By Jeffrey M. Rosin and Ari N. Stern, Esqs.

There is a new non-compete law in Massachusetts that goes into effect October 1, 2018, but franchisors, franchisees, and other businesses that operate in Massachusetts can breathe a sigh of relief as to certain aspects of it. The new law focuses solely on non-compete provisions contained in employment and independent contractor agreements and does not concern non-compete provisions contained in agreements for the sale of a business. Those latter provisions will continue to be subject to enforcement under traditional, more relaxed principles of common law. In this way, franchisors, franchisees, and other businesses operating in the Commonwealth can continue to fortify themselves from competition upon sales or transfers in a more robust, comprehensive manner than what is provided for by the new law.

Notwithstanding this, as detailed below, the new law merits careful consideration by any and all employers operating in Massachusetts, franchise entities included.  Because the new law applies to employers’ non-compete agreements with employees and independent contractors, and because it is safe to say that almost all franchisors and franchisees tend to have at least one such relationship, franchisors and franchisees are bound by the new law with regard to their employees and independent contractors.

The New Massachusetts Non-Compete Law: Some Good News for Businesses

The new non-compete law is prospective in nature. It does not pertain to any non-compete provision contained in any agreement entered into prior to October 1, 2018.  In this regard, all businesses operating in the state could rest on the commitments in their current non-compete agreements with employees and independent contractors. Whether this would be a sound strategy is up for debate, however, as arguments about these “old agreements’” enforceability will undoubtedly reference the “public policies” evident in the new law as to why these “old agreements” should not be enforced, to the extent they conflict with the new law.

The new non-compete law also do not apply to non-solicit or other types of restrictive covenant agreements. In other words, even new contracts that are signed on and after October 1, 2018 can continue to limit solicitations of customers and employees without regard to the new law.

A General Overview of the New Non-Compete Law

The new law completely forbids non-compete covenants for certain individuals: (a) college or graduate students who serve as interns; (b) employees who are eighteen-years-old or younger; (c) employees subject to a reduction in force or who are terminated “without cause”; and (d) employees classified as “non-exempt” under the Fair Labor Standards Act (“FLSA”).  The last two categories are notable. As for category (c), if a company terminates an employee “without cause,” it cannot enforce a non-compete. This begs the question of whether broad “for cause” provisions need to be drafted into employment agreements.  As for category (d), there is substantial law and litigation about whether employees are properly “exempt” or “non-exempt.”  Here in Massachusetts, we will now see this battleground in the cases of non-compete enforcement.  No doubt, certain employees will now defend against enforcement of non-compete by arguing they were not properly classified as exempt.

Others who may not fall into one of these four categories may be afforded significant protection from non-competes under the new law. The new law protects any employee or independent contractor who is a Massachusetts resident, or has been employed in the Commonwealth, for a minimum of 30 days immediately prior to termination. For example, an individual who resides in Rhode Island or New Hampshire but who is employed in Massachusetts by a franchisor or franchisee is protected by the new law so long as he or she meets that 30-day threshold of employment prior to termination. Similarly, and as another example, an individual who executes an employment agreement with a franchisor or franchisee outside the Commonwealth and who at that time resides outside the Commonwealth, but who is subsequently transferred by the franchisor or franchisee to the Commonwealth for work purposes, is covered by the new law so long as that “30 day” requirement is met.

A business wishing to enforce a non-compete provision against a former employee or independent contractor must establish that the provision meets certain statutory requirements.  For example, but without limitation, the non-compete provision must be part of a written agreement that is signed by both the business and employee/independent contractor, and the agreement must expressly state that the employee/independent contractor has the right to have the agreement reviewed by counsel prior to execution.  Additionally, and also without limitation:

• The agreement containing the non-compete provision must be provided to the prospective employee “before a formal offer of employment is made or 10 business days before the commencement of the employee’s employment, whichever comes first[.]”
• The non-compete provision must be supported by a “garden leave” clause or an express provision related to some other form of “mutually-agreed upon consideration.” Whether a form of “mutually-agreed upon consideration” is sufficient for purposes of the law is a matter that likely will be litigated in the courts, as the term “mutually-agreed upon consideration” is not defined by the statute (e.g., if you’re a quick service restaurant, will one year’s worth of free coffee or dessert suffice?). By comparison, for a “garden leave” clause to be sufficient under the statute, it is expressly defined to mean “payment . . . on a pro-rata basis during the entirety of the restricted period of at least 50 per cent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding the employee’s termination . . . .”
• The non-compete provision, like those drafted prior to October 1, 2018, must still be reasonable in terms of geography, time, and scope of activity. Notably, with regard to “time”, a non-compete provision may be for no longer than 1 year with the exception that if the former employee/independent contractor breaches his or her fiduciary duty to the business or steals the business’ property, the non-compete provision may be extended for up to 2 years.

A Special Note to Franchise Entities and Other Businesses Under the New Law

In the franchise business community, franchisors and franchisees may often insert a “choice of law” provision into an employment agreement that requires the agreement’s terms to be construed under the law of the franchisor’s/franchisee’s home state. Similarly, a franchisor or franchisee will often insert a “jurisdictional” provision into an employment agreement that provides exclusive jurisdiction in the event of disputes to be: (1) in the office of an alternative dispute resolution provider located near the franchisor/franchisee; and/or (2) a federal or state court located near the franchisor/franchisee. For franchisors and franchisees with a principal place of business outside the Commonwealth and who operate in Massachusetts, such provisions are likely to now be invalidated under the new law.

The new law expressly requires that any non-compete provision applicable to an employee in Massachusetts be construed under Massachusetts law, irrespective of any “choice of law” provision. Additionally, to enforce a non-compete provision against a former employee or independent contractor, a business must bring an action in the former employee’s/independent contractor’s county of residence, or, if mutually agreed-upon, in the Business Litigation Session of the Suffolk County (MA) Superior Court.

As a result, franchisors and franchisees (as well as other businesses) with a “home state” other than Massachusetts should closely examine the “choice of law” and “jurisdictional” provisions contained within their employment agreements, as well as those generally related to dispute resolution, to ensure compliance with these matters.

With Labor Day now passed, under 30 days remain for businesses operating in Massachusetts to become fully acquainted with the requirements of the new law. For a comprehensive review of your employment agreements and for counseling on best employment practices, please contact your O’Hagan Meyer attorney.