Question

I have been hearing recently about a federal effort to ban non-compete agreements. Is it really going to happen?

Answer

There is an effort by the US Federal Trade Commission (FTC) to ban non-compete agreements across the country. Is it going to happen? Maybe.

The federal rulemaking process is usually lengthy, complex and contentious. And it often ends up in the courts. Recall the effort to have the Occupational Safety and Health Administration (OSHA) issue COVID vaccine requirements in 2021 or the Fair Labor Standards Act (FLSA) white collar regulations in 2016. Both proposals were adopted by enforcement agencies but ultimately nullified by court decisions.

Bottom line – The proposal is high profile, underscored by the fact that the President referenced it in his State of the Union speech, but we can expect a long wait until it takes effect, if it does.

Several states enforce restrictions on the use of non-compete agreements within their borders. California, North Dakota, Oklahoma, and Washington, D.C., have outright bans on non-compete agreements. Other states focus on protecting lower-income workers from the adverse consequences of having to sign a non-compete agreement. That list of states includes Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington.

Any AIM member with operations in any of those jurisdictions should check for the dollar threshold as it varies by state ranging from $30,000 a year in New Hampshire to $100,000 a year or more in Oregon, Washington, and Colorado.

Massachusetts passed a non-compete law in 2018.

Under the law, a non-compete agreement (NCA) is defined as an agreement between an employer and an employee in which the employee or expected employee agrees that he or she will not engage in competitive activities with his or her employer after the employment relationship has ended. In return, the employer must provide consideration (defined below) to the employee or an applicant who has been offered a position.

In general, NCAs place limits on the ability of a former employee to take information from her or his current employer to compete against the former employer in a defined area for a defined time period. The courts must consider on a case-by-case basis whether the NCA is reasonable in purpose, geography and time. The Massachusetts statute reframes the NCA discussion by dramatically limiting the scope of the purpose, geography and time criteria of all NCAs.

Some of the other key provisions in the law include a “garden leave” provision and a specific limitation on the categories of employees subject to an NCA.

Under the Massachusetts non-compete law, the agreement must meet the following requirements:

1. Post offer of employment (for new employees) – It must be in writing and signed by both the employer and the incoming employee and expressly state that the employee has the right to consult with counsel prior to signing. It must be provided to the incoming employee by the earlier of the following: a formal offer of employment or 10 business days before the commencement of the employee’s employment.
2. Existing employees – It must be in writing, signed by both parties, and supported by fair and reasonable consideration (something of value) apart from continued employment. Notice of the agreement must be provided at least 10 business days before the agreement is to be effective. It must include language stating that the employee has the right to consult with counsel prior to signing.
3. Purpose – It must be limited to what is necessary to protect one or more of the following legitimate business interests of the employer: the employer’s trade secrets, as defined by state law; the employer’s confidential information, which would otherwise not qualify as a trade secret; or the employer’s goodwill. It will be presumed necessary in cases in which the legitimate business interest can’t be protected any other way.
4. Duration – An NCA is capped at 12 months from the end of employment. It can be extended to up to 24 months if the employee has breached a fiduciary duty to the employer or has unlawfully taken property belonging to the employer.
5. Geography – The agreement must be reasonable in geographic reach in relation to the interests protected. A geographic reach that is limited to only the geographic areas in which the employee, during any time within the last 2 years of employment, provided services or had a material presence or influence is presumptively reasonable.
6. Period of covered employment – It must be reasonable in scope to protect a legitimate business interest and is limited to the specific types of services provided by the employee at any time during the previous two years of employment.
7. Consideration – It must be supported by a garden leave clause or other mutually agreed upon consideration between the employer and the employee. The garden leave must provide for the payment of at least 50% of the employee’s highest annualized base salary paid within the two years preceding the employee’s termination and not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments unless the period has been increased beyond 12 months due to a breach (see number 4 above).
8. Public Policy – The agreement must be consonant with public policy.

In a 2022 decision, a Massachusetts court considered the question of whether a specific NCA was enforceable. The court determined that the NCA failed on at least two counts. First, it took effect immediately without the employee receiving at least 10 days’ advance notice and, second, the 2020 NCA did not expressly state that the employee had the right to confer with an attorney before entering into the NCA.

An employer may not use an NCA for certain classes of employees, including:

• non-exempt employees under the Fair Labor Standards Act;
• undergraduate or graduate students in an internship or a short-term employment program with an employer, whether paid or unpaid, while enrolled in a full-time or part-time undergraduate or graduate educational institution;
• employees terminated without cause or laid off; and
• employees aged 18 or younger.

NCAs may include:

• Covenants not to solicit or hire employees of the employer;
• Covenants not to solicit or transact business with customers, clients, or vendors of the employer;
• NCAs made in connection with the sale of a business entity, or substantially all of the operating assets of a business entity or partnership, or the disposal of the ownership interest of a business entity or partnership (or division or subsidiary thereof) when the party restricted by the noncompetition agreement is a significant owner of, or member or partner in, the business entity that will receive significant consideration or benefit from the sale or disposal;
• Non-competition agreements outside an employment relationship;
• forfeiture agreements;
• Non-disclosure or confidentiality agreements;
• Invention-assignment agreements;
• Garden leave clauses;
• Non-competition agreements made in connection with the cessation of or separation from employment if the employee is expressly given 7 business days to rescind acceptance; or
• Agreements by which an employee agrees to not reapply for employment to the same employer after termination.

Final thoughts

The Massachusetts law may prompt employers to consider whether having employees sign a non-compete is worth it. Part of that evaluation will be whether the employer is prepared to enforce the NCA in the event of a breach. Consult with outside legal counsel to evaluate all the possible options and ensure compliance with the law.

AIM members with questions about this or any other human-resources issue may call the AIM Employer Hotline at 1-800-470-6277.