Yesterday — three weeks after the Massachusetts House of Representatives passed a bill that would severely restrict non-competition agreements — the Massachusetts Senate approved its version of the legislation, which would impose even more severe restrictions on non-competes. The Senate’s version makes the bill much more favorable for employees, and might even go so far as to make the employee non-compete agreements almost worthless from an employer’s perspective. The Senate’s changes include: (1) reducing the time that a worker can be prohibited from competing from a year to three months; (2) increasing how much a worker has to be paid during the restricted period; (3) preventing judicial reformation of non-competes that are overly restrictive (instead requiring courts to throw them out); (4) and further limiting the types of employees who can be subject to non-competes.
Just Three Months of Protection
The Senate version reduces the length of time that an employee can be prohibited from working for a competitor from one year to only three months, which is probably too short period of time to be of much value to most employers. An employee could leave at the beginning of June take the summer off, while still being fully paid by his old employer, and start up a new job in September. While that would be a great deal for the employee, it is hard to see much benefit for employers. The Senate did accept the House’s extension of restrictions to two years when the employee steals from the employer or breached a fiduciary trust to the employer, providing at least some value if an employee acts badly.
No More Judicial Flexibility
In the past when a Court has found a non-compete to be too limiting, it has had the ability to “blue-line” the agreement, making it more reasonable, rather than throwing the whole thing out. While the version passed by the House would continue this judicial flexibility, the Senate version would require courts to throw out overly broad noncompetition agreements. This is a return to how the bill was originally written, and, as discussed in my last post on this bill, would remove a huge advantage and safety net from employers. Prohibiting reformation means that employers only get one bite at the apple to get the agreement right forcing them to guess how much restriction a court will find to be reasonable. If they include too much protection, they get none at all.
Full Pay During the Non-Competition Period
Under current law, employers do not need to pay a former employee while a non-compete is in effect. The House version of the bill would require employers to pay “garden leave” equal to at least half the employee’s salary during the time in which the employee is prohibited from working for a competitor. The Senate version increases this amount to the employee’s full salary. In other words, an employer would need to pay its former employee his or her highest annualized salary in the last two years for the duration of the non-compete, unless the employee stole from the company or otherwise breached a fiduciary duty to it. This applies even if the former employee is working and drawing a salary during this time (though not, of course, in breach of the non-compete). The House version also had a way for employers to avoid paying garden leave by negotiating alternative compensation, but the Senate version requires any such negotiated replacement compensation to be at least as much as the garden leave would be.
Two New Administrative Requirements
The Senate version also includes two new burdensome administrative requirements: (1) an employer must notify a departing employee within 10 days of the termination of employment that it intends to enforce the non-compete or the non-compete is voided; and (2) the non-compete must be reviewed with the employee at least every five years. The notice of intent to enforce requirement appears to replace a provision in the House version that would have allowed the employer to opt out of paying garden leave if they decided not to enforce the agreement or if the employment restriction was found unenforceable. The Senate version counter-intuitively seems to exclude the employer from having an opt out if the employee steals from the employer or breaches a fiduciary duty to the employer because the notice requirement does not apply in those situations.
Non-Competes Limited to Top Employees (and Not Independent Contractors)
With all of these limitations, it is unlikely that most employees would bother to ask their employees to sign non-competes. But even if they want to, they will be prohibited under the Senate version from entering into non-competes with most employees, as it only permits non-competes with employees who makes at least twice the weekly average wage in Massachusetts. Employees who are not classified as an exempt worker under the federal Fair Labor Standards Act (i.e. hourly workers) could also not be subject to non-competes regardless of how much they make. The Senate version also prohibits non-compete agreements with independent contractors. (In any event, the idea of having a non-compete with an independent contract seems a little strange because one of the criteria that is used to determine whether a worker is an independent contractor under Massachusetts law is whether the worker is free to provide services to anyone wishing to use those services.)
Two More Nails in the Non-Compete Coffin
If the Senate draft had not already made non-competes unappetizing enough to employers, it also includes provisions prohibiting contractual provisions that penalize an employee for challenging or defending against enforcement of a non-compete agreement and prohibiting advance waiver of employee rights under the law.
Not the End of the Story
Now that the Senate has passed its version of employee non-compete legislation, the two versions will have to be reconciled into a single version that can be passed by both houses. This will be done by six legislators, three from each house. It will require quick action to get the two versions reconciled in time to pass the bill this year because the legislature ends its session on July 28. Of course, if the legislature fails to enact a new non-compete law, the old one will remain in effect. Employers who rely on non-competes to protect their intellectual property should consider contacting their legislators to ask them to support modifying some of the more draconian provisions of the bill or simply to oppose it altogether. Watch this space for further updates.