Restrictive Covenants

A restrictive covenant (RC), as used in most physician employment agreements, is a provision(s) that prevents or restricts an employee from competing with his employer. Such provisions will prevent the new employee, in the event he leaves employment, from:

  • recruiting staff away from the employer to his new location;
  • soliciting customers (patients) of the employer;
  • setting up shop (practice) within a certain distance from the employer for a certain length of time.

electric-fenceSuch provisions implicitly acknowledge that there are costs to the employer of recruiting, hiring and establishing a physician in practice that will not be recouped if the newly recruited physician takes patients away from the employer to a competing entity or his own, newly established independent practice.

The third of these provisions is the most potentially damaging of these restrictions. If the duration is long enough and the distance far enough, the physician will have no choice but to abandon any practice he has created and start from scratch building a new practice at a distant site. These considerations, of course, apply mostly to primary care physicians and medical specialists, less to certain surgeons, and even less to anesthesiologists, emergency medicine specialists, urgent care physicians and hospitalists (who provide episodic care and don’t generally develop a “loyal” practice of repeat patients).

If too onerous, RCs can be found to be unenforceable, with each state jurisdiction having its own regulations and case law. It is very important that your attorney be well versed in your state’s case law in this area so that you know what the local trends are. However, most states allow for some level of non-compete restrictions to be enforceable.

Employer Perspective

Whether it’s a hospital system or medical group, your new employer is more concerned about recouping the investment in your employment than the challenge it may present to you if you leave. Interestingly, it is the small physician groups that tend to impose the strictest non-compete clauses in their contracts (sometimes bordering on unenforceable) because  they find it much more difficult to absorb the losses that occur when a new associate leaves the group and sets up a competing practice. Most employers have consulted a corporate attorney when constructing employment agreements, and are fairly confident in the enforceability of their RCs.

Employee Perspective

Building a practice is a very personal thing. And the size and stability of the practice is directly related to the commitment, skill, hard work and personality of the physician employee. It is difficult to imagine that the practice (cohort of patients) that is linked so closely to the physician is legally “owned” by the employer. But rather than get bogged down in who owns the practice, I think it is best to simply focus on the potential consequences of leaving employment and how to create a fair document that recognizes the contributions of both the employer and the physician.

Ideally, your relationship with the employer will be positive, long and mutually satisfying. However, if it breaks down you will want to be able to walk away with the smallest disruption to your income and lifestyle. It is unlikely that an offer of employment will not include some type of RC. But employers are more likely to be flexible with provisions that also cause them the least amount of disruption. Perhaps the restrictions can start out severe and taper over time. You may find that the employer will not relinquish on both distance and duration, but might give a little on one or the other of the restrictions. For some of you, for example, a two-year duration will be acceptable, as long as the distance is minimal, or vice versa.

Negotiation Tactics

As I have stated before, all of the potentially negotiable provisions in an agreement should be negotiated in their totality. A simple outline to strive for might look like this (more on this in a later post):

  1. Try to obtain several offers, from good, stable, attractive employers;
  2. Look at the letters of intent and be certain they are a general offer of employment that do not limit your ability to negotiate on some of the important issues;
  3. Request to see the proposed or draft employment agreement before signing the letter of intent because once that is signed, you are limiting yourself to serious negotiations with one employer (but it is helpful to have comparison agreement that you can refer to as a bona fide offer with a better salary or other terms);
  4. Create a spreadsheet with all of the major issues to address (salary, tail coverage, non-compete, scope of practice, benefits, etc.), preferably in the order of their importance to you;
  5. After reviewing the draft agreement, create a counter offer to the proposed agreement, in writing, knowing that you will need to compromise on many of the items, and discuss this counter offer in detail with your attorney before sending it back to the employer;
  6. When a counter offer is made, be prepared to compromise more on less important items in order to achieve your primary goals.

Considerations

Look at the location of the prospective practice. How many other potentially attractive practice opportunities might exist just beyond the stated boundaries of the restrictive covenant and how much travel would be required without moving?

Would it be possible to work in a slightly different specialty? If employed as a traditional internist, could you work as a hospitalist locally without invoking the RC, or does it apply to all practice activities?

As suggested above, perhaps the RC can be in place for the first 3 to 5 years, then be dropped as an acknowledgement of your contribution to the group.

Consider requesting that the RC only apply to certain types of employers (for-profit, or not-for-profit, hospital system or physician owned group).

If the duration is short enough, many primary care physicians can quickly rebuild a practice after 12 to 18 months of working just outside the RC distance limits.

Be sure that the RC does not limit the ability to shift to academic or administrative duties not directly related to patient care if appropriate.

Send me examples from contracts you have seen for additional comments or suggestions.

Disclaimer: I am not an attorney and I do not provide legal advice. My role is to provide education and coaching to physicians to help them find a great job and avoid costly mistakes as employed physicians. I strongly recommend that every physician entering into an employment agreement, or any contract, engage an experienced local attorney to assist them in their negotiations.

About johnjurica

Former Senior VP and CMO writes about physician leadership.
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One Response to Restrictive Covenants

  1. Pingback: Moonlighting | contract doctor

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