Legislative Update: Employee Noncompetition Agreement Reform

Yesterday, the Massachusetts House of Representatives unanimously passed a major reform of employee non-compete agreements. The bill is much more employee-friendly than existing law, although the version passed by the House is more employer-friendly than earlier drafts. The bottom line is that the bill would continue to allow non-competes in Massachusetts (some had proposed doing away with them entirely, as California did), but would restrict them to one year and impose additional burdens on employers while the non-compete was in effect. So what does it do, who does it cover, and what happens next?

What does it do?

Perhaps the most controversial and biggest change contained in the bill is that under it an employer would have to pay an employee during the non-competition period, up to a maximum of one year, at least 50% the employee’s highest annual salary from the last two years. This provision, called the “garden leave” clause, is meant to ensure that employees actually get some compensation for signing noncompetition agreements. An amendment this week allowed employers to avoid paying garden leave money if the employer decides not to enforce the agreement. This is a major improvement to the bill because it lets employers off the hook if at the end of the employment they decide to release the employee from all noncompetition obligations, allowing the employee to go to work for a competitor immediately. This provision will likely have the effect of causing some employers to release employees to work for competitors, which would give those employees a better chance of working where they want. Another recent change to the legislation is that employers and employees can mutually agree to replace the garden leave clause with some other sort of compensation, but there still must be some form of compensation for entering into a non-compete.

Keeping with the trend of trying to protect employees, the bill requires that employers inform potential employees of the need to sign a noncompetition agreement when the employer makes the formal job offer or 10 days before the job begins, whichever comes first. This provision is intended to protect employees from the difficult situation in which an employee quits their current job for a new job and then finds out that the new job comes with an unacceptable noncompetition agreement. The bill also requires that noncompetition agreements include a notice that the employee has the right to consult an attorney before signing the agreement. As a practical matter, many employees will likely not take advantage of the opportunity to consult with a lawyer before signing, but those who do may benefit from a better understanding of how the non-compete and other provisions of the agreement will affect them.

Perhaps the biggest change in the current draft from the previous drafts is that the current version allows judges to reform noncompetition agreements that are too broad through a process called “blue-lining.” Judges have authority to blue line non-competes under existing Massachusetts law, but the earlier versions of the bill would have required judges to throw out the entire non-competition agreement if it contained an overly-broad provision. Allowing reformation is a huge advantage to employers because it allows employers to draft broad restrictions without as much fear that their agreements will be invalidated by a court down the road.

Another major change is that the bill would restrict noncompetition agreements to only one year in length unless the employee breaches a fiduciary duty to the company or steals from the company, in which case it can be up to two years in length.  Existing Massachusetts law allows non-competes to be up to two years in duration regardless of whether the employee breaches a fiduciary duty.

Who Does It Cover?

The bill covers agreements with employees and independent contractors who are residents of, or employed in, Massachusetts at the time of termination. The bill significantly narrows whom companies can make noncompetition agreements with by prohibiting agreements with several classes of employees, including employees who are terminated without cause and employees who are not exempt from federal wage and hour laws under the Fair Labor Standards Act (FLSA), e.g., employees paid by the hour. Noncompetition agreements are also unenforceable against students and children under the age of 18.

The termination without cause exclusion may be of concern to some employers, because it will prevent them from enforcing noncompetition agreements when they reduce their workforce for economic reasons. The exclusion of workers who are not exempt under FLSA is meant to prevent companies from applying noncompetition agreements to low-level employees who are not critical to the business.

What Comes Next?

The next step is for the bill to be considered by the Massachusetts State Senate, where it could be adopted in its current form, rejected, or (most likely) further amended. If the Senate does amend the bill, any differences between the House and Senate versions will have to be ironed out before the legislative session finishes at the end of July. There is strong support for the bill in both houses of the legislature, so we may actually see the bill passed this year. Governor Baker has not said if he supports or opposes the bill yet, so that is one potential stumbling block if there is not enough time to override a potential Governor’s veto. Stay tuned for more updates.