By: Joseph Rust
Employees are often considered a company’s greatest asset. In many cases, your employees give you the advantage over your competitors, and therefore, the success of your business is directly affected by the performance of your employees. That can be why it is so important to train and develop your employees in their role in your business and ensure they feel like an integral part of your company’s goals and achievements. Unfortunately, what happens after an employee is terminated or leaves your company? Specifically, all the knowledge of your company, whether that be customer or client lists, trade secrets, products, or special skills to name a few. Using a Non-Compete or Restrictive Covenant Agreement is what you are looking for.
Non-Compete agreements are used to protect a business’s interests from a former employee taking a position with a direct competitor or starting their own business in direct competition. This may protect your business from losing customers, clients and the like to the competing business. Or in the instance of a former employee who received extensive, likely costly, and specialized training from their employer and then uses that knowledge and training working for a competitor or sharing and training the other employees of the competitor. Naturally, you would like to avoid these scenarios, and entering a non-compete agreement with your current employees is your best option. However, the non-compete agreement is not absolute.
Non-compete agreements must be entered into with your employees at the time of hire. This is because courts will not find the agreement valid if the employee did not receive anything in return, which is called consideration. Here, the prospective employee is bargaining for and receiving employment in exchange for the non-compete. There may be some scenarios where a court would find a non-compete valid when entered with a current employee such as part of a promotion or raise.
There are other factors you should consider when creating a non-compete agreement with your employees. The agreement must be reasonable in scope, duration and geography. For example, restricting a former employee from working in the same industry in any capacity for the next ten years throughout Iowa would obviously be considered incredibly too restrictive. If challenged, courts look to a reasonableness balance between the interest of the employer and the employee. Commonly, Iowa has found one to three years is reasonable in length often depending on the employee’s length of employment with your company. Geography is less certain but will depend on industry standards and a specific market area for the employee.
Keep in mind, Iowa uses the partial enforcement doctrine when evaluating non-compete agreements. It is one of the few areas of contract law where a court will find there is a valid agreement between the parties but some terms may not be reasonable, and the court will reform the agreement to what would be considered reasonable. So, if you are reading this article thinking of how your non-compete agreements may be too restrictive, if ever challenged by a former employee, the likely outcome is the court simply modifying the duration and geography to be less restrictive.
If you are in need of assistance drafting a non-compete agreement or are interested in learning if your current non-compete agreement is too restrictive, we recommend that you consult with an attorney.