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Massachusetts bill would require employers to pay up when enforcing noncompetes -- but there’s a loophole

Gov. Charlie Baker, right, and Lt. Governor Karyn Polito take a last peek the thick stack of papers of the fiscal year 2019 document prior to signing the Massachusetts budget in Boston. (Charles Krupa/AP)

Workers who are asked to sign noncompete agreements by their employers have long faced the possibility that -- if their employer decides to enforce the agreement -- they could end up in limbo between jobs, no longer paid by their past employer but barred from working for a competitor.

But a new bill that passed the Massachusetts legislature this week and is headed for Gov. Charlie Baker’s desk would require companies in the state to give employees some kind of compensation for up to a year after leaving if they decide to enforce a noncompete agreement. The reform bill has been in process for nearly a decade and Boston-based employment lawyers say Baker is expected to sign. It offers a guideline of paying at least 50 percent of the employee’s salary or a “mutually agreed upon consideration.”

If the bill is signed into law, said Michael Elkon, a partner at employment law firm Fisher Phillips, Massachusetts would become the first state to offer a statutory guideline for what’s known as “garden leave” for employees. (The concept comes from Britain, he said, and refers to being paid while doing nothing, or “while you tend to your garden, which is a very British thing to do.”)

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While many companies voluntarily offer garden leave to employees, particularly top executives, in practice -- and a handful of states require companies to give workers something in exchange if they ask them to sign a noncompete well after employment -- a statute suggesting pay for new workers at companies that enforce noncompete agreements is unusual, lawyers say. And Elkon says it’s possible other states could follow suit in the aftermath of an Obama administration effort to reform or limit employers' noncompete restrictions.

“I can absolutely see other states picking it up,” Elkon said. A bill in New Jersey, for instance, proposes requiring employers to pay workers their full pay if they’re subject to the enforcement of a noncompete.

Other lawyers who represent companies on labor issues were more circumspect on whether the practice of “garden leave” pay would spread. And the alternative of a “mutually agreed upon consideration” that was added is a huge loophole, they say.

“The statute as it’s currently passed was watered down significantly because it gave another option,” said Erik Winton, who co-leads Jackson Lewis’s practice focused on noncompetes and is based in Boston. “I see most companies likely ignoring [the garden leave payment] and going with the other option," which could take the form of a signing bonus, the promise of severance, or some other kind of additional pay or benefit.

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Others say job candidates may be willing to sign even limited compensation offers if they really want the job.

“I could see an employer saying [at a job offer] 'you’re going to sign this and we’re going to agree on $1,” said Erik Weibust, a partner in the Boston office of Seyfarth Shaw. “If they’ve never dealt with a noncompete before, they’re likely to just sign it.”

But Elkon thinks being too flippant about the requirement carries legal risks, and will depend on how critical it is that the company enforces the noncompete on certain employees.

“You run the risk of rubbing judges the wrong way if they look at an agreement and say ‘you essentially evaded it with this $50 garden leave provision,' " he said. “Businesses are going to have to weigh the risks of the agreement coming under a cloud because you paid so little it looks like you abused bargaining power and the desire to not spend too much.”

States vary widely in what they require of employers on noncompete agreements, from a small few, like California, banning them altogether, to those who are more protective of employers' right to enforce them, such as Florida, Elkon said. But since an Obama administration push to draw attention to noncompete agreements being forced against low-wage or blue-collar workers, some states have aimed to make it tougher on employers to enforce noncompetes.

The Massachusetts bill, for instance, also mandates that employees must have time to review the agreements before being asked to sign them, restricts the enforcement period to a year, and bans the enforcement of noncompetes for certain kinds of employees, such as students, those who have been laid off and “non-exempt” workers (typically, hourly paid workers who can receive overtime).

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