  10. Agreements by which an employee agrees to not reapply for employment to the same employer after termination. 
An employer cannot use an NCA for certain classes of employees, including:
  1. Non-exempt employees under the Fair Labor Standards Act;
  2. Undergraduate or graduate students in an internship or a short-term employment program with an employer, whether paid or unpaid, while enrolled in a full-time or part-time undergraduate or graduate educational institution;
  3. Employees terminated without cause or laid off; and 
  4. Employees age 18 or younger.
Any employer seeking to require an employee or new hire to sign an NCA must ensure it complies with the language above. One of the consequences of the law may be to compel employers to decide how large a percent of its workforce actually needs to sign an NCA.
 
Consult with outside legal counsel to ensure compliance with the law. 
 
AIM members with questions about this or any other HR-related issue may call the AIM Employer Hotline at 1-800-470-6277.
 
Back to list
This site uses cookies to store information on your device. Some are essential to make our site work; others help us improve the user experience and are shared with analytics partners.
By using the site, you consent to the placement of these cookies. Read our Cookies Policy to learn more.
I Accept