By Lauren Hoepfner
Attention all 150,000+ students in Boston: starting October 1, short-term student employees can no longer be bound by noncompetition agreements after they leave a job.
Massachusetts recently passed a sweeping reform that prohibits the enforcement of noncompetition agreements, or “noncompetes,” against both undergraduate and graduate students. Under the new law, employers cannot enforce noncompetes against full or part-time students who are hired for an internship or other short-term employment, whether paid or unpaid.
For noncompetes to be enforceable against non-student employees and independent contractors, they must be reasonable in scope to protect a legitimate business interest as well as limited to one year and to the geographic area where the employee worked in the prior two years. The noncompete must be supported by a “garden leave” clause—an agreement to pay the employee during the restricted period—or another mutually-agreed benefit to the employee, and provided to the employee at least ten days before employment begins.
The new law goes into effect on October 1, 2018.
What is a noncompete?
A noncompete is an agreement between an employer and a current or prospective employee that prohibits the employee from working for a competitor after they leave their job. Noncompetes are often signed before an employee or independent contractor starts work—either as a stand-alone agreement or within an employment contract.
Employers use noncompetes to prevent former employees from disclosing valuable information or using inside knowledge to benefit a competitor. But Massachusetts has long recognized that noncompetes can be abused by employers to prevent their employees from jumping ship, rather than simply protecting the company’s information. To protect workers from this type of abuse and promote competition for talent, Massachusetts has only allowed employers to enforce a noncompete if it was “necessary to protect legitimate business interest, reasonably limited in time and space, and consonant with the public interest.” In short, noncompetes had to target a specific business interest rather than simply serving as an employee retention tool. For example, a noncompete that prohibited a former bank executive from soliciting the bank’s customers for a period of time may be valid, but an agreement prohibiting a hairstylist from working at a different salon would not be enforced.
Now there are even stronger limits.
What noncompetes are covered by the reform bill?
The reforms only apply to post-termination noncompetes, or agreements that restrict an employee’s choice of work after leaving the company. Concurrent noncompetes—agreements that prohibit employees from working for competitors while employed—remain valid and enforceable.
The law is not retroactive. The law exempts noncompetes signed before October 1, including those signed by interns, and these agreements may still be enforceable. Noncompetes signed before October 1 will still have to protect a legitimate business interest, be reasonably limited in time and space, and consonant with public policy to be enforceable. However, in light of the reform, there may be some appetite among employers to reevaluate and update existing noncompetes as a best practice.
What does the new law say?
For students –
Students cannot be bound by a noncompete, and any noncompete signed by an intern after October 1, 2018 will not be enforceable.
A noncompetition agreement shall not be enforceable against . . . undergraduate or graduate students that partake in an internship or otherwise enter a short-term employment relationship with an employer, whether paid or unpaid, while enrolled in a full-time or part-time undergraduate or graduate educational institution.
Who is a “student”? The law covers undergraduate and graduate students enrolled full-time or part-time in a college or university. It applies to paid and unpaid internships and short-term employment.
This means that students have the right to let their employers know that any noncompete provision included in an employment contract cannot be enforced against them. Savvy employers may look to other agreements (see below), to restrict student employees’ behavior, so students should look through all agreements carefully and seek legal advice if they have questions.
BU and MIT students, feel free to come and talk to us!
For hourly employees –
Employees who are “nonexempt” and overtime eligible under the Fair Labor Standards Act (FLSA) also cannot be bound by noncompetes under the new law. Nonexempt employees under the FLSA are typically compensated hourly rather than by salary, and do not have a guaranteed minimum compensation amount. Nonexempt employees also typically do not perform high-level executive, professional, or administrative work. The new law prohibits the enforcement of noncompetes against this category of employees.
Like students, hourly employees can push back against employers who include noncompete provisions in employment agreements. They should also pay close attention to the terms of other agreements (see below) that may restrict their behavior in other ways.
For all employees –
Noncompetes entered into on or after October 1 are only valid for one year after the end of employment, and they must be limited in scope. To be valid and enforceable, a noncompete must be in writing, signed by both the employer and employee, and provided to the employee at least 10 days before employment begins.
The agreement can be no broader than necessary to protect an employer’s “legitimate business interest.” Under the law, the noncompete must be targeted at protecting an employer’s trade secrets, confidential information that does not qualify as a trade secret, and/or the employer’s goodwill. For example, a noncompete agreement can be targeted at protecting business plans, but cannot be targeted at protecting the employer from competition generally. The employer must show that the interest can’t be protected by a less restrictive agreement like a nonsolicitation or a nondisclosure agreement.
It must be supported by a garden leave clause—an agreement to pay the employee during the restricted period—or another mutually-agreed benefit to the employee. Garden leave clauses must provide at least 50% of the employee’s highest salary in the 2 years preceding the employee’s termination. Other benefits could include stock options or a signing bonus.
A noncompete can’t last longer than 12 months, and can only apply to the geographic area in which the employee worked for the last 2 years. Finally, the agreement must be consonant with public policy. For example, courts have held that noncompetes signed by sandwich shop workers, hair dressers, or other blue-collar workers are against public policy because these low-wage workers would be severely limited in their post-termination employment opportunities.
What can employers do to protect confidential information?
Although the new law places limits on noncompetes, companies still have many ways to protect confidential and sensitive information provided to students and hourly employees. And of course, there are separate protections for a company’s trade secrets.
The law does not apply to other agreements that protect company information. Employers can still require employees, including student interns and hourly workers, to sign the following agreements:
- Nondisclosure agreements (NDAs): NDAs promote confidentiality by preventing employees from disclosing proprietary information gained in the course of their employment.
- Proprietary Information and Inventions Assignments (PIIAs): PIIAs ensure that all relevant intellectual property created or contributed to by an employee during the term of his employment remains the property of the employer.
- Nonsolicitation agreements: These agreements may (a) prohibit employees from solicitating a company’s clients or customers for his or her own benefit or for the benefit of a competitor after leaving the company; (b) prohibit a former employee from poaching current employees; (c) prohibit a former employee from transacting business with the former employer’s customers, clients, or vendors.
- Other agreements that the new law expressly does not restrict the use of are (a) noncompetes made in connection with the sale of a business entity; (b) noncompetes outside of an employment relationship (i.e. independent contractor agreements); (c) forfeiture agreements; (d) garden leave clauses; (e) noncompetes drafted at the cessation of employment; and (f) agreements where an employee agrees not to reapply for employment at the same employer after termination.
Employers will likely turn to these other employment agreements to fill gaps left by the absence of noncompetes, and as a result, make them more restrictive.
If you own or operate a business, the above-mentioned agreements can provide alternative ways to protect your company’s intellectual property and confidential information. But remember, these alternative agreements must be reasonable and targeted at protecting confidential information in order to be enforceable.
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Lauren Hoepfner is a 3L at BU Law and the summer 2018 Matthew Z. Gomes Fellow with the Entrepreneurship & Intellectual Property Clinic. She is most interested in corporate governance and compliance.