Many people need to sign non-compete agreements when they start work. Problems may arise when they want to leave employment but continue doing the same kind of work. The first thing the employee may do is ask the employer to release them from the contract. If the employer refuses, then the employee may consider taking legal action based on the contract’s language and examination of the entire situation. This article will look at Iowa Employment law in relating to general non-compete agreement topics and situations that the court may find unenforceable.
What Are Non-compete Agreements?
In Iowa, employers may have their employees sign Iowa non-compete agreements. These agreements are contracts that contain sections called “restrictive covenants,” which prevent the employee from doing something. In this case, the non-compete agreements prevent employees from performing some work or working for a particular employer. Although courts are generally hesitant to prevent someone from performing the kind of work they have chosen as a career, there are times non-compete agreements are enforceable (the court will order the employee to stop doing some kind of work).
What Is The Test For Determining Whether A Non-compete Agreement Is Enforceable?
The courts have established a three-pronged test to determine whether these agreements, sometimes called “restrictive covenants,” are valid. These are:
- Is the non-compete agreement necessary for the protection of the employer’s business?
- Does the non-compete agreement unreasonably restrict the employee’s rights?
- Is the non-compete agreement not prejudicial to the public interest?
These three requirements mean the restriction on the employee signing the non-compete agreement must be no greater than is necessary to protect the employer. The employer has valid interests in ensuring the employee does not take elements of the employer’s business, including customer lists and other valuable information (inventions, ideas, etc.), to compete with them directly.
However, these agreements must be written for clear and specific purposes so the employee is not harmed unfairly. The employer is responsible for showing enforcement of the non-compete agreement is reasonably necessary to protect its business. If there is only a small gain to the employer, but the employee is badly harmed, the court is less likely to enforce the non-compete agreement.
What If The Agreement Is Too Restrictive Or Unfair?
The court may find a non-compete agreement invalid because of “oppressive restrictions” or if bad faith was involved in its execution. If the court finds the non-compete agreement was seriously unfair, the court will not enforce it.
The most common reason the court may find an agreement too restrictive is that it is either too restrictive in terms of time or distance. For instance, if an agreement says someone cannot work anywhere in the United States, it is more likely to be found too restrictive than if the agreement says someone is not to work within 50 miles of the employer. Likewise, a provision saying someone is not allowed to work for ten years is likely to be found too restrictive, while a time period under two years will probably be valid.
Note, however, that a court, in its discretion, may modify an agreement to make it fair. So, if a non-compete agreement does not have a distance limitation, the court could create one it thinks is fair.
Courts will also strongly consider whether the employee had the opportunity to take or “pirate” clients or customers. Courts will consider how much access the employee had to customers and customer lists. Courts will also consider whether the employee received any special knowledge at this job or special training from, or paid for by, the employer. Also, the court will consider the kind of job and its industry in enforcing this non-compete agreement.
Further, a contract made in bad faith will likely not be enforced. Bad faith is a concept that means a person was acting unfairly, in a way that deceives or otherwise treats another person in a contract unfairly. If a Defendant can show the employer had bad intentions in creating the non-compete agreement, this will be a defense against enforcement. The defendant may also say the agreement was “unconscionable,” It is so unfair that it would be “shocking to the conscience” and so grossly unfair that a court should not enforce it.
Is There A Consideration Requirement?
In contract law, an agreement must have something called consideration. This means that both parties must give up something in exchange for doing something. Courts have found this requirement is met if the employer makes the employee’s signature of the non-compete agreement a condition of continued employment. So, if an employee must sign the non-compete agreement or be fired, the consideration requirement is probably met.
When Is A Non-compete Agreement Against Public Policy?
A restrictive covenant may violate public policy if there is a severe shortage of workers in that profession. For instance, there is a shortage of certain kinds of doctors in many parts of Iowa. Courts have held non-compete agreements unenforceable if there is a shortage in essential industries like this.
Courts are also generally allowed to consider the effect on third parties to the contract when looking at whether enforcement would be in the general interest.
For more on this, check out our article: Clauses for Employers to Include in Employment Contracts and Independent Contractor Agreements.
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