Connecticut Employees Living in MA Gain Greater Protections When Entering into CT Non-Compete Agreements

Connecticut companies with employees who live or work in Massachusetts must comply with a recently passed Massachusetts law governing non-compete agreements. The new law applies to non-competes entered into on or after October 1, 2018 with any employee or independent contractor who lives or works in Massachusetts.

Significantly, the law makes unenforceable any non-compete entered into with a non-exempt employee, undergraduate or graduate student who is engaged in short-term employment, and employees who are 18 years old or younger. Also, a pre-termination non-compete will not be enforceable if the employee is subsequently terminated without cause, or is laid off. However, in such circumstances the parties could enter into a separation agreement containing a non-compete, provided the terminated employee is given 7 days to review the agreement before signing, and the terms are reasonable under existing Massachusetts common-law.

The statute defines a “non-compete agreement” as any agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that the employee will not engage in certain specified activities competitive with the employee’s employer after the employment relationship has ended. The law also applies to “forfeiture for competition agreements,” which is any agreement that imposes adverse financial consequences on a former employee as a result of the termination if the employee engages in competitive activities.

If a non-compete is negotiated at the commencement of employment, it must be in writing, signed by both parties, expressly state the employee’s right to consult with counsel, and presented to the employee either when a formal employment offer is made to the employee, or 10 business days before the employee starts work, whichever comes first.

If a non-compete is negotiated after employment has begun, it must provide a right to review with counsel, a 10-day review period, additional “fair and reasonable consideration,” which likely means something more than continued employment, and be signed by both parties.

In addition, the law places limits on the geographic scope, duration, and protectable interests an employer may use to justify the non-compete. Specifically, the geographic scope will be presumed reasonable as long as it is limited to the geographic areas in which the employee “provided services or had a material presence or influence” at any time in the employee’s last 2 years of employment. Further, non-competes cannot be more than one year in duration, unless the employee is shown to have breached a fiduciary duty or has unlawfully taken the employer’s physical or electronic property, in which cases the employer may toll the restrictive period for up to two years. The law continues the general concept that a non-compete must be no broader than necessary to protect the employer’s legitimate business interests, but goes further by requiring an employer to show that no other type of restrictive covenant, such as a non-solicitation agreement or non-disclosure agreement, would be sufficient to protect the legitimate business interest at issue. Lastly, the non-compete will be presumptively reasonable if it only limits the employee from performing the specific types of services provided by the employee at any time during the last 2 years of employment.

A major component requires employers to make at least some type of payment to an employee to enforce the non-compete. The law requires a non-compete to be supported by a “garden leave clause” or “other mutually agreed upon consideration.” A “garden leave clause” would require an employer to pay, throughout the restriction period, at least 50% of the employee’s highest annual base salary in the 2 years preceding termination. Presumably, the parties could negotiate something less than garden leave pay and still meet the law’s consideration requirement.

In addition, the law permits, but does not require, courts to “blue pencil” an overbroad non-compete to render it valid and enforceable to the extent necessary to protect an employer’s legitimate business interests.

A civil action to enforce a non-compete must be brought either in the county in which the employee resides or, if mutually agreed upon by the employer and employee, in Suffolk County. Employers may not use a choice of law provision to avoid the new law’s requirements, if the employee is, and has been for at least 30 days immediately preceding his or her cessation of employment, a resident of, or employed in, Massachusetts at the time of his or her termination of employment.”

The law does not impact other types of restrictive covenant agreements, including non-competes made in connection with the sale of a business, non-solicitation of employees, customers, and/or vendors, and non-disclosure of confidential information agreements. Again, non-competes entered into in connection with a termination of employment for any reason, including without cause, or lay-off, will be enforceable, provided that the employee is given seven days to revoke acceptance, and the terms otherwise meet existing common law requirements, as opposed to the specific statutory requirements outlined above.

Connecticut based employers with employees who reside in Massachusetts should review any non-compete it may enter into on or after October 1, 2018 to make sure it complies with these new legal requirements.