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Posted on June 13, 2022
Two common employment-law agreements used by AIM members are non-competes and releases of claims.
It is crucial to understand the potential complexity of using one or both of these agreements. An employer considering these documents needs to consult with legal counsel to ensure that the final agreement complies with the law and is thus enforceable.
Massachusetts adopted a law in 2018 governing noncompete agreements (NCAs). The statute took the place of the long-standing practice of NCAs being interpreted and enforced through the courts. The law did not ban the use of NCA’s, but it altered the terms under which they may be used.
Key provisions of the law include the definition of a non-compete agreement, specific limits on duration and geography, a “garden leave” provision and a specific limitation on the categories of employees subject to an NCA.
The law defines an NCA as an agreement (i.e. a contract) between an employer and an employee in which the employee agrees not to engage in competitive activities with the employer after the employment relationship has ended. In return, the employer must provide consideration (defined below) to the employee.
An NCA must include the following to meet the requirements of the statute:
New employees – The document must be in writing and signed by both the employer and the new employee. The NCA must expressly state that the employee has the right to consult with counsel prior to signing. The agreement 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.
Existing employees – The NCA 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.
Purpose – The NCA must be limited to what is necessary to protect the following legitimate business interests of the employer:
An NCA is presumed necessary when the legitimate business interest cannot be protected any other way.
Duration – NCAs are capped at 12 months from the end of employment unless it can be shown that the employee has harmed the employer by breaching a fiduciary duty or unlawfully taken property belonging to the employer. In such cases it may be extended to a maximum of 24 months.
Geography – The scope of an NCA must be limited to the areas in which the employee has provided services to the company or had a material presence during the previous two years of employment.
Period of covered employment – The NCA must be reasonable in scope to protect a legitimate business interest and limited to the specific types of services provided by the employee at any time during the previous two years of employment.
Consideration – An NCA has to be supported by a garden leave clause or another 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).
The agreement must be consonant with public policy.
The limitations on NCAs explicitly exclude the following types of restrictive covenants:
An employer may not require or enforce an NCA limiting the activities of certain classes of employees, including:
Using an NCA
Requiring one or more employees to sign an NCA demands significant preparation and planning. Questions to consider include which employees will be asked to sign, whether the employer is prepared to enforce it, and how to proceed if employees refuse to sign it.
There are relatively few court cases reported to date discussing the NCA statute, so many of the parameters of the law, such as garden leave agreement, purpose, and adequacy of consideration have not been fully explored.
At the same time, any employer considering an NCA must ensure it complies with the framework outlined above. The idea of using a boilerplate non-compete agreement downloaded off an Internet website invites future litigation. On the other hand, a well drafted NCA can save employers several headaches in protecting their interests.
Massachusetts also has industry/profession-specific laws prohibiting noncompete agreements for:
Release of claims
The other employment agreement members often consider is a release of claims. A release of claims allows a departing employee to waive many state and federal discrimination claims as well as some other legal claims in return for consideration. Consideration typically consists of a payment above and beyond money owed by the employer to the employee and/or the continuation of healthcare coverage funded by the employer. Unpaid wages and accrued but unearned vacation time cannot serve as consideration.
While a release of claims may give an employer reasonable assurance of protection against future litigation, there are certain rules an employer must be aware of before implementing a release of claims. For an employee to waive rights to file an age discrimination claim, the federal Older Workers Benefits Protection Act requires that the release be drafted in such a way to address the following for employees 40 years of age or older:
The Massachusetts Commission against Discrimination (MCAD) has developed its own framework regarding the use of release of claims agreements. Its criteria include:
(1) clarity and comprehensibility to a layperson;
(2) whether the release specifically references the statutes waived;
(3) whether the employee was aware of any discrimination claims at the time the release was executed;
(4) the “nature of the discussion” between employee and employer at the time of execution;
(5) whether the employee had an opportunity to negotiate;
(6) whether the employee was encouraged to, or did, consult a lawyer;
(7) whether the employee had a “reasonable” time to consider the release;
(8) the employee’s sophistication; and
(9) whether the release purports to waive future claims.
Employers should be aware that certain potential claims cannot be waived. These include:
Massachusetts law recognizes a limited exception to the prohibition on wage claim releases if the release is:
The circumstances surrounding the decision to use one or both agreements will be fact-specific. Both agreements are extremely complex and can easily backfire if not drafted by a knowledgeable employment law attorney.
AIM members with questions about this or any other human resources issue may call the AIM Employer Hotline at 800-470-6277.