State legislatures across the U.S. are considering proposals that would restrict or even eliminate the use of post-employment noncompetition agreements. This debate has been prompted by concerns that broad noncompetes hinder flexible labor markets and depress wages by keeping employees from joining a competitor for higher pay. Earlier this month, Massachusetts adopted legislation that substantially restricts the use of noncompetes with employees and independent contractors in that state.
The new law limits post-employment restrictions to one year. Noncompetes will not be enforceable if the employee is laid off or terminated without cause. During the restricted period, the employer must pay the employee at least 50 percent of his or her highest base salary during the prior two-year period, unless another financial arrangement is agreed upon. The new law restricts when a noncompete can be signed at the beginning of employment and requires certain disclosures by the employer. For noncompetes with existing employees, “fair and reasonable” consideration beyond continuing employment must be provided, although this term is not defined.
The law directs state courts to scrutinize noncompetes in terms of their scope and geographic limitations, which must be tailored to the employee’s actual job responsibilities prior to departure. The new law exempts confidential information agreements, as well as customer and employee nonsolicitation restrictions from its coverage. It bans use of noncompetes with non-exempt workers, although employers are already limited in their ability to place these employees under post-employment restrictions. Noncompetes included in a business purchase agreement are not covered by the legislation.
It is somewhat surprising that these changes came out of Massachusetts. That state’s burgeoning technology sector has in the past made it relatively employer-friendly in terms of enforcement of noncompete agreements. This legislation may signal the beginning of a wave of efforts to limit the use of post-employment noncompetes viewed as unfair to employees looking to change jobs. Assuming it is signed by the governor, the new Massachusetts law takes effect for agreements entered into on or after October 1, 2018.