In 2023, California strengthened its already strict position on enforcing non-compete provisions against employees by enacting two new pieces of legislation:
SB 699: which creates a private right of action for employees, including a right to attorneys’ fees; and
AB 1076: which requires employers with employees working in California (even if the employer is not based in California) to notify employees that their non-compete is void.
The new laws take effect on January 1, 2024, with the notice required by February 14, 2024. Other states are also looking to beef up their restrictions on non-competes.
For employee benefit plans governed by ERISA, there is case law precedent for the proposition that ERISA preempts California law prohibiting enforcement of non-competes in an ERISA covered plan, i.e., that such restrictions may be enforced if permitted under ERISA and federal common law. Although only rarely found in a qualified plan such as a 401(k) plan, (because minimum vesting requirements under ERISA must be met by those plans), for so called “top hat” plans, non-compete provisions are not rare and in the past have at least arguably been enforceable. Top hat plans are unfunded plans that are designed to primarily benefit top management. [Top Hat Plan Basics?]
Of course, no court has yet ruled on ERISA’s preemption provisions as applied to the new California law, but because the new law is based on the same statute as before, there is at least an argument that the same analysis will apply.
Of course, not every benefit plan is subject to ERISA, so it is important to know if a plan is subject to ERISA before moving forward to with attempts to enforce such a clause. ERISA applies to “health and welfare plans” and “pension plans.” A welfare plan provides welfare benefits such as health insurance, life insurance, disability insurance, or severance. A pension plan is a plan that is designed to defer compensation to termination of employment or beyond. Although a complete discussion of what is an ERISA covered plan is beyond the scope of this post, here are some examples of plans that typically fall outside of ERISA coverage:
Plans covering only the company owner and spouse
Stock Option Plans
Voluntary benefits (such as pet insurance)
Employers with any employee in (or moving to) California should check with their employment counsel regarding these new rules and feel free to reach out to Boutwell Fay if there are questions about ERISA coverage or the new laws effect under ERISA.