Massachusetts Non Compete Agreements and Garden Leave
One of the most significant changes under the new Massachusetts non compete law is the garden leave requirement. Under the new law, an employer can only enforce the non compete provision if it pays the employee "garden leave" during the restricted period.
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Why Garden Leave is a Game Changer
In the past, it was relatively easy for an employer to threaten enforcement of a non compete. Simply writing a cease and desist letter was often enough to discourage an employee from taking a competing position. For the employee, the cost of hiring an attorney to challenge the non compete was often prohibitive. In addition, new employers were often unwilling to risk litigation.
Now, unless the employer chooses to waive the non compete, it will have to pay at least 50 percent of the employee's base salary for the length of the restrictive covenant. That means if you are restricted for six months, you must be paid this garden leave for six months.
Employers in Massachusetts will now have to think harder about the value of enforcing non compete agreements. It may be that it is worth the garden leave payments to protect their trade secrets or other legitimate business interests. For many, however, a mere preference to keep talent from going to the competition may not justify the additional cost.
How Much Garden Leave Must Be Paid
The statute says two potentially conflicting things. On the one hand, it states that garden leave can be "other mutually agreed consideration." On the other, it states that the garden leave payment "must" provide for payment of at least 50 percent of the employee’s highest annualized base salary paid by the employer.
The argument has been made that the first provision allows an employer to negotiate something other than 50% of base salary as a garden leave payment. The counter-argument is that the statute sets the floor at 50% of base, and any other "mutually agreed consideration" must equal or exceed that amount.
Because the law is so new, courts have not had many opportunities to interpret this provision and clarify the ambiguity. It is important that you understand the garden leave provision in your non compete, and take advantage of the opportunity to consult with counsel before signing.
Can the Employer Choose Not to Pay Garden Leave
The statute provides only two ways out of the garden leave requirement. First, if the employee breaches a fiduciary duty to the employer or takes property belonging to the employer, he or she can lose the garden leave protection.
Second, the statute allows the employer to waive the non compete provision and avoid the garden leave payments. It does not specify when or how this waiver must happen. Presumably if the employer notifies the employee immediately upon resignation or termination that the provision is waived, this would be effective. In that case the employee would be free to compete but would not be owed any continuing compensation.
But what if the employer simply does nothing and only tries to waive the non compete after the employee has demanded payment of the garden leave amounts? Though the statute does not put a time limit on the waiver, the employee may have an argument that he or she decided not to pursue competing jobs in reliance on the promise of garden leave payments.
How this plays out at the time of resignation or termination could be important to determining your rights to garden leave payments. If you are considering leaving your job, or are facing a termination, it is a good idea to consult an attorney for a review of your situation and your non compete as soon as possible.
Garden Leave and Severance Payments
Often an employer will negotiate a severance package with a terminated employee, in which certain payments are made in exchange for the employee releasing any and all legal claims. A substantial severance may qualify as "other mutually agreed consideration." If the severance payment is less than 50% of the employee's base, it may still not be sufficient under the statute even if the employee agrees to it.
A severance payment that exactly meets the statute's 50% requirement raises additional questions. If the employer is paying exactly what the law already requires, is it really providing any consideration for the release of claims? This could leave you in compliance with the non compete law but at risk of your release of claims being held invalid later on.
The other thing to remember is that the statute specifically does not apply to non compete provisions in a separation agreement. This means if you did not have a non compete agreement before termination, but are asked to agree to non compete provisions in exchange for your severance payment, that will likely be enforceable even if it does not meet all of the requirements of the statute.
If you are subject to a non compete and are considering a severance package, it is important to consult with an attorney familiar with the non compete laws before making a final decision.
Garden Leave and Out of State Employers
If you live or work in Massachusetts, the new statute applies to you. This is true even if your employer is out of state, and even if they do not have physical offices in Massachusetts.
A recent decision in federal court in Massachusetts suggested that an out of state non compete agreement without a garden leave provision was still consistent with Massachusetts law. That decision involved a non compete that was not subject to the new law. However, the reasoning in that decision may lead some out of state employers to argue that they should not have to provide this payment.
Garden Leave and the Massachusetts Wage Act
The garden leave provision specifically states that the payments shall be made consistent with the statute governing timely payment of wages. Arguably this means the Legislature has declared the garden leave payments to be wages under the Wage Act. If that is the case, a failure to make those payments could subject the employer to triple damages under the Wage Act.
Unanswered Questions About Garden Leave
The following are scenarios in which the answers are not yet clear.
An employee subject to a non competition agreement resigns. There is no discussion at the time of resignation about whether the employer is going to waive the non compete. If the employer does not make the garden leave payments, and the employee brings a claim under the Wage Act, can the employer then waive the non compete?
An employee subject to a non compete is terminated for cause, and the employer offers a severance payment equal to half a year's salary. Is this a garden leave payment under the statute? If so, is the release of claims in the severance agreement invalid because the employer gave no additional value for it?
An employee with a non compete is terminated. The severance agreement includes a non compete and an offer of payment of less than 50% of the employee's base. Does this new non compete connected to the severance cure any deficiencies in the employee's original non compete?
How We Can Help
We can help you get clarity on your rights and obligations under your non compete clause, so you can make an informed decision about whatever you are facing. You can use the button below to schedule a call back from a member of our team, give us a call at 781-784-2322, or fill out our web form to let us know a little more about your situation.