After several years of legislative wrangling, Massachusetts Governor Charlie Baker on Friday signed a bill into law that will limit the conditions under which employers in the state can enforce non-compete agreements on their employees. The law goes into effect on October 1 and will apply to all non-compete agreements signed after that date. Lisa Nagele-Piazza outlines the law’s provisions at SHRM:
The Massachusetts law aims to prevent overuse of such agreements by prohibiting noncompetes with employees who are:
- Nonexempt under the Fair Labor Standards Act.
- Under age 18.
- Part-time college or graduate student workers.
For a noncompete to be valid, it must be:
- Limited to 12 months in duration (with some exceptions).
- Presented to new hires either with an offer letter or 10 days prior to an employee’s start date, whichever is earlier.
- Signed by the employer and the worker.
The agreement must also inform employees of their right to consult legal counsel before signing it. If employers want existing staff to sign noncompetes, they will need to offer “fair and reasonable” consideration beyond continued employment for the agreements to be valid.
The new law is also the first in the U.S. to require that employers offer “garden leave” pay to former employees bound by non-competes. The law requires to pay these employees 50 percent of the highest base salary they earned in the prior two years for one year after their departure, or some other “mutually agreed upon consideration.”
That alternative represents a huge loophole in the law, Michael Elkon, an attorney with Fisher Phillips in Atlanta, tells Nagele-Piazza. What sort of “consideration” counts as valid for the purposes of this law will likely be hashed out in court in the coming years, but Elkon notes that employers will expose themselves to a risk of litigation (before an unsympathetic judge) if they attempt to get around this provision by offering an employee a “consideration” that undercuts the law’s guidelines.
Elkon believes the garden leave provision may make its way into other state laws governing noncompetes, he added in comments to Washington Post columnist Jena McGregor. Whether that will actually happen is a matter of some debate, however, as is Elkon’s contention that the provision will prove difficult for employers to work around:
“The statute as it’s currently passed was watered down significantly because it gave another option,” said Erik Winton, who co-leads Jackson Lewis’s practice focused on noncompetes and is based in Boston. “I see most companies likely ignoring [the garden leave payment] and going with the other option,” which could take the form of a signing bonus, the promise of severance, or some other kind of additional pay or benefit.
Others say job candidates may be willing to sign even limited compensation offers if they really want the job. “I could see an employer saying [at a job offer] ‘you’re going to sign this and we’re going to agree on $1,” said Erik Weibust, a partner in the Boston office of Seyfarth Shaw. “If they’ve never dealt with a noncompete before, they’re likely to just sign it.”
Massachusetts had been mulling restrictions on non-competes since 2016, when negotiations over a similar bill fell apart after the two houses of the state legislature failed to reach consensus on the particulars of its garden leave provision. With a highly educated workforce and a collection of world-class research universities, the Bay State has potential to rival northern California as a major tech hub; the rationale for restricting non-competes is to drive competition in that sector, emulating a feature of California law that is widely believed to have fueled the growth of Silicon Valley.
In its regular session earlier this year, the Washington State legislature failed to vote on two bills that would have banned most non-competes. Several other states, including New Hampshire, Pennsylvania, and Vermont, are also considering legislation to restrict the use of these clauses. Attorneys general in states like New York have also become more aggressive in taking action against non-competes they consider excessive or injurious to employees. A bill to crack down on non-competes at the federal level was introduced in the Senate in 2015 but went nowhere. The Obama administration supported state efforts to restrict them and urged companies to drop them, particularly for low-wage workers; so far, this has not been a priority for the Trump administration.