Employers in Massachusetts will soon face tighter restrictions on their use of noncompete agreements and could have to pay former employees up to half their previous salaries for cooling their heels before starting another job.
The measure, signed into law Aug. 10 by Gov.
The law also requires businesses to offer former employees subject to noncompete agreements “garden leave,” in which the employer agrees to pay the employee not to work elsewhere—or to stay home and tend the garden—while the agreement is in effect.
Noncompete agreements can prevent workers from starting their own businesses or joining direct competitors. The state’s technology industry has long argued that the existence of the agreements stifled entrepreneurship and hurt the state’s competitiveness, especially in comparison with California, which has banned them.
Bay State employer groups, meanwhile, pushed hard to preserve noncompete agreements in some form, in particular as a way to protect a company’s intellectual property.
The Massachusetts Noncompetition Agreement Act was contained in an amendment (H.4868) to the $1.1 billion economic development bill (H.4732) passed by the state Legislature Aug. 1. The law will take effect Oct. 1.
“Our administration is proud to sign our second economic development bill to provide more opportunities to workers, strengthen Massachusetts’ economy and enhance workforce development programs,” Baker said in an Aug. 10 statement that accompanied his letter to the legislature.
Half Salary for Garden Leave, Maybe
Garden leave must equal half of the employee’s highest salary while the agreement is enforced. But the law also includes an alternative: “other mutually-agree upon consideration. “That could conceivably be significantly less than the 50 percent “garden leave” requirement.
Some employers may opt for the alternative to providing garden leave, Suzanne W. King, a management-side employment attorney at Pierce Atwood LLP in Boston, said.
“Some employers may decide they want to pay less. And sophisticated employees may push back at that,” she told Bloomberg Law by phone. “It remains to be seen how this will play out in the real world.”
Mark Gallagher, vice president of government affairs at the Massachusetts High Technology Council, called the new law’s provisions “common sense reforms.”
“The issue had been left up to the courts,” he said. “Now you have a statutory framework to deal with issues like compensation.”
The Associated Industries of Massachusetts, representing manufacturers, said the agreements were viewed as necessary by the “vast majority of Massachusetts employers who wish to preserve the use of noncompetes to protect intellectual property.”
The new bill is a “productive compromise,” wrote Brad MacDougall, AIM’s vice president of government affairs, in an Aug. 1 blog post.
Shift to NDAs, Non-Solicitation Agreements?
The new law will make it harder—but not impossible—for employers to use noncompete agreements to restrict employees from working for competitors, King said.
The changes narrow the scope of noncompete agreements, and “there is no doubt” the law will change the way employers in Massachusetts use noncompete agreements, she said.
Employers concerned about an employee taking a client list or proprietary information to a competitor can still use non-solicitation and nondisclosure agreements, which aren’t covered by the new law, she said. Non-solicitation agreements prevent employees from taking a company’s customers with them to a new employer; nondisclosure agreements prevent an employee from using confidential information or trade secrets of their former employer with their new employers.
“It is reasonable to anticipate that employers will continue to rely heavily on non-disclosure and non-solicitation agreements for most employees, and use non-compete agreements on a more limited basis,” she said in an email.
Many employers who continue to use noncompete agreements will likely revise them—even though the law is clear they don’t have to—"just so there is no question about enforceability going forward,” King said.