A number of companies require that employees sign agreements promising they will not compete with their employer after they have left their job. These agreements are often in the form of a provision within a larger employment contract or may constitute a separate document altogether.
Certain requirements must be met before a non-compete agreement can be enforced in Massachusetts. If you are an employer who wishes to include a non-compete agreement in your employment contracts, or you are a person subject to one yourself, you should consult with an experienced Massachusetts attorney.
Elements of a Valid Non-Compete Agreement
A non-compete agreement is a contractual promise which prohibits one of the contracting parties, typically an employee, from engaging in conduct which is competitive with the other contracting party, typically an employer. As of October 1, 2018, non-compete agreements are generally banned in Massachusetts unless they meet certain strict statutory requirements.
The agreement must be
- in writing,
- signed by both the employer and the employee, and
- the agreement must state that the employee has a right to consult a lawyer before signing the agreement.
The employer is also required to provide notice of the agreement to the employee. The notice requirements change depending on when the employee is asked to sign the agreement.
- Beginning of Employment: When an employee is asked to sign the agreement at the beginning of his or her employment, the employer must provide a copy of the agreement to him or her before making a formal offer, or ten days before the employee starts, whichever is first.
- During Employment: When an employee is required to sign a non-compete in the middle of his or her employment, the employer must give notice of the agreement no less than ten business days before the agreement would become effective.
Certain requirements under the "common law" have been changed and clarified under Massachusetts statutory law.
Non-compete agreements are enforceable if:
- They are reasonable in duration, geographic area, and scope.
- They are necessary to protect a legitimate business interest.
- The agreement is consonant with public policy.
- They contain a "garden leave" clause.
Only an agreement that is reasonable will be enforced by Massachusetts courts. Reasonableness is tested on a factual basis and takes into account the circumstances of the parties and the public interest. Non-compete agreements must not exceed a reasonable duration, which is defined by statute as no greater than one (1) year following the termination of the employee's employment. One exception to this exists in cases where an employee breaches a fiduciary duty, in which case the time duration is then two (2) years.
The agreement must also be reasonable in terms of geographic scope. It will be presumed reasonable in geographic scope if
- it is limited to the geographic areas in which the employee provided services or had a material presence or influence within the last two years of employment, and
- it is limited to the specific types of services the employee provided during the last two years of employment.
The scope of the agreement relates to the conduct prohibited. The scope should not exceed the activities the employee participated in during the employment period or other reasonable restrictions to protect a legitimate business interest.
2. Legitimate Business Interest
In Massachusetts, a non-compete is only enforceable to protect a legitimate business interest. Certain recognized interests include
- the protection of trade secrets;
- confidential information such as client lists, computer data, and business plans; and
- customer goodwill.
Non-compete agreements may not be used to prevent ordinary competition or deprive the employee of the right to use skills acquired during employment that do not fit within a protected interest.
3. Public Policy Concerns
The conduct which the agreement seeks to prevent must not violate the public interest. Generally, public policy favors an employee's ability to move from one job to another without restriction. Only a narrowly tailored agreement to protect a legitimate business interest will fit within public policy.
4. "Garden Leave" Clause
Non-compete agreements must also contain a "garden leave" clause or some other form of mutually agreed-to consideration. This type of clause requires the employee to pay the employee at least 50 percent of his or her highest salary within the last two years during the duration of the non-compete period.
This requirement is relieved if the employee breaches the non-compete agreement.
Professions Where Non-Competes Are Common
While non-compete agreements may be found in a variety of situations, there are certain professions where these agreements are more common.
- Sale of a Business: After the sale of a business, it is common for a provision of the sale contract to prohibit the seller from competing with the buyer for a certain period of time.
- Tech Companies: Companies that develop and sell technology and software commonly include non-competes to protect trade secrets.
- Executives: Higher level executives for companies are often subject to a non-compete agreement because of their specialized and in-depth knowledge of the company for which they work.
- Franchise Agreements: Franchise agreements commonly include non-compete provisions because of the trade secrets and business plans the franchisee has access to.
Where Non-Competes are Prohibited
As a matter of public policy, Massachusetts has enacted legislation which bars the use of non-compete agreements for certain professions:
- Social Workers,
- Broadcasters, and
It is against public policy in Massachusetts to allow for non-compete agreements with these specific professions. This is to protect public health and the free flow of information and ideas. A non-compete agreement in any of these areas is unenforceable as a matter of law.
Under Massachusetts law, a non-compete is not valid against a low-wage employee. The law states that employees who are classified as "non-exempt" under the FLSA may not be required to sign a non-compete agreement.
Non-competes are also prohibited or unenforceable when an employee is terminated without cause or laid off. This would not be true if the employee was terminated with cause.
To Fight or Enforce - The Legal Process
If an employee violates the terms of a non-compete agreement, an employer can file a lawsuit to enforce the agreement. The burden of proof rests with the employer in such a lawsuit. This means that the employer must prove that the non-compete satisfies the elements listed above and that the employee signed the non-compete agreement.
The lawsuit must be brought in the county where the employee resides, or in Suffolk County if the employer and employee mutually agree to litigate the case there.
If an employee breaches a non-compete, and the employer has satisfied its burden of proof as to the elements, an employer may receive money damages or possibly an injunction. Money damages may include lost profits, out-of-pocket expenses, or other financial damages that result from the breach.
An injunction is a court order that prevents a person from engaging in a specific act or compels that person to engage in a specific act. In the non-compete context, the typical injunction is to prevent the employee from working for a new employer.
To obtain an injunction, an employer must prove
- The likelihood of success on the merits,
- That irreparable harm will occur if the injunction is not granted, and/or
- That there is a risk of irreparable harm to the employer.
Injunctions are equitable remedies and are common in non-compete cases so long as the requisite requirements are proven.
An employee who is the subject of a lawsuit may defend themselves from the agreement in certain ways. Non-compete agreements are interpreted in favor of the employee because courts do not wish to take away an employee's livelihood and the employee has a weaker bargaining position.
First, an employee may show that the non-compete does not meet the elements of a valid agreement. If the non-compete agreement violates any of the essential elements, Massachusetts courts will not enforce the agreement. Non-competes are contracts, and as such contractual defenses also apply.
Another possible remedy is the use of the "blue pencil," or the power of a Massachusetts court to reform the terms of the non-compete agreement so that unreasonable provisions are transformed to become reasonable. This may include the reformation of the geographical area covered by the agreement or the duration of the agreement. However, employers should not rely on this "blue pencil" as this is completely within the court's discretion. An enforceable agreement from the start is a much better option.
Knowing the Law
Non-compete agreements are subject to very specific legal requirements. If your company intends to use non-compete agreements in contracts or wishes to enforce an agreement, or if you are an employee who is the subject of a lawsuit, you should contact an experienced Massachusetts attorney for help.
The attorneys with the Katz Law Group can ensure compliance with Massachusetts law and protect your rights in non-compete agreements. Please feel free to call us at 508-480-8202 or contact us on our website.