Employment Not to Compete Contract

Jan 28, 2017

4.2 years. That’s the median number of years that employees stay with an employer as of January 2016 according to the United States Department of Labor’s Bureau of Labor Statistics. That’s down from 4.6 years in January 2014 and January 2012. The median number of years had been trending up since 2000 when the median was 3.5 years. Interesting, but what’s that mean for employers? It means you have to deal with employees coming and going. Let’s focus on the going: when an employee leaves, they can take clients with them unless employers take steps to protect those relationships. This can be done through a contract containing a “covenant” (or promise) not to compete. In Iowa, it is a best practice to condition hiring or receiving a promotion on signing the contract not compete. However, courts in this jurisdiction have found that an employee’s continued employment is sufficient consideration to support the contract.

Iowa law relies on a three factor test to determine if an agreement not to compete is enforceable: (1) the agreement must be necessary for the protection of the employer’s business, (2) not unreasonably restrictive of the employee’s rights to find new employment, and (3) not prejudicial to the public interest. Under the necessity test, key factors would be whether the employee works in a position which results in close, personal contact with an employer’s clients and whether the employee would be in a position to take the customer along when the employee leaves for a new job. (A good example is a sales person…) Another key factor would be where the employer provided specialized or technical training and skills that the employee can take with them (and are important to the customer relationship). A third key factor would be where the employee knows trade secret or confidential business information about his or her employer that they could take to the competitor and whether they may “inevitably disclose” such information in their new role.

Under the reasonableness test, courts consider time and geography. Is the time period for which the employee is restricted reasonably related to the time needed for the prior relationships to fade? Or for the employer’s new top saleswoman to grow and solidify their customer relationships? As one Iowa court case contemplated: is there ample time to succeed after the employee leaves? Or is it long enough for the confidential business information to grow stale? A commonly enforced time period is around two years. Also, is the geographic restriction reasonable? If the employer’s client base is in Iowa and Missouri, then the agreement not to compete should not be nationwide.

Under the public policy test, the courts consider whether the public would be harmed by enforcement of the agreement not to compete. As an example in one Iowa case, the court determined that enforcement of the agreement “simply prevented a new company from entering the market place [for a period of time]” and “did not result in a monopoly or even a reduction in the number of companies” who performed that type of work.

Since employers bear the burden of proof in a court case regarding breaching such a contract or in a court case seeking to prevent a former employee from beginning work at a competitor, employers should consider the actual evidence supporting these tests when crafting any agreement not to compete.

If you have questions regarding Employment Law or Not to Compete Agreements please contact Amy L. Reasner at Lynch Dallas, P.C. at areasner@lynchdallas.com or 319-365-9101.

Category: Employment Law

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