Requiring That Employee Agree To A Non-Compete In Order To Get Severance Benefits Violated Employer's Severance Plan

In Pactiv Corporation v. Rupert, the U.S. District Court for the Northern District of Illinois recently held that under an employer’s severance pay plan, the employer could not require a former employee to agree to a restrictive covenant in order to receive severance pay.

The severance plan at issue, which was subject to ERISA, provided that in order to receive severance pay and benefits, an eligible employee had to sign a separation agreement “in a form acceptable to the Company.”

After the employee was terminated without cause, he was told that in order to receive severance benefits under the plan, he had to sign a separation agreement which included a non-compete. A non-compete was never a condition of the employee’s employment; the first mention of it was at the time of his termination. When the employee refused to sign, the employer refused to provide the severance benefits, and this lawsuit ensued.

As a threshold matter, the Court explained that “[c]ovenants-not-to-compete are limitations on the ability to work” which “are disfavored under Illinois law and may not be implied in employment contracts but must be clearly stated.”

In this case, the Court found that the plan document did “not authorize or require” that the employee agree to a non-compete in order to receive severance benefits under the plan. To the contrary, the Court explained that “[r]eserving the right to have a separation agreement in a ‘form acceptable to the Company’ is not notice to an ERISA beneficiary that a non-competition covenant could be required as a condition to receive benefits. What is here proposed is not a matter of ‘form;’ it is a substantial limitation.”

Accordingly, the court held that “[u]nder the written terms of the Plan in effect on [the employee’s] last date of employment, he was not required to agree to a non-compete clause in order to be entitled to the severance benefits provided for in the Plan.”

Although this case involved an unusual fact pattern, it nevertheless highlights the scrutiny with which courts approach non-competition agreements, and the need for non-competes to be clearly set out.