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Massachusetts weighs restrictions on employers' use of 'non-compete' pacts

A bill designed to rein in employers’ use of non-competition agreements which, according to the Brookings Institution, affect a fifth of the U.S. workforce – some 30 million workers – advanced to the Massachusetts Senate floor today, with supporters arguing that such agreements constrain innovation and economic recoveries.

Workers who sign "non-compete" agreements are bound not to work for competing companies for a certain period of time after they separate from the original company.

The rising use of such contracts has led more workers to stay put and not move to other states or regions in search of professional advancement.

The Senate’s consideration comes on the heels of the Massachusetts House of Representatives unanimously approving a similar bill last month.

“This legislation unleashes our state’s potential for innovation and growth,” state Rep. Lori Ehrlich (D-Marblehead), the original sponsor of the bill, told AMI Newswire. “It’s also my hope that our effort in Massachusetts serves as a national example for fairness and equity in the workplace.”

Supporters of the bills argue that when there is more open competition for talented employees, innovation thrives. In California’s Silicon Valley, for example, employees who work at major tech firms such as Apple and Google are often coveted by smaller startups, leading to worker benefits and a healthy spirit of competition. 

A Brookings Institution blog last week pointed out that American workers today are switching jobs and crossing state borders in search of new employment at the lowest rate since the 1970s. The result is a less flexible economy, the Washington-based think tank reports.

Some employers, however, stand by non-competition agreements as essential to protect the investments they have made in their industries and their ability to create jobs.

The Associated Industries of Massachusetts (AIM), for example, contends the agreements protect intellectual property, trade secrets and sales lists, according to a blog post by AIM's vice president for government affairs, Brad MacDougall.

Furthermore, a 2014 survey of AIM members found that hundreds of member companies view the retention of non-competition pacts a priority.

Massachusetts lawmakers hope to make their state more competitive with other states through reforms such as restricting the use of such agreements, but they only have until the end of the month to pass compromise legislation before the legislative session ends.

The House version of the bill bans non-competition agreements for hourly workers, those 18 and under, and interns. It also contains a so-called “garden leave” clause, which requires those employers that call on workers to sign non-competition pacts to pay 50 percent of the worker’s salary during the enforcement period. That period can last a maximum of one year, the bill states.

The Senate bill is more restrictive, with a requirement that the employer pay 100 percent of the worker’s salary during the transition period, which is limited to only three months.

AIM, however, argues that there is no evidence that non-competition agreements harm the Massachusetts economy. The organization notes that the House bill, while not perfect, does give companies flexibility not to pay the "garden leave" compensation if the company and employee had previously agreed on an alternative compensation agreement.  

Michael Rosen, a Boston attorney who represents employers and writes a blog on non-compete covenants in Massachusetts, told AMI Newswire that the Senate version’s tougher restrictions would not be palatable for some businesses.

Even so, Rosen said, the topic is a complex one that divides many businesses. Venture capital firms and startups seeking talented workers tend to oppose non-compete covenants, while more established firms tend to be more favorable to them.

MacDougall, the AIM official, has argued in testimony before lawmakers that, "One could infer that advocates in the venture community are simply seeking to ban the use of non-compete agreements to facilitate the taking of a firm’s intellectual property for profit."

Contested non-competition agreements have not created a flood of litigation, Rosen said, but lawsuits over such agreements can be frustrating because their results are difficult to predict. The idea behind reforming the agreements is to create fewer circumstances when they are enforceable and to ensure greater predictability for the whole process.

Asked about the likelihood of a compromise reform plan becoming law, Ehrlich said, “Gov. (Charlie) Baker has indicated that this is one of the top issues he will be considering before the end of session, so I do think it is possible, if not likely, that something will be done.”

Massachusetts’ government is divided, with the legislature controlled by Democrats and a Republican in the governor’s chair.

Other states, including Washington, New Mexico and Utah, have shown interest in moving to limit the use of such agreements, Ehrlich said, and three states – California, Oklahoma and North Dakota – don’t permit the use of non-compete agreements.

In a blog post last month, David Brown, vice president of innovation leadership for the Greater Boston Chamber of Commerce, argued that reaching a compromise on non-competition agreement reform would make the state’s economy stronger. But he also called for a spirit of compromise among those representing business and labor, as well as greater transparency when such agreements are negotiated.

Brown said mandated “garden leave” provisions could put reform at risk, but he urged businesses with different views to work together for the good of the larger economy.