Q. We have employees who live and work in California. We get frustrated that we are not allowed to have them sign a noncompete agreement. Is there anything we can do?
A. The enforceability of most noncompetition agreements and similar restrictions on post-employment competition generally depends on the common law or statutes of the state in which an employee lives and works, or the law chosen in an employment agreement.
Unlike Minnesota, California and certain other states’ common law or statutes prohibit nearly all employee noncompetition agreements. There is, however, a potential option to incentivize employees not to compete, by using certain compensation plans regulated by federal law rather than any state’s.
The Employee Retirement Income Security Act (ERISA) is the federal law that regulates certain employee benefits such as health plans and pension plans. Certain deferred compensation plans regulated by ERISA and related to more highly compensated employees, may contain forfeiture-for-competition provisions. Those provisions state that employees forfeit later payments of deferred compensation if they have competed with the company after their employment ends.
One advantage to these forfeiture-for-compensation provisions is that ERISA pre-empts state laws. That means California’s and other states’ laws prohibiting noncompetition agreements do not apply to their enforcement.
Of course, these plans may not be right for all employers, and they must be drafted to meet ERISA requirements. Under certain circumstances they can create a significant incentive for employees not to compete after they leave the company.