In the past few years, more legislators have shown persistent hostility toward non-competition agreements in employment contracts. In adopting the Massachusetts Noncompetition Act (MNCA) in 2018, Massachusetts legislature played a major part in this catalyst movement of restricting non-competes.
The MNCA dramatically restricted and placed limits on non-competes within the State. As a result, non-competes in Massachusetts are now far more expensive to implement, and certain types of employees are exempt from non-competes.
The bigger impact following the adoption of the MNCA is that Massachusetts provided a roadmap for several other states to further restrict their own non-competes.
What is a Non-Competition Agreement?
In its simplest form, a non-competition (a/k/a “non-compete”) agreement is a legal agreement or clause in a contract specifying that an employee must not enter into competition during the term of the agreement and for a timeframe after employment is over. The purpose is to protect the legitimate business interests of the former employer, which can include confidential information and trade secrets. The non-compete typically outlines how long the employee must refrain from working with a competitor, the geographic location, and/or the market.
What is the MNCA?
The MNCA is Massachusetts’ non-compete law which substantially limits employers’ ability to restrain employees through non-compete agreements. Under the MNCA, employers must now meet several requirements for a non-compete to be valid and enforceable. Not only must the agreement be in writing, but it must explicitly state that the employee has the right to consult with an attorney prior to signing the agreement. Further, the employee must be given a 10-day notice period before the agreement becomes effective. The MNCA also requires that non-compete agreements are supported by “fair and reasonable consideration” independent of continued employment. Along with complying with reasonable time and geographic restrictions, the non-compete agreement must also protect a “legitimate business interest” as defined by the statute, and it must be consistent with public policy. Most notable amongst the requirements is the employer’s obligation to include a “garden leave” provision in the non-compete agreement.
What is Garden Leave?
A garden leave clause is a provision requiring an employer to pay an employee post-employment during the restricted time period specified by the non-compete agreement. The term is derived from the idea that the employee can stay home from work and mosey in his garden. Specifically for MNCA garden leave, the statute requires employers implementing a non-compete agreement to “provide a payment of at least 50% of the employee’s highest annual salary on a pro-rata basis during the entirety of the restricted period.” Consequently, employers now have to decide whether entering into a non-compete agreement is worth compensating their employees during this restricted time period.
Does the MNCA Apply to All Employees?
The MNCA includes a specific provision that it is unenforceable for employers to enter into non-compete agreements with certain employees. In fact, the MNCA completely bans employers from entering into a non-compete agreement with students, minors, employees laid off or terminated without cause, and employees exempt under the Fair Labor Standards Act (FLSA).
Does the MNCA Apply to Existing Agreements?
The MNCA only applies to the non-compete agreements entered into after the adoption of the Act in 2018. Employers with existing non-compete agreements effective prior to 2018 do not need to revise their agreements pursuant to the MNCA.
Does the MNCA Apply to Health Care Professionals?
The MNCA does not explicitly mention health care professionals. This is because Massachusetts law contains other statutory provisions that prohibit non-competes in certain health care professions. Massachusetts employers are already prohibited by statute from restraining physicians, nurses, and psychologists through non-compete agreements and there have been efforts to pass legislation that would ban the use of non-competes for physician assistants as well.
How Has the MNCA Impacted Other States?
Since the MNCA was enacted in 2018, several other states have adopted legislature and proposed bills similar to the restrictive Massachusetts model, attempting to significantly limit their own non-compete laws. For example, recent amendments to the Illinois Freedom to Work Act now prohibit most employees’ ability to enter into non-compete agreements; however, it does permit agreements that include garden leave provisions. Also, a new Washington law prohibits an employer from enforcing a non-compete against a layoff employee unless the employer agrees to compensate the employee at an equivalent to the employee’s base salary for the period of enforcement. The Oregon Legislature also passed new restrictions following the Massachusetts approach. Employers in Oregon can only enforce non-competes by agreeing to pay the employee during the restricted period the greater of at least 50% of the employee’s annual gross base salary at the time of termination, or 50% of the median income for a four-person family. And finally, a proposed New Jersey bill – very similar to the Massachusetts model – would not only require employees be given advance notice and the opportunity to consult with counsel, but the bill also contains a garden leave provision that is even more favorable to employees than in Massachusetts.
What Is the Effect on Non-Competes for Health Care Professionals?
Massachusetts is also paving the way toward more restrictions on non-compete agreements in the health care profession. Indeed, the recent surge of states introducing bills focused on restricting non-competes is particularly prominent. States like Connecticut, Ohio, and Colorado have all proposed bills that would ban non-competes for physician contracts. Pennsylvania has also proposed a ban on non-competes in all health care practitioner’s employment contracts.
A Nationwide Movement Toward Restricting Non-Competes
Not only are other states implementing laws modeled after the MNCA, but the model is being adopted on a federal level as well. In 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy. Even though the Executive Order by itself does not implement or change any current federal law, it does encourage the Federal Trade Commission to move towards restricting non-competes throughout the nation.
Consider a Non-Compete Agreement with ByrdAdatto
While non-compete agreements can be advantageous to a medical practice or business, employers must ensure their non-competes are compliant with state law. In an area of law that is constantly changing, expert guidance is essential. If you are considering a non-compete agreement, contact ByrdAdatto at email@example.com to set up a consultation.
We are grateful for the significant research and drafting contribution to this article from our Law Clerks, Abi Altick and Clint Nuckolls. Abi and Clint are students at SMU Dedman School of Law.