Garden Leave Is Not a Nonconcompete under Massachusetts Law

The Massachusetts Noncompetition Agreement Act (the “NAA”) does not impose on a “garden leave clause” the same requirements it imposes on a noncompetition agreement.

The NAA states that, “[t]o be valid and enforceable, a noncompetition agreement must meet the minimum requirements of paragraphs (i) through (viii).” G.L. c. 149 § 24L(b) (emphasis added).

The last of those referenced paragraphs says, “The noncompetition agreement shall be supported by a garden leave clause or other mutually-agreed upon consideration . . . .” G.L. c. 149 § 24L(b)(viii) (emphasis added).

This language has vexed companies and employees alike.

Accordingly, Erika Hahn and I wrote two articles analyzing this language (both independently and in relation to other language in the NAA requiring “fair and reasonable” consideration for noncompetition agreements entered into after commencement of employment).

In the first article, “The new noncompete law: compromise happens,” we explained why we believe that although the new law requires “fair and reasonable consideration” for noncompetes entered into during employment (where there is a heightened concern for an employee’s leverage), something short of that – perhaps precisely what was required before the law became effective – is likely all that is required for a noncompete entered at commencement of employment.

In the second article, Consideration happens, but not during garden leave,” we attempted to reconcile the Legislature’s inclusion a so-called “garden leave clause” option (as an alternative to “other mutually agreed upon consideration”) with its exclusion of (qualifying) garden leave clauses from the statute’s regulation. Our epiphany (and conclusion, following early morning pressure-testing of the theory with Hannah Joseph) was that if an employer is willing to make the investment in a garden leave clause and comply with the specific definitional requirements that the Legislature laid out, then the agreement is in fact not a noncompetition agreement but instead constitutes a garden leave clause and as such, would be excluded from the operation of the statutory requirements for noncompetition agreements. We concluded that such a reading (1) explained why the Legislature included garden leave clauses in the consideration section, (2) gave effect to all the language concerning garden leave clauses, and (3) made sense from a policy standpoint.

More recently, Hannah observed that there is further textual support for the position advanced in the articles.

Her analysis – with which I agree – is as follows:

Starting back at the definitions, the term “noncompetition agreement” means “an agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.” G.L. c. 149 § 24L(a).

Expressly excluded from the definition are several types of agreements including “garden leave clauses,” which are defined as “a provision within a noncompetition agreement by which an employer agrees to pay the employee during the restricted period, provided that such provision shall become effective upon termination of employment unless the restriction upon post-employment activities are waived by the employer or ineffective under subsection (c)(iii).” G.L. c. 149 § 24L(a) (emphasis added).

The minimum payment requirements are explained in paragraph (b)(vii), which states that “[t]o constitute a garden leave clause within the meaning of this section, the agreement must (i) provide for the payment, consistent with the requirements for the payment of wages under section 148 of chapter 149 of the general laws, on a pro-rata basis during the entirety of the restricted period, of at least 50 percent of the employee’s highest annualized base salary paid by the employer within the 2 years preceding the employee’s termination; and (ii) except in the event of a breach by the employee, not permit an employer to unilaterally discontinue or otherwise fail or refuse to make the payments . . . .” G.L. c. 149 § 24L(b)(vii) (emphasis added).

Accordingly, if the agreement provides for payments consistent with these requirements, it is a garden leave clause and therefore not a noncompetition agreement. G.L. c. 149 § 24L(a) (“Noncompetition agreements . . . do not include: . . . (viii) garden leave clauses . . . .”). This exemption is a clear statutory mandate and must be given effect. See Malloch v. Town of Hanover, 472 Mass. 783, 788 (2015) (“where the statutory language is clear, [courts] must give effect to the plain and ordinary meaning of the language” (emphasis added; internal quotations omitted)).

Given that the Legislature excluded qualifying garden leave clauses from noncompetition agreements, it is necessarily the case that the law permits employers to use garden leave clauses without the need to comply with the requirements applicable to noncompetition agreements (set forth in paragraphs (b)(i) through (b)(viii)). To suggest otherwise would be to ignore the language through which the Legislature expressly exempted (qualifying) garden leave clauses from the definition (and therefore requirements) of noncompetition agreements. (This conclusion is based simply on the definitions and express exemptions – and is consistent with the conclusion drawn from the analysis in Erika’s and my second article.)

Accordingly, by way of example, a proper garden leave clause would not need to be given to a new employee at least 10 business days before commencement of employment (see G.L. c. 149 § 24L(b)(i)). In contrast, an agreement that provides only 40 percent (i.e., less than 50 percent) of the employee’s salary (and thus fails to satisfy the definition of “garden leave clause”) is a noncompetition agreement and must therefore comply with the minimum requirements of (b)(i) through (b)(viii) applicable to noncompetition agreements.

With that as the background, Hannah’s posits the following scenario: Assume a qualifying garden leave clause (as provided for under (b)(vii)) is given to an employee only five business days before commencement of employment (rather than the 10 business days required for noncompetition agreements).

If the statute were interpreted to mean that a noncompetition agreement supported by a garden leave clause is nevertheless subject to the minimum requirements for a noncompetition agreement, the posited garden leave clause would both comply with the statute (i.e., by meeting the statutory definition, thereby rendering it exempt from the definition of a noncompetition agreement) and also violate the statute (i.e., by failing to comply with the minimum notice requirements applicable to noncompetition agreements).

That result makes no sense. A statute should not be read to both permit conduct and simultaneously prohibit the very same conduct.

To the extent that a court were to find that, notwithstanding the express exclusion of garden leave clauses from the definition of noncompetition agreements, the statute’s language was nevertheless ambiguous, it would need to be guided by the canons of statutory construction. In particular, courts “must avoid any construction of statutory language which leads to an absurd result . . . .” Bellalta v. Zoning Board of Appeals of Brookline, 481 Mass. 372, (2019) (internal quotations omitted). To avoid the (absurd) result that the law permits certain conduct while simultaneously prohibiting the very same conduct, the exemption of garden leave from the definition of noncompetition agreement must simply be given effect.

Also consistent with Hannah’s point, another aspect of the definition of garden leave clause provides even further support. Specifically, the definition indicates that a garden leave clause can be “ineffective under subsection (c)(iii).” By expressing that garden leave clauses can be subject to section (c)(iii), but omitting any reference to the other subsections of section (c), the language further supports that garden leave clauses (in contrast to noncompetition agreements) are not subject those other provisions. See Phillips v. Equity Residential Management, L.L.C., 478 Mass. 251, 259 n.19 (2017) (explaining that “where the maxim [expressio unius est exclusio alterius] furthers the legislative purpose, it is . . . relevant and useful, particularly where it corroborates a reasonable interpretation”).

As we are increasingly convinced that this is the correct result, we will be standing by waiting to see if the courts agree.

Thank you to Hannah Joseph for identifying the additional textual support and editing this post for me!