Owning a business comes with inherent risk. Adding employees and hiring independent contractors is great as it means your business is growing, however, each new employee is a potential source of conflict. While having a thorough hiring process will weed out any bad apples, a detailed contract, including a non-compete clause, will ensure trust, transparency, and protection for both the business and the employee.
The Supreme Court of Iowa has established a three-pronged set of guidelines to use when determining the validity of a non-compete clause and to evaluate cases brought forward by businesses and workers. The three factors are:
- Necessary for the protection of the employer’s business;
- Does not restrict the employee’s rights, within reason; and
- Not prejudicial to the public interest
Necessity To Protect the Employer’s Business
If an employer in Iowa stands to lose significant business after an employee leaves due to the potential relationship between an employee and his or her customers, a non-compete covenant may be “necessary” to protect the business. This scenario occurs when an employee has developed direct relationships with customers, whether in person, over the phone or virtual, leaves the company and then lures the previous business’ customers over to the new business. For example, a salesperson who has regular contact with his or her clients and is the primary person on the sales account will have much greater sway over the decision of the client than the business itself. Or, a physician who worked in an office for X number of years will have usually developed a close doctor-patient relationship with his or her patients and would be much more likely to retain those patients upon leaving if there was no non-compete in place. If any of these cases were to come to court and a non-compete was in place, expect the non-compete to be legally enforced.
Reasonable Restrictions Against the Employee
Along with wanting to prevent patients, clients, or customers from being poached by a previous employee, a business also needs to protect its trade secrets, training procedures, and other sensitive information. The employer may ask the employee or independent contractor to sign a non-compete, but the employer cannot overly infringe on the past employee’s right to earn a living. Iowa law requires that the agreement be reasonable for both parties. For example, if a dental office in downtown Chicago had a non-compete clause of 20 miles and 20 years, the courts would most likely argue this is unreasonable based on the range and the timeframe. Ranges will ultimately depend on the geographic area of the original business. A non-compete should have a smaller range in downtown Davenport versus a non-compete in a more rural part of Iowa. The timeframe will usually be the same across most non-competes regardless of location. In Iowa, one to two years is considered reasonable. The law basically allows for the business to have a chance to be successful after the loss of the employee. Beyond that point, if the business has failed to secure clients of the previous employee or generate enough business to make up for the loss of the employee it is on the business.
The burden of proving “reasonableness” is on the employer and what reasonable is depends on comparing the hardship and oppression brought against the employee by the non-compete and the potential benefit of the employer. Iowa adopted the partial enforcement doctrine to deal with clauses that are considered overly restrictive. This doctrine allows the court to enforce the non-compete to a degree that it finds reasonable, versus the old days of all or nothing.
Employee Termination
If an employee is terminated by his or her employer and had a non-compete clause Iowa courts will typically try to find a middle ground between the employer and the employee. In some cases, the non-compete will be considered null and void if the employee was laid off for reasons other than a breach of contract, misconduct, etc.
Due Diligence
As an employee, if you are considering an offer from a company but are unsure of the non-compete contained in the contract, or if your previous employer has brought a non-compete claim against you which you think is unjust, be proactive and seek guidance from a qualified attorney. A little bit of time and money can save you a lot of headaches in the future. Conversely, if you’re an employer and you’re unsure of how to structure your non-compete or you feel a previous employee has breached a non-compete agreement you’ll likely need an attorney to handle your case.
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