Restrictive Covenants in Employment or Independent Contractor Agreements: An Owner/Employer’s Perspective

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Restrictive Covenants in Employment or Independent Contractor Agreements: An Owner/Employer’s Perspective

What Are Restrictive Covenants and Why Do They Matter For Dental Practices?
The success of any dental practice can be measured, at least in part, by its ability to create and maintain patient relationships. Unfortunately for practice owners, such patient relationships do not ordinarily arise between a patient and the practice itself, but rather the patient and the individual dentists and hygienists who directly interact with the patient. This puts the practice at risk of losing patients when these individuals leave the practice as patient may choose to follow the departing provider to their next stop. As you would expect, the risk is even greater in situations where the departing employee is permitted to secure new employment in a nearby practice (or even open up their own practice in close proximity) and then solicit his or her loyal patients away from the original practice.

Although there is no fail-safe way to prevent any individual patient from leaving a practice, careful planning at the outset of an employment relationship can significantly protect against the loss of patients to a former employee. The most effective form of protection is a restrictive covenant agreement between a practice and its essential employees containing, among other things, non-compete and non-solicitation provisions. As the name suggests, a non-compete covenant precludes an employee from engaging in certain acts of competition against an employer within a specified geographic area for a limited period of time both during and following his or her employment. Similarly, non-solicitation provisions prevent a former employee from soliciting a practice’s patients and/or recruiting its employees.

Key Benefits
While each agreement must be specifically tailored to fit an individual practice, there are numerous benefits to requiring your employees to enter into both non-compete and non-solicitation agreements:

  • Protect Patient Relationships—Perhaps the most obvious benefit, requiring new employees to sign a non-compete and non-solicitation agreement prevents them from soliciting your patients if they chose to move on to a different practice.
  • Prevent Wasteful Training Expenditures—Training a new employee can be a costly and time consuming process and, as a result, it is necessary to prevent competitors from stealing away employees soon after undertaking the costs to train them.
  • Deter Competitors from Recruiting your Employees—Requiring a restrictive covenant sends a message to your competitors that you intend to protect your patient lists and patient information. A competitor is much less likely to recruit your employees if the employees are prohibited from utilizing his or her knowledge of your business and patient base.
  • Enhance the Value of Your Practice—Whether or not you plan on one day selling your practice, failing to require your employees to agree to non-compete and non-solicitation provisions in their employment agreement could have significant financial repercussions. The value of your practice will decrease if your employees are not subject to non-compete and non-solicitation provisions as purchasers will recognize the risk associated with the departure of those employees.

Making Restrictive Covenants Binding and Enforceable
Once you decide to require your employees to enter into restrictive covenants, the next step is to speak with an attorney. The benefits are clear, but courts are hesitant to enforce broad restrictions on a person’s ability to work for the employer of their choice. Moreover, the enforceability of certain restrictions varies from state to state as to issues relating to the timing of these covenants and their assignability in connection with a practice transition. As a result, restrictive covenant agreements must be narrowly tailored to satisfy the legal requirements of your state while still effectively protecting your practice. Although doing so may not create immediately apparent results, it will certainly assist in the prevention of unwanted future losses.

Categories: Associate Agreements, Blogs, Restrictive Covenants, Transition Issues