Massachusetts’ new noncompete law is a halfway measure

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I’ve written that noncompete agreements should cost companies something. Massachusetts has finally addressed this issue with a law passed at the end of July, awaiting the governor’s signature. But it’s shot full of holes, and won’t make Massachusetts the competitive innovation economy that it needs to be.

In California, noncompetes are void by law. The result is free movement of staff, higher salaries, and a burgeoning startup culture.

In Massachusetts, by contrast, companies could tie up their employees for more than year, even hourly workers. The new law fixes some of the worst corporate abuses of noncompetes, but as Scott Kirsner describes in the Boston Globe, there are some loopholes that will allow companies to continue to tie up workers for very little compensation.

As of October 1, when the new law goes into effect, noncompetes will not apply to hourly workers and students. This prevents some of the worst abuses of the law, for example, preventing workers from moving from one branch to another of a fast-food chain.

Noncompetes cannot last longer than a year. This is a step in the right direction, since requiring someone to sit out of the job market for their skilled work for more than a year is abusive.

Probably the most crucial change is that layoffs now nullify noncompetes. Forcing a laid off worker not to work for a competitor was cruel; at least that’s now fixed.

But two elements of the law still favor employers.

First, noncompetes signed before October 1 will still be in force. So if you’re stuck in a job right now with no prospects for promotion and you signed a noncompete, you’re not going to a competitor any time soon, nor will you be able to start a new company that competes with your employer — and the terms will be whatever you signed, even if that period lasts longer than a year.  According to attorney Russell Beck in the Globe article, “I don’t think the new legislation will have any immediate impact on noncompetes entered into prior to Oct. 1.”

Second, as I recommended in my first post on this topic, for employment agreements signed after October 1, employers will now be required to pay employees at least 50% of their salaries during the noncompete period. This is sometimes called “garden leave,” because it implies that you’ll putter around in your garden for half pay until your noncompete runs out.

But unfortunately, the wording in the law now sets the compensation as 50% pay for employees or “mutually agreed upon compensation” — a pernicious loophole.

It’s clear what will happen now.

If you take a job after October 1, your employment paperwork will include a one-year noncompete that agrees to pay you, say, one month’s severance pay, or vests your stock worth $1,800, or some other “mutually agreed upon” consideration. If you want the job, good luck negotiating that. When you are applying, typically, the company has the upper hand, and you’ll be in a take-it-or-leave it situation. It’s hard to imagine an HR department agreeing to change the terms of their “standard” contract which includes that laughable level of post-work compensation, and that’s what they’ll tell you.

The cost to companies for a noncompete in Massachusetts is no longer zero. But it will be low. And that small investment will prevent workers from starting competing businesses or jumping to competitors. In this way, Massachusetts continues to favor employers over competition and innovation.

This new law will keep salaries in check. It will slow the creation of startups and consultancies. And it will keep California, with its startup-friendly noncompete rules, firmly in the lead in innovation.

2 responses to “Massachusetts’ new noncompete law is a halfway measure

  1. What actually happens if you violate a non-compete? What are the repercussions?

    I guess your former company could probably sue you for something or another, right? But does that actually happen? Or does the fact that you break a non-compete with one company come back to haunt you when trying to get a job with another?

    I would think there’s probably a wide variation across industries. But just curious if Josh or anyone else has any insights they could share. To put it plainly: I’m wondering if non-compete clauses should just be ignored by all workers, and render them meaningless. Could that work in reality? If not, why?

    1. What happens is the old company threatens to sue, and informs the new company that you are in violation of an agreement. If you continue and the new company isn’t spooked, what happens next is the old company secures an injunction to stop you from working for the new company.

      They take action just frequently enough to scare you into not doing it.

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