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Noncompete reform: Senate makes important changes

The Senate Committee on Rules recommended today that the Senate pass a version of H.4434, with a few major changes. See here for bullets, and below for the detailed language.

Compensation

Employees subject to a noncompete should receive compensation equivalent to at least 100% of their highest base pay over the last two years.

Duration

Noncompetes should be enforceable for no longer than three months.

“Red pencil”

Courts should not have authority to rewrite overly restrictive noncompetes to make them enforceable.

What happens now

The Senate will debate, and vote on, this bill on Thursday. Assuming it passes, a compromise awaits. Six lawmakers from the Senate and House will meet to discuss the two passed versions of the bill, and synthesize them to a point where both branches are happy. They’ll then send it to Governor Baker, who will have an opportunity to review the bill, sign it, or send it back for further revisions.

What this means

This is great news, but not the end of the road; it’s a huge step in the right direction. The House laid the groundwork with its landmark, unanimous vote; the Senate is prepared to strengthen the bill in favor of employee fairness and with solid economic foresight. As the two branches work toward a compromise, we will continue to fight to see that it brings meaningful reform.

Full language of the proposed Senate Additions

(10) The noncompetition agreement shall be supported by a garden leave clause or other mutually-agreed upon consideration between the employer and the employee which shall be equal to or greater than 100 per cent of the employee’s highest annualized earnings paid by the employer within the 2 years preceding the employee’s termination and is negotiated during the 30-day period immediately following the termination of employment. If the employer and employee fail to reach an agreement for other consideration within that 30-day period, the garden leave clause shall become effective. To constitute a garden leave clause under this section, the noncompetition agreement shall: (i) provide for the payment, consistent with the requirements for the payment of wages, under section 148, of 100 per cent of the employee’s highest annualized earnings paid by the employer within the 2 years preceding the employee’s termination; and (ii) not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments except in the event of a breach by the employee; provided, however, if the restricted period has been increased beyond 3 months as a result of the employee’s breach of a fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer, the employer shall not be required to provide payments to the employee during the extension of the restricted period.

 

(6) The restricted period shall not be more than 3 months from the date of termination of employment, unless the employee has breached a fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer, in which case the duration shall not be more than 2 years from the date of termination of employment.

 

(e) A court shall not reform or otherwise revise a noncompetition agreement so as to render it valid and enforceable to the extent necessary to protect the applicable legitimate business interests. A court shall not invoke the doctrine of inevitable disclosure to extend an expired noncompetition agreement or otherwise render enforceable a noncompetition agreement that fails to satisfy the requirements of paragraphs (2) to (11), inclusive, of subsection (c).

 

(4) To remain valid and enforceable, the employer shall review a noncompetition agreement with the employee not less than once every 5 years.

 

(9) Not later than 10 days after the termination of an employment relationship, the employer shall notify the employee in writing of the employer’s intent to enforce the noncompetition agreement. If the employer fails to provide such notice, the noncompetition agreement shall be void. This paragraph shall not apply if the employee has breached a fiduciary duty to the employer or the employee has unlawfully taken, physically or electronically, property belonging to the employer.

 

(f) A contractual provision that penalizes an employee for defending against or challenging the validity or enforceability of the noncompetition agreement is void. The substantive, procedural and remedial rights provided to the employee in this section shall not be subject to advance waiver.