ERISA is the acronym for The Employee Retirement Income Security Act. It is a federal law which was established in 1974 and governs employee pension and benefit plans in the private sector.
ERISA was intended to create reform for pension and retirement plans for individuals who work in the private sector as well as to prevent abuse of those plans by their administrators. ERISA requires that clear information be provided so that plan owners are aware of the details of their plans.
It is important to note that ERISA does not require an employer to offer their employees pension plans, health plans, or other types of benefits. ERISA does, however, govern how those plans function should the employer choose to offer them.
For example, ERISA requires that an employee who has an ERISA pension plan is required to see their benefits are vested, or secured, after a specific number of years. Types of information which are required to be provided pursuant to ERISA include:
- General features of the plan
- How the plan is funded, such as whether the employer matches the amount their employee contributes
- Length of service, or the amount of time which an employee is required to work for their employer prior to participating in the plan
- Minimum contribution, or the minimum amount the employees who participate in the plan are required to contribute
- Time of vesting, or how long an employee must work before they are granted access to all of the funds or their share of the funds
- In other words, if they take the funds out before their retirement, they may not receive the full amount.
- Process for appealing, or how an employee can file a grievance related to their plan
- Right to sue, or providing notification to plan participants that they may file suit if the appeals process fails
ERISA provides minimum standards for issues such as the funding and vesting of plans.
What Is a Non-Compete Agreement?
Non-compete agreements are legal contracts. Non-compete agreements are also known as non-compete clauses, non-compete covenants, or covenants not to compete. Typically, non-compete agreements involve employers and employees.
In non-compete agreements, employees usually agree that they will not use their knowledge or services to compete against their current employer over any future:
- Business customers;
- Clients; or
- Opportunities.
Employees may be bound by non-compete agreements even after they have stopped working for their employers. In order for non-compete agreements to be legally binding between employees and employers, the agreements must meet the requirements for forming a contract.
Employees may dispute non-compete agreements in civil lawsuits if the agreements do not contain the necessary contract requirements or the agreements are unreasonable. It is important to note that a new federal law was voted into effect, the Final Rule or Non-Compete Clause Rule, that will take effect around August of 2024.
This law will place a ban on the majority of non-compete clauses and agreements. The Final Rule will be addressed near the end of this article.
It is also still essential to be familiar with the current laws governing covenants not to compete, as there is always a possibility that the Final Rule will be struck down or changed, in part, and some or all of the previous laws will then apply once more.
What Is the ERISA Non-Compete Agreement?
A non-compete clause is typically considered unfavorable by courts. For example, in California, courts have struck down non-compete clauses as well as entire pension plans because those plans contained non-compete clauses.
In other cases, the courts have ruled that a non-compete clause must be limited in its scope, both in their duration as well as in the geographic area they encompass. Companies were, therefore, restricted in their ability to provide their employees with non-compete agreements where they were illegal under state law.
In 2014, however, there was a decision from the 5th Circuit of the Federal Court of Appeals which provided that employers are permitted to insert a non-compete clause into an ERISA pension plan. It is important to note that federal laws trump state laws and ERISA is a federal law.
Therefore, in states which outlaw non-compete agreements, employers may still include a non-compete clause in their employee’s ERISA-governed pension plans to potentially limit the access of the employee to their retirement funds if they violate that non-compete clause. It is important to note that ERISA overrides state laws only with regard to laws which are related to employee benefit plans, which includes insurance and banking laws.
An employer may be able to use that leverage to prevent an employee from competing with their business if that employee leaves the company. By including non-compete clauses in their ERISA plans, employers can take away from the money which was built up in the retirement accounts of the employees if they compete after they obtain a new job.
Can an Employer Enforce ERISA’s Non-Compete Agreement?
Yes, an employer can enforce an ERISA non-compete agreement. As previously discussed, non-compete clauses which are outside of ERISA contracts would be void in states which do not allow non-compete agreements.
In this type of state, however, an employer may use a loophole by putting the non-compete clause in the employee’s ERISA pension plan, which would, therefore, threaten the employee’s benefits if they choose to compete.
The majority of non-compete clauses have been confirmed as valid under ERISA. There are limitations, however, regarding how much of the employee retirement benefits an employer is permitted to take back.
There is a minimum vesting requirement under ERISA. An employer may choose from two different vesting schedules.
The first vesting schedule provides that a plan must be fully vested following five years of employment. The second vesting schedule provides that the employee is vested after seven years but they are entitled to receive a percentage of their benefits at specific defined intervals prior to that time.
Pursuant to ERISA, an employer is required to contribute a certain minimum amount for a pension fund to be considered valid. Employers who create pension plans which are governed by ERISA are required to meet the minimum amount by keeping the accounts fully funded.
If an employee violates a non-compete agreement which is written in their pension plan, their employer may retain any benefits which exceed the minimum vesting amounts. An employer may not retain the amount which is required by ERISA, even if a non-compete agreement is violated.
An employee will be allowed to keep their own contributions to the fun because those contributions are considered fully vested. In addition, once an employee reaches the retirement age for their particular pension plan, that employee is entitled to keep all of the funds upon their retirement, even if they seek employment with a competing business after that.
How Can You Protect Your Rights with ERISA?
In order for an individual to protect their investment in their retirement account, it is important for them to stay informed. An employer has a fiduciary duty to its employees to administer pension plans properly.
Pursuant to ERISA, employees are entitled to a summary of their plans as well as to be provided with calculations of their benefits. It is important for employees to remain aware of the rules of their plans as well as how much is in their accounts.
Employees should also closely examine the language of non-compete provisions which may be included in the pension plan. It may be helpful to discuss the issue with an attorney.
Once an employee has signed an employment agreement and becomes enrolled in their pension plan, they may be bound by the non-compete agreement, which may limit their access to their retirement funds at a later time.
What Is the Most Recent Law Governing Non-Compete Agreements?
The Final Rule or Non-Compete Clause Rule is a new federal law that will govern non-compete clauses and agreements, which takes effect around August of 2024. This federal law will ban almost all types of non-compete agreements and clauses, with only one exception.
The rule was voted into law in April of 2024. It will go into effect 120 days after the publication of the Federal Register containing the rule.
Employers of all types have to follow this new rule once it becomes effective. Therefore, every employer that uses a non-compete clause or agreement should start preparations now for the implementation of the rule.
It would be advisable to consult with a lawyer or in-house counsel to ensure that the employer is complying with the rule once it takes effect. It may require standard forms to be rewritten, removing these types of clauses or agreements.
There is only one exception to this ban, which is non-compete agreements that were made with senior level employees. This is allowed because these agreements were more likely to have been negotiated than those made with entry level or lower level workers.
If a worker was not considered a senior executive at the time their agreement was signed, once the new rule goes into effect, their non-compete agreement will no longer be enforceable. Every employer will be required to provide these types of workers with notice that their non-compete agreement or clause will no longer be enforceable in the future.
How Does this Affect State Laws?
If a state law already bans non-compete agreements, it will not be affected, as it agrees with the Final Rule. However, if a state law allows these agreements or has fewer limitations on them, they will be preempted.
Because the Final Rule is a federal law, that means it takes precedence over, or overrules, state laws that do not agree with it, for example, those state laws that allow non-compete agreements. All employers should meet with an attorney for information on their specific state laws and how they will be affected by the implementation of the new rule.
What if the Final Rule Is Challenged in Court?
The Final Rule will likely be challenged in court at some time in the future. In addition, it may also undergo changes or interpretations.
The Final Rule has a severability clause which states that, if any part of the law is determined to be unenforceable or is invalidated, the rest of the rule will still remain in effect. Due to the possibility of future changes, employers that have these types of agreements with their workers should consult with their attorneys to make sure they are in continuous compliance with the new rule and any future changes to it.
Additionally if an employer or employee is currently a party to a case involving non-compete agreements or clauses, they should take note of the upcoming changes and possible updates and how those may have an effect on their case. Typically, the laws that were in effect at the time the claim was initiated will be the ones that govern the outcome.
However, it is still a good idea to discuss these changes with the party’s lawyer to ensure that the proper evidence is submitted to cover all possibilities. This will allow the party to handle their claim in such a way that they will have a better chance of obtaining a favorable outcome no matter what changes are made to the Final Rule.
It is also important for all parties to request that their attorneys keep a watch on the updates to the Final Rule throughout 2024 and into the future and share that information with them to ensure they are in compliance and their case is adjusted as necessary.
Do I Need a Lawyer for an Issue with ERISA?
It is important to consult with an employment contract attorney for any issues, questions, or concerns you may have related to ERISA benefits. Your attorney can review the language of any employment agreements or pension plans, even if they do not contain a non-compete clause.
Your attorney can advise you regarding what laws will apply as well as your rights to access your retirement funds. They can also assist you if you have already terminated your employment and are now seeking benefits.
If necessary, your attorney can present your case against your former employer in a court of law. LegalMatch is an excellent resource to help you find an attorney to assist you with your ERISA issue today.
