The Employee Retirement Income Security Act (ERISA) is a federal law, established in 1974, which governs private-sector employee pension and benefits plans. Although ERISA does not require employers to offer their employees pension plans, or health or other types of benefits, it does govern how they function if the employer chooses to put them in place. For example, ERISA provides the requirement that an employee with a ERISA pension plan must see their benefits “vested,” or secured, after a certain number of years.
Non-compete clauses have generally been looked upon unfavorably by courts. In California, for example, courts have struck down not only non-compete clauses but entire pension plans, because they contained non-compete clauses. In other cases, courts have ruled that non-compete clauses must be limited in their scope, both in the time of their duration, and in the geographic area they encompass.
This restricted the ability for companies to give their employees non-compete agreements where they were illegal under state law. However, a 2014 decision from the 5th Circuit of the Federal Court of Appeals stated that employers could insert non-compete clauses into ERISA pension plans. ERISA is a federal law, and federal law trumps state law.
Therefore, in a state which outlaws non-compete agreements, an employer may still write a non-compete clause into their employees’ ERISA-governed pension plans, and potentially limit the employee’s access to their retirement funds for violating the non-compete clause. It should be noted that ERISA overrides state law only in regard to laws related to employee benefit plans (including insurance and banking laws).
The employer can use this leverage to prevent employees from competing with their business if they leave the company. By including a non-compete clause in an ERISA plan, an employer can take away from the money built up in the employee’s retirement account if they compete once they have a new job.
Yes, these clauses have been held to be enforceable. As stated above, a non-compete clause outside of an ERISA contract would be void in a state that does not allow non-compete agreements.
However, the employer in such a state can use the loophole of putting the non-compete clause into the employee’s ERISA pension plan, thereby threatening their benefits if they choose to compete anyway. Most non-compete clauses have been held valid under ERISA.
There are, however, limitations to how much of the employee’s retirement benefits the employer may take back. ERISA provides for a minimum vesting requirement. There are two vesting schedules for an employer to choose. Under the first, the plan must be fully vested after five years of employment. Under the second, an employee is fully vested after seven years, but is entitled to a certain percentage of the benefits at defined intervals before that time.
ERISA also requires that the employer contribute a certain minimum amount for the pension fund to be deemed valid. An employer who creates a pension plan governed by ERISA must, therefore meet this minimal amount by keeping the account fully funded.
If the employee violates the non-compete agreement written out in their pension plan, the employer may retain any benefits in excess of minimum vesting amounts.
The employer may not, however, retain the amount required by ERISA’s minimums, even if the non-compete agreement is violated. The employee also gets to keep their own contributions to the fund (your own contribution are always considered fully vested).
Additionally, once the employee reaches the retirement age for their pension plan, they are entitled to keep all of the funds upon retirement, even if they seek employment with a competitor afterwards.
In order to protect your investment in your retirement account, it is important to stay informed. Employers have a fiduciary duty to to their employees to administer pension plans properly. Under ERISA, all employees are entitled to be provided with a summary of the plan, and to be provided with calculations of their benefits.
Stay aware of the rules of your plan and how much is in your account. Additionally, look closely at the language of any non-compete provisions in the pension plan. You may want to discuss it with an attorney. Once you have signed your employment agreement and become enrolled in the pension plan, you may be bound by the non-compete agreement, which could limit your access to your retirement funds later.
If you have already terminated employment with your former employer and are seeking benefits, you may want to consult an employment contract attorney. This attorney can review the language of your pension plan, and any non-compete clause it may contain. They can then counsel you on your rights regarding access to the retirement funds. If you have a valid claim, they can present your case against your former employer in court.