Many business owners I talk with are reluctant to enter into a non-compete with their employees. These business owners are afraid an employee won’t sign or a confrontation will occur. Some just don’t believe they should keep the employee from finding a job – even if it is to the employer’s detriment.
But to avoid disruptions to your business or losing customer relationships you should consider non-compete agreements in certain situations. This is especially true if the employee has a close relationship with the customer and could easily take the customer if the employee leave your employ.
The best time to secure a non-compete agreement is when you hire the employee although continued employment may be sufficient consideration to bind even current employees. Iowa courts have developed a three-part test to determine whether a non-compete agreement is enforceable:
1. Is it necessary for the protection of the employer’s business?
Factors to consider: Does the employee have a great deal of personal contact with customers? Is the employee in a position to lure customers away? Have you spent significant time and money training the employee?
2. Is the non-compete unreasonably restrictive of the employee’s rights?
Factors to consider: Is the non-compete limited in time? The most common time restrictions are 1-3 years. Courts tend to favor shorter time restrictions. (This will always depend on the cirmcumstances of the particular case).
Is the non-compete limited in geographic scope? For a local business, a 50-mile limit may be reasonable while a regional business may use a scope spread out over several states. It depends on the market area of the particular business. Because of the Internet and other technologies, geographic limits are becoming a less effective way to control competition from former employees. Businesses must carefully consider how to be reasonable and still control competition in the global marketplace.
3. Is the non-compete prejudical to the public interest?
Factors to consider: Does the particular non-compete harm the general public? This part of the test has rarely been used to invalidate non-competes in Iowa. For example, non-competes in Iowa have been upheld against doctors and dentists where you might expect that limiting access to health care could harm the general public.
Finally, Iowa has adopted a "partial enforcement" doctrine permitting a court to uphold a non-compete agreement to the extent it is reasonable and allowing the Court to modify terms if necessary. For example, a court may reduce a time restriction from 3 years to 1 year if the judge finds that is appropriate. Or, a judge could change a geographic restriction from the entire state of Iowa to a 100-mile radius of the business. This is different from an all or nothing approach where a judge might declare the entire non-compete agreement invalid if just one of the terms is found unreasonable. When litigating non-compete agreements in Iowa the parties must consider whether the agreement may be partially enforced.
If you are one of those who is not comfortable with a non-compete agreement for your employees I would strongly encourage you to have at least confidentiality and non-solicitation agreements. These agreements generally provide protection for your business without restricting the employee’s ability to work elsewhere. If a departing employee attempts to take clients or other employees with them you will be glad you had those agreements in place.
*Remember there are several pitfalls relating to these agreements if not written correctly so be sure to contact your employment or business lawyer to review and/or draft such agreements. For more information read this interesting article on The Power of the Noncompete Clause through the Harvard Business School.