Home Posts tagged non-competes
Employment

Let the Buyer Beware

By Alexander Marsh and Jeremy Saint Laurent, Esq.

 

Historically, non-competition agreements have been a useful tool for employers to protect their businesses, financials, and proprietary information when a departing employee leaves the company to work for a competitor. Over the past decade, the ways in which non-competition agreements can be used has been restricted.

Indeed, Massachusetts has significantly limited the functionality of non-competes, and California has barred them altogether. Recently, the federal government, vis-a-vis the Federal Trade Commission, has limited their use in corporate mergers and acquisitions.

“In October 2018, Massachusetts practically banned non-competes through the creation of very specific and strict requirements. As a threshold matter, non-competes in Massachusetts cannot be freely used and, rather, must protect a legitimate business interest.”

Alexander Marsh

Alexander Marsh

Jeremy Saint Laurent

Jeremy Saint Laurent

Just four years ago, in October 2018, Massachusetts practically banned non-competes through the creation of very specific and strict requirements. As a threshold matter, non-competes in Massachusetts cannot be freely used and, rather, must protect a legitimate business interest. The definition of legitimate business interest is limited to trade secrets, confidential information of the employer that otherwise does not qualify as a trade secret, or the employer’s good will.

Other alternative restrictive covenant, such as non-solicitation, non-disclosure, and/or confidentiality agreements, must be explored prior to resorting to a non-compete.

Massachusetts further tightened up the ability to implement non-competes by creating a litany of other requirements. The non-compete must:

• Be in writing;

• Be signed by both the employer and the employee and state that the employee has a right to consult a lawyer before signing the agreement;

• Provide notice of the agreement to the employee (the notice requirements change depending on when the employee is asked to sign the agreement); and

• Occur at the beginning of employment or provide notice of the agreement no less than 10 business days before the agreement would become effective and provide additional compensation.

The conduct 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.

It is against public policy in Massachusetts to allow for non-compete agreements in certain professions. Non-competes signed by nurses, physicians, psychologists, social workers, and certain employees of broadcasting companies are considered void in Massachusetts. 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.

Additionally, a non-compete agreement is not valid against a low-wage employee. The law states that employees who are classified as ‘non-exempt’ (typically, employees eligible for overtime pay and hourly wages) under the federal Fair Labor Standards Act 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. These workers are not bound by the terms of any non-compete agreement that they have already signed with their employer.

Now, on the federal side, non-competition agreements are coming under scrutiny through corporate mergers and acquisitions. The primary rationale for restricting them is public-policy concerns.

Traditionally, non-compete agreements as part of a corporate merger or acquisition were quite broad in scope and geography. The reason for their broad coverage makes sense: the sale of a business is primarily based upon good will. Buyers understandably would require broad non-competition coverage so, post-sale, they are not competing against a seller who may start or work for a competitor company. In other words, in a business sale, to protect its interest in the business, the buyer would want to restrict the seller’s ability to compete against it.

However, the Federal Trade Commission recently restricted the ability of a buyer to require broad, sweeping language in non-competes. Rather, they must be limited to what is specifically needed to protect portions of the business.

What does all of this mean for companies? Knowing how to properly craft a valid, legally enforceable non-competition agreement is paramount. As with other restrictive covenants, non-competition agreements should be used sparingly and tailored as narrowly as possible to adequately protect your client’s legitimate business interests without being overly restrictive to the employee.

Generally, a one-year duration is considered to be reasonable. Depending on the circumstances, it may be possible to protect your client with a non-compete that has a shorter enforcement period. Again, as a rule of thumb, the shorter the length of restriction, the more likely the non-compete will be enforceable. It may also make sense to explicitly prohibit competition during employment.

 

Jeremy Saint Laurent, Esq. is a litigation attorney who specializes in labor and employment law matters at the Royal Law Firm LLP, a woman-owned, women-managed corporate law firm that is certified as a women’s business enterprise with the Massachusetts Supplier Diversity Office, the National Assoc. of Minority and Women Owned Law Firms, and the Women’s Business Enterprise National Council; (413) 586-2288. Alexander Marsh is a legal assistant at the Royal Law Firm LLP.

Employment

Language Course

 By Timothy M. Netkovick, Esq.

Big changes may be on the horizon regarding non-competition agreements. For the first time, there may be legal restrictions on the terms of those agreements, and, in a major development, employers may be required to pay former employees during the non-compete period.

This is the result of a bill passed by the Massachusetts state legislature that, if signed by Gov. Baker, will mandate the timing of non-competition agreements, the employees who can enter into those agreements, and certain language within the agreement.

Timothy M. Netkovick, Esq

Timothy M. Netkovick, Esq

Employers use non-competition agreements in order to protect their business interest in the event an employee leaves the company and begins to work for a competitor. In that scenario, the now former employee could be motivated to entice clients to their new place of business or to use confidential information of the former employer for the benefit of a competitor.

Historically, there has been little restriction on the contents of a non-competition agreement other than what terms would be enforced by a court in the event of a dispute. However, that may be about to change. If signed by Gov. Baker, the bill states that a non-competition agreement will need to include:

• A reasonable geographic reach in relation to the interest sought to be protected;

• A reasonable scope of the activities prevented;

• That the agreement be supported by a garden-leave clause (more on that later); and

• That the agreement comply with public policy.

The new bill is the result of the Legislature’s perception that non-competition agreements have become overused in the Commonwealth. As such, the bill requires that certain steps be taken at each stage of the employment process. At the outset, the bill mandates that non-competition agreements are unenforceable against:

• Nonexempt employees under the Fair Labor Standards Act (hourly workers);

• Interns;

• Employees terminated without cause or due to layoff; and

• Employees under 18 years old.

In a typical scenario, non-competition agreements are entered into at the beginning of the employment relationship, and can be included as part of the employee’s ‘on boarding’ documents, along with a copy of the Employee Handbook and other standard documents.

The Legislature’s apparent concern is that an employee could sign a non-competition agreement without understanding what they are signing.

In order to protect employees, the bill requires that a non-competition agreement must be entered into by the earlier of a formal offer of employment or 10 business days before the start of employment. In addition, the agreement must be signed by both the employer and the employee and, further, must include a statement that the employee has the right to consult with counsel of their choosing prior to entering into the agreement. In effect, this makes a non-competition agreement the subject of a separate negotiation well prior to the first day of employment.

In the event the agreement is entered into after employment has started, the bill requires that there be a 10-day waiting period before the agreement becomes effective, and that it include the same statement that the employee has the right to consult with counsel of their choosing prior to entering into the agreement.

The bill further requires that “fair and reasonable consideration” be exchanged in order to support the agreement. The bill doesn’t state what “fair and reasonable consideration” is, however, it specifically states that “fair and reasonable consideration” must be more than just the employee’s continued employment.

Since there is no definition of “fair and reasonable consideration,” there can be a variety of potential interpretations as to what that phrase means. Could it be a raise for the employee to support the agreement? A bonus? Unfortunately, the legislation is silent. However, it is clear from the overall text of the legislation that the intent is for more than just nominal consideration, i.e. $1.00.

For the most part, once the agreement is signed, the bill adapts the standards typically used by Massachusetts courts in enforcing non-competition agreements in terms of duration and scope. For instance, Massachusetts courts have typically held that non-competition agreements are enforceable so long as they are reasonable in time and scope.

Courts have also typically interpreted non-competition agreements narrowly in terms of enforcing the agreement for a short period of time and limited to the areas where the employee actually performed services for the former employer. In addition, several professions are exempt from non-competition agreements due to public policy reasons, such as doctors and lawyers.

The major potential change is the requirement for employers to pay their former employees during the non-compete period. Under the bill, the agreement must be supported by a “garden leave clause” or other mutually agreed upon consideration. The bill defines a “garden leave clause” as 50% of the employee’s highest annualized salary within the two years preceding termination. In effect, employers will be required to pay the former employee not to work during the non-compete period.

In addition to the other provisions put in place, it seems that the Legislature’s goal is to provide an additional disincentive for an employer to enter into a noncompetition agreement unless the employer views it as absolutely necessary for a legitimate business interest. Given the other restrictions in terms of the category of employees specifically excluded from entering into non-competition agreements, it’s clear that the Legislature intends for non-competition agreements to apply to only executive or upper level management.

If enacted, these new requirements will require employers to review and modify their existing non-competition agreements. Employers will want to monitor the situation and consult their employment counsel regarding any revisions that may be necessary before they seek to enter into new agreements, or run the risk that those agreements will be unenforceable when the employer needs them the most.

Timothy M. Netkovick, an attorney at Royal, P.C., has 15 years of litigation experience. He has successfully tried several cases to verdict. In addition to his trial experience, he has specific experience in handling labor and employment matters before a variety of administrative agencies including the Mass. Commission Against Discrimination, Equal Employment Opportunity Commission, National Labor Relations Board, and Department of Industrial Accidents. He also assists employers with unionized workforces during collective bargaining, at arbitrations, and with respect to employee grievances and unfair labor practice charges; (413) 586-2288.

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