Can I Add a No Compete Provision to a Severance Agreement?

[author: Angela Bohmann]

Pactiv Corporation sponsored a severance plan subject to ERISA. The plan required an employee to sign a separation agreement and release in a “form acceptable to the company” in order for the employee to be entitled to a payment under the plan. The severance plan itself did not contain a no compete provision. When an employee terminated employment, the employee was presented with a separation agreement that contained a no compete provision. The employee refused to sign and sued instead for the severance payment of $99,676. The court found in favor of the employee. Even though the employer had some discretion with respect to the form of separation agreement, the court would not permit the employer to condition the severance payment on compliance with a no compete. To add such a requirement, the employer should have amended the severance plan; the proposed separation agreement was not itself such an amendment.

Employers wishing to impose a no compete as a condition for an employee to receive severance pay should make sure that the no compete is part of the severance plan. Of course, the employer should also make sure that the no compete is consistent with applicable state laws (to the extent those state laws are not preempted by ERISA – which is another whole topic).