Massachusetts Senate passed a competing version of noncompete reform with its own twists

July 18, 2016

Employment Law Alert

Author(s): David S. Rosenthal, Matthew J. Frankel

On Thursday, July 14, 2016, the Massachusetts Senate debated, and passed, its own version of non-competition reform. It differs in important ways from the bill approved on June 29, 2016, by the House of Representatives. (Please see our alert dated July 1, 2016, explaining the key provisions of the House bill.) The legislation will now be referred to a conference committee to work out the differences. The stated goal of the legislature is to pass a compromise bill before the legislature adjourns for its summer vacation. Given the key differences, it is not clear whether a compromise can be reached.

In a number of respects, the Senate bill is more employee-friendly than the House counterpart:

  • With respect to the “garden leave” provision, the Senate version provides for payment of 100% of an employee’s “highest annualized earnings within the 2 years preceding the employee’s termination” during the restricted period, rather than the 50% of “base salary” stipulated in the House bill. The reference to “earnings” could include other forms of compensation, thus making the garden leave requirement more expensive for employers.
  • The Senate version limits the maximum duration of restrictive covenants to three months, rather than the twelve months approved by the House, with certain exceptions that are the same in the House and Senate bills.
  • The bill passed by the Senate takes away from the courts the ability to “blue-pencil,” or reform, covenants that are determined to be overly restrictive, a major departure from the House bill and long-standing Massachusetts law. This change in existing law, by itself, would cause Massachusetts employers to substantially narrow restrictions, because overly broad agreements would be stricken altogether, rather than being narrowed to an extent acceptable to the court, which is what the law permits now.
  • The Senate bill provides that non-competition agreements may not be used with lower wage workers (defined as those who earn “less than 2 times the average weekly wage in the Commonwealth”) thus adding an additional category of persons for whom noncompetition agreements are banned.

The points of agreement between the Senate and House bills are many, and significant. Most important: both houses agree that non-exempt employees and independent contractors cannot be restricted by non-competition agreements, leaving large (and increasing) numbers of employees totally free from such restrictions; both houses agree that employees who are terminated without cause or as part of a reduction in force cannot be subject to non-competition restrictions; and the law will apply if enacted, to agreements entered into on and after October 1, 2016.

As we pointed out in our earlier alert, this major change in the employment law of Massachusetts, if enacted, will require Massachusetts employers (including out-of-state employers that employ Massachusetts residents) to rethink noncompetition terms for new employees and/or existing employees who may become subject to new agreements, their hiring practices and how they are going to protect trade secrets, confidential information and company goodwill from misuse and misappropriation by departed employees. Members of Nixon Peabody’s Labor and Employment group will continue to keep you updated on legislative developments and are available to assist employers with these and other labor and employment matters.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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