A new noncompete law takes effect in Massachusetts on October 1st. Employers will be well served making sure that their noncompetes meet the new requirements. Local companies will be even better served by paying attention to their Nondisclosure Agreements (NDAs); these often overlooked documents may soon become “Noncompete Lites.”
Noncompetes, as Noncompetition Agreements are often referred to, restrict employees from leaving one company to work for a competing firm. Proponents claim that noncompetes reduce employee turnover and protect a company’s investment in key personnel. Critics say they, too frequently, are one sided and overreaching, inhibiting innovation. Whichever side one favors, many state legislatures are considering legislation on the issue. Strict noncompetes are essentially unenforceable in California. New ones in Massachusetts are much more employee friendly.
No longer can a company operating in Massachusetts ask an hourly worker to sign a noncompete. Agreements for exempt employees are now limited to one year. Most controversially, the new Massachusetts law requires employers to pay half of a former employee’s salary while that individual is subject to a noncompete. This requirement represents a new and potentially significant business expense.
Which may be why the Massachusetts Legislature slipped in some confusing, waffle language.
The new Massachusetts law allows both parties, the employee and his/her employer, to forgo the half year’s compensation in return for “mutually agreed upon consideration.” Since this “consideration” would be negotiated at the time of signing, when a prospective employee often has limited bargaining power, the legal community is waiting for clarification. What will the state courts consider as an appropriate consideration to be paid to the employee? A few Red Sox tickets? An all-expenses-paid, weekend stay at the company apartment in NYC? A signing bonus equivalent to three month’s salary?
The answers to these and other questions will take time to emerge. In the meantime, some local companies are ditching their noncompetes in favor of more carefully worded NDAs. NDAs are not burdened with legislated restrictions and potential employee compensation, yet they can serve a similar purpose. Yes, it appears that these “gentlemen’s agreements” of years-past may become the new employer battleground. It’s probably time to ask a lawyer to review your NDA templates . . . to see if yours can still “compete” in this changing world. I suggest you do so whether your company operates in Massachusetts or not.
Peter has spent the past twenty-plus years as an acting/consulting CFO for a number of small businesses in a wide range of industries. Peter’s prior experience is that of a serial entrepreneur, managing various start-up and turnaround projects. He is a co-founder of Keurig.