You started a medical practice and, through the years, have developed policies, procedures, strategies, work products, client relationships and confidential information that are specific to your practice and its success. As your practice grows, you know you will need to hire more employees. You also understand, however, that any potential employee may pose a risk to your business, because each employee will be exposed to the confidential or proprietary information and practices you have developed and compiled as you have built your business. One way to protect your practice is to execute an employment contract with each new employee, one that outlines certain requirements, covenants and representations.
This agreement will memorialize the understanding of both parties regarding what the position entails and the responsibilities of both the employer and the employee. To prevent your ideas and information from being taken by an employee to a competitor’s practice, you may want to include restrictive covenants in the employee agreement.
Restrictive covenants can be essential to protect a practice. Specific examples of restrictive covenants in an employment context are non-competition and non-solicitation provisions. Non-competition provisions outline where an employee is prohibited from practicing if that employee chooses to end his or her relationship with an employer. Non-solicitation provisions prohibit a former employee from soliciting employees for a successor practice. Drafting these types of provisions in a deliberate, reasonable way is critical to ensuring enforceability.
How Are Non-Competes Analyzed by Courts?
Non-compete clauses are somewhat common in employment contracts. Their purpose is to protect an employer from unfair competition by preventing former employees from using strategies and information developed by a practice at a subsequent place of employment. These provisions also prohibit individuals who leave a practice from soliciting patients to move with the employee to a new practice, and prohibit employees from soliciting the former practice’s referral sources. Non-competition provisions help curtail the movement of this information from a practice to its competitor by limiting where, and when, employees can work after their relationship with a current employer ends.
Non-compete clauses … protect an employer from unfair competition by preventing former employees from using strategies & information developed by a practice at a subsequent place of employment.
Courts want to make sure that restrictive covenants, such as non-competition and non-solicitation clauses, are reasonable and do not impose an unnecessary restriction on trade. To do this, they will often look at a few factors when determining whether a given covenant is enforceable: the function of the covenant, the geographic scope of the covenant and the duration of the covenant. When examining restrictive covenants, courts will also want to ensure that the covenant:
- Is narrowly written to protect an employer’s legitimate business interests;
- Is not unduly burdensome on the employee; and
- Does not violate public policy.
Courts do not want employees to be completely restricted from working in their field. This would be against public policy. Instead, non-competition clauses are meant to keep former employees from being able to work at a similar practice where that employee could possibly use information, strategies or referral sources or treat patients from its previous practice to gain an unfair advantage in the marketplace.
State courts vary in their analysis and treatment of restrictive covenants (see sidebar, right). Some courts do not allow non-competition or non-solicitation clauses in employment agreements except in very specific circumstances. Other state courts are more lax in their requirements. Some courts, such as those in Illinois, focus on the consideration exchanged for the restrictive covenant. An Illinois court recently found that there must be adequate consideration for a restrictive covenant to be enforceable. The court found that although the sole consideration for a restrictive covenant can be at-will employment, the at-will employment must be at least for two years following the signing of the employment agreement to be considered “adequate.” It is clear that states treat restrictive covenants in a variety of ways. Therefore, state-specific analysis is necessary.
What Can You Do to Protect Your Business?
An employer who decides to draft restrictive covenants into its employment agreements must have a carefully, narrowly drafted and individual-specific provision; a one-size-fits-all approach using boilerplate language will usually not work in the restrictive covenant context because of the stringent requirements that courts have placed on these types of provisions.
So what can you, as an employer, do to ensure the restrictive covenants in your employment agreements are enforceable? First, it is important to analyze state law, which will dictate whether restrictive covenants are enforceable and what type of language is permissible in restrictive covenants in that state. Second, it is critical to be precise in the activities that you are trying to limit your employee from undertaking in the future. Third, it is necessary to limit the scope of the activity to a reasonable geographic location. Finally, analyze state law to ensure the duration of the restrictive covenant is one that courts in that state have enforced before.
If you have any questions about the admissibility and enforceability of restrictive covenants in your state, contact an attorney to assist you in drafting restrictive covenants to effectively protect your practice.
Steven M. Harris, Esq., is a nationally recognized healthcare attorney and a member of the law firm McDonald Hopkins LLC. Contact him via email at firstname.lastname@example.org.
Restrictions on Non-Compete Clauses
According to a 2016 White House report, Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses, non-compete agreements currently impact nearly a fifth of U.S. workers, including a large number of low-wage workers. The report states, “Because of the potential issues presented by some non-competes, there is a growing movement in states to take action to limit the misuse of non-compete agreements. Several states are banning non-compete agreements outright for certain sectors and occupations. This year, Hawaii banned non-compete agreements for technology jobs, and New Mexico banned them for health care jobs. Others have taken steps to limit the scope of non-competes. Oregon recently banned non-compete agreements longer than 18 months, while Utah limited the agreements to one year.”
Although federal law does not prohibit a company from including a non-compete agreement, some states either completely ban or limit their applicability. Here are a few more states with restrictions:
- California: Usually not enforceable, with narrow exceptions.
- Montana: Only permitted in certain statutorily enumerated circumstances.
- North Dakota: Not likely to be enforceable.
- Oklahoma: Not enforceable.
- Oregon: Only permitted in certain statutorily enumerated circumstances and are void unless in strict compliance with statutory requirements.
The report also says, “At the federal level, legislation has been proposed to limit the use of non-compete agreements below a certain income threshold where they are less likely to have valid uses.”
Before incorporating a non-compete clause into your employment contracts, be sure to consult with your attorney and make sure it complies with all applicable state and federal laws.