The inclusion of restrictive covenants – provisions to limit an employee’s ability to compete after leaving a company for a new job – in employment contracts is a common practice throughout the business world. In the O&P profession, practitioners, as well as mid- to high-level administrators and managers, can expect to encounter restrictive covenants in their employment contracts.
Employers use restrictive covenants to protect their business by safeguarding trade secrets, confidential information and proprietary ideas. In addition, such covenants also are used to protect a company’s investment in its employees by discouraging them from leaving and going to work for a competitor.
Protection from competitors
The most common type of restrictive covenant is the covenant not to compete, also known as a non-compete clause or covenant. This holds true for every discipline, not just the O&P profession, according to Ron Scott, PT, EdD, JD, MSBA, associate professor at Rocky Mountain University of Health Sciences in Provo, Utah and lead faculty for the Healthcare Management Certificate Program at MedBridge Education in Seattle.
“The covenant not to compete disallows anyone from doing that, and the courts that have allowed it require that it be reasonable in three areas: what you are restricted from doing, over what geographic area, and for how long,” Scott said.
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The length of time that a non-compete covenant stipulates can vary depending on the individual employee and his or her position in the company. Typically, the length of time specified is usually not less than a year or more than 3 years. Although such covenants are decided on a case-by-case basis, the courts generally look more favorably on a shorter length of time.
For example, a non-compete clause that restricts an individual from working for a period of 3 years could be considered unreasonable. In contrast, one that limits the length of time to 18 months or 2 years could be considered reasonable.
In addition, hiring someone for a position within a company generally would stipulate a shorter term than for acquiring someone’s company. Typically, that term is going to be longer because company owners would have a long ingrained knowledge base with their patients and their referral sources and they are being paid fair value for that knowledge, Jim Kingsley, MBA, chief operating officer of Scheck & Siress in Chicago, told O&P News.
“Usually, the courts have held that it is fair for that to be a longer term because of what you paid and the assets that you are receiving. In return, you should have a chance to capitalize on that before someone can run off and reestablish those relationships at some other company,” Kingsley said.
The geographic component of a non-compete covenant must cover a reasonable area that the company serves. For instance, if the company has locations in Illinois, the non-compete clause cannot restrict someone from practicing in California because there really is no competitive impact from that distance.
“In general, the concept is you draw patients or referral sources that are located within some reasonable distance from your office location, and different people have different views on how big that geographic radius of influence is. The courts favor a smaller versus larger geographic limtation,” Kingsley added.
Read, understand and review
Before signing any employment contract, Scott suggested two rules for potential employees. First and foremost, he recommends never signing any contract without first understanding everything contained in the document to be signed.
“Whether it is a covenant not to compete, a nondisclosure agreement or a hold harmless clause – these are all other types of restrictive covenants – or a no moonlighting provision, whatever you do not understand, do not sign,” Scott said.
Second, he recommended having a personal attorney review the contract prior to signing. For new practitioners or individuals who do not have their own attorney, Scott suggested they contact their county’s lawyer referral service and ask to speak to a contract law specialist.
“Everyone can have a personal attorney free of charge or for very low cost by going to lawyer referral service at the county bar in any county in the United States or parish if you are in Louisiana,” Scott said.
During the initial consultation, the attorney will review the contract and offer advice. Scott noted the attorney may be able to suggest ways to redact or modify the contract “to be more favorable to [the employee] because [they] want the job obviously and [they] want to please the employer, but there has to be a mutual fairness in the process.”
Both employers and potential employees also should review their state laws regarding restrictive covenants as each state takes a different stance on those kinds of agreements. Some states are more restrictive, whereas other states are more liberal regarding what is and what is not enforceable in restrictive covenants, Brian Gustin, CPO, consultant for Forensic Prosthetic and Orthotic Consulting in Suamico, Wisc., said.
“Some states will rule that if one thing is found to be outside the bounds of the law, then the whole agreement is deemed to be null and void, even if some of the other provisions in that agreement are valid in the state,” Gustin said.
Only one state, California, completely disallows non-compete covenants, making them “non-enforceable and thus creating a different sort of animal,” Thomas J. Cutler, CPO, Limbitless LLC in Visalia, Calif., told O&P News.
Additional employee considerations
For employees, non-compete covenants must be approached carefully. Kingsley recommends that potential employees learn all that they can about a company before signing any employment contract.
“You want to do your due diligence and make sure that this company feels right to you,” Kingsley said. “Do they have the right culture? Do they have a strong reputation? Do their employees tend to stay for a long period? It is important to feel that you are making the right choice and can have a long and prosperous career. That is a good outcome for both the employee and employer.”
After deciding that a company feels like the right place, the next step is to consider whether the terms of the contract are acceptable. Kingsley suggests asking whether the terms of the non-compete clause make sense: “Is the geographic area realistic? Does the non-compete term – 1 year, 2 years, 3 years – make sense to you?”
For instance, Kingsley noted that limitations on the geographic area may not be a concern for those who have mobility and would be willing to move or commute to a location outside the restricted area if things do not work out. He added that understanding the details of that agreement is crucial because it is unrealistic for potential or new employees to expect to be able to significantly change the terms and conditions of a non-compete contract.
“We have a pretty standard agreement so those employees who have a non-compete, have agreed to the same terms,” Kingsley said. “It gets a little tricky to say, ‘I am going to negotiate a special deal for you,’ when I have 20 other employees who have all signed this.”
Employer considerations
For employers, the primary reason for non-compete and other restrictive covenants is to safeguard their company. Non-compete covenants are one way that organizations can invest in “developing talent with a reasonable expectation that they would see a return on that investment,” Cutler said. “Times are tough, to be sure, and nobody wants to spend a lot of time and resources on someone just to develop the talent of their soon-to-be newest competitor.”
Employers should be able to explain their reasons for any non-compete covenants in their employment contracts. In addition, they need to stay abreast of current laws regarding such covenants in their own state; being aware of what other states are doing also can prove helpful.
“As an employer, you have to be mindful of the current legal environment and just make sure that you are in line with it,” Kingsley said. “If the courts in a certain state determine that any non-compete covenant with a term longer than a year is invalid, then you have a big issue if your agreements are all written for a 2 year term.”
Kingsley noted that after new employees sign contracts, such documents usually are filed somewhere and then often forgotten. However, he suggests reviewing such documents periodically and asking whether they still make sense, are still legal, and still provide the same protection as when they were first signed.
“It is usually something that we like to do during the annual review process,” Kingsley said. “We do not necessarily go through it with the employee, but just look at it and ask, ‘Is this still valid in the current legal environment?’”
It also is important for employers to retain a local employment law attorney who is knowledgeable in contract law and can point to established cases to see how the courts ruled in those cases on restrictive covenants.
“What did the courts enforce, and what did they not enforce? What were their opinions, especially for those cases that maybe were appealed to an appellate level court?” Gustin said. “Were the appeals upheld or were they overturned, and what were the circumstances?”
Employers might find their state looks unfavorably on some non-compete covenants that would restrict an employee’s ability to earn a living and get a job. In such instances, Gustin noted that, “It is worth the employer’s time and money to do just that research on the front end before even creating these things.”
Avoiding an adversarial tone
Gustin said the use of restrictive covenants when hiring employees can create an adversarial tone from the very beginning, without clearly delineating in writing what the expectations are for both parties – from employer to employee, and from employee to employer.
“All too often what I see in the companies that I go into and that I work with, employers have expectations of employees, but they are expectations that are in that employer’s mind and not written down somewhere,” Gustin said. “The employee has a completely different perception of what [the employer’s] expectations are and when those two sets of expectations come to loggerheads, that is when you have issues. If those expectations were clearly defined and written out so both the employer and the employee understood what was expected of them, you would not have those issues.”
Gustin noted the best way to prevent an adversarial relationship is not with a restrictive covenant but by having good operational policies and procedures in place and just by treating people decently.
“Most people have a contentious relationship with an employer or an employee because they do not feel like they have been treated well,” Gustin said. “If you have good operational policies and procedures and you treat people the way you want to be treated, chances are you are not going to have a problem with an employer and an employee.”
The operational policies and procedures should clearly outline the rules of engagement for providing services to a patient.
For new practitioners, Gustin said the questions that should be asked include: What is the process for seeing a patient? What are the procedures? What kind of evaluation forms are used? What kind of paperwork is completed for each patient? When does that paperwork need to be completed? Who gets the paperwork? When does the patient start getting treated? Last, when must treatment wait until certain approvals have been received?
“That is where the most contentions come from when an employer comes to a practitioner and asks, ‘Why did you go ahead and do this? We did not have the approval for these things,’” Gustin said. “[Employers should create] a set of expectations in both directions that say ‘I expect this of you, and you can expect this of me,’ clearly penciled out and then both parties sign and date that. It does not say, ‘If you breach this, then I can sue you.’ It just says, ‘This is what I expect of you, and this is what you can expect of me.”
Gustin noted that as the business grows or as the profession changes, expectations also are going to change and will need to be updated.
“If people do not know what is expected of them, they are neither happy nor efficient, and as a result, the company is not as profitable as it could be. You cannot afford that in this business today because it is getting harder and harder from a regulatory standpoint,” he said.
Legal validity
Although California is the only state that disallows non-compete covenants, Scott noted restrictive covenants actually violate the letter, if not the spirit, of federal antitrust law.
“If you go back to the original Sherman Antitrust Act of 1890, that was the intention – to disallow employers from restricting employees’ ability to move on,” he said. “We have just allowed this exception to creep into the law in most states over the last 65 years, since 1950. Every time that [non-compete covenants] are challenged in court, they gain a little validity when courts in various states establish conditions for legal acceptability of a covenant not to compete.”
Scott added that such non-compete covenants are “absolutely unnecessary” because those protections against an employee taking anything that an employer legitimately would not want taken away are already protected by law.
“Employees cannot steal your client lists or your processes but they can take the knowledge they have gained and take it somewhere else,” Scott said. “There is absolutely no advantage to the employee of signing a covenant not to compete.”
Scott noted that the American Medical Association (AMA) approved a provision in 2012 that discouraged physicians from signing restrictive covenants. The AMA stated, “Covenants-not-to-compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services.”
Scott also said that his other profession of law wholly disallows non-compete covenants. “Model Rule 5.6 prohibits law firms from imposing a covenant not to compete on attorney employees, so our ethics rules disallow it.” He suggested other professions, including orthotics and prosthetics, also should consider taking what he called a “bold step” and disallow covenants not to compete among members. – by Mary L. Jerrell, ELS
- Reference:
- AMA Code of Medical Ethics. 2014. Opinion 9.02 – Restrictive Covenants. Available at www.ama-assn.org/ama/pub/physician-resources/medical-ethics/code-medical-ethics/opinion902.page. Accessed Aug. 3, 2015.
Disclosures: Cutler, Gustin, Kingsley and Scott report no relevant financial disclosures.
