Yesterday the Massachusetts House of Representatives passed a bill that would strongly restrict how businesses use employee noncompete agreements. How would this affect you? Read on for details.
What is a noncompete and what’s the controversy?
An employment noncompete agreement is an agreement between an employee and employer in which, in return for a job, an employee agrees to limitations on future employment with other companies.
In some circles, noncompetes are controversial. To established employers, they are useful in preventing employee attrition and knowledge drain, and in keeping their proprietary information from going to their competitors in the memories of former employees. To employees, they can be burdensome restrictions that hinder career advancement. To new companies, or those with deep pockets that want to use their resources to hire the best and brightest, the inability to hire employees who are under a noncompete with another company may frustrate business growth.
In many states, common law rules provide the only limitations on the use of noncompetes. Generally, they will be allowed unless they are unreasonably burdensome or not reasonably limited by geography or duration, with those standards of reasonableness varying by jurisdiction and industry. Some states, most notably California, either restrict or ban the use of noncompetes. Bill H. 4323, if passed by the Senate and signed by Governor Baker, would move Massachusetts into that latter category by putting strong restrictions on noncompetes.
What would the new law prohibit?
- Noncompetes that last for more than one year after employment would be invalid, or two years if the employee is guilty of a breach of fiduciary duty or stealing from the company.
- Noncompetes entered into after an employee starts working for the company would be invalid unless the employee receives additional compensation, independent from ordinary pay for employment.
- Noncompetes would be unenforceable against an employee terminated without cause or because of layoffs – only an employee who quits or is terminated for cause would be subject to a noncompete.
- A noncompete must make an employee sidelined for a period by the noncompete eligible for “garden leave” pay during that period. Garden leave pay would be equal to 1/2 of the highest annualized salary paid in the last 2 years. The exception is that if an employee is eligible to be sidelined for 2 years because of wrongdoing, the employer only has to pay garden leave for the first year.
- If a court hears a complaint involving a noncompete that violates the terms of this law, the court may not edit the agreement to make it lawful – currently a common practice – but would have to consider it invalid.
- Employers may not use “choice of law” contract language to get out of these requirements – if the employee lives or works in Massachusetts, this law would control. Yes, this law could invalidate noncompetes for employment in other states when the employee is a Massachusetts resident.
Note that these terms are much more restrictive than current law. Nearly all noncompetes currently in effect in Massachusetts would become invalid and must be rewritten!
What doesn’t change?
Noncompetes that are not in the nature of a restriction of future employability are not affected by this bill. This includes:
- Agreements that if an employee departs for a another company or to start a new business the employee will not solicit the old employer’s employees or clients.
- Agreements that a person who sells a business to another person will not open a new competing business for a period of time.
- Nondisclosure agreements and agreements that an employee’s inventions belong to the employer.
Also, noncompete agreements made during negotiation of an employee’s exit from a company are not affected when the agreement gives the employee a scene day period to rescind, nor are agreements not to reapply to the same employer made during a negotiated exit.
How does this affect my business?
If you use noncompete agreements, this bill (if it becomes law) will force you to rewrite them and will restrict your use of them in the future to the point where it might no longer make sense to use them at all. The garden leave requirement means that you will have to weigh whether keeping a departing employee away from a competitor is important enough to pay for. The net effect will be that you will be more likely to lose employees to your competitors – but also more likely to snag their employees.
If you do not use noncompetes, or find your business growth hampered by noncompetes restricting your prospective employees, this bill is probably good for your business. If it becomes law, you will have access to an expanded pool of prospective employees as many businesses will stop using noncompetes entirely and those prospects who are restricted by them will be kept out of the applicant pool for less time.
Will this become law?
It seems likely to me that this bill or one like it will become law. The bill passed the House without objection – 150-0 with 10 non votes. In the past, when noncompete limitations have been proposed, the Senate has been more enthusiastic than the House, and there is no reason to suppose they no longer want a noncompete law. It only remains to be seen whether the Senate will accept something the House’s version, which is a compromise worked out between various business and employee groups, or demand something stricter such as a full ban on noncompetes. Will Baker accept it? His public comments have been supportive of a compromise solution – and it may not matter, if both chambers have more than 2/3 support.