Covenants not to compete: Winter is Coming
The two constants in almost every physician employment contract are compensation and post-employment restrictive covenants. Those covenants typically restrain employees from soliciting staff and patients to follow a departing physician, and restrict the physician from establishing a competing practice (or employee from joining another practice) within a defined geographic distance from the practice for a specified period of time. Often, the contracts include onerous consequences in the event that the covenant is violated.
This year, the Legislature made fundamental changes with regard to “covenants not to compete” that will result in at least abbreviating the terms of most covenants, and may render others void entirely. The Legislature was motivated to act by employer abuses that resulted in non-compete provisions covering entry level positions where the only interest of the employer was to impair job mobility rather than to protect the business from unfair competition.
The new law goes into effect on January 1, 2020, but is expressly intended to be retroactive. Significantly, it has no effect on covenants not to solicit employees or patients, nor does it extend to covenants entered into in connection with the sale of a practice. In brief, here are the key changes that may relate to physicians:
- Covenants not to compete that are longer than 18 months are presumed to be unreasonable and unenforceable, unless there is “clear and convincing evidence” that a longer term is necessary to protect the employer’s business or goodwill. That is a higher standard of proof than in the usual civil case.
- The terms of the Covenant must be disclosed in writing to the prospective employee no later than the time of the acceptance of the offer of employment. In short, put it in the offer letter, in detail, or, if the Covenant is contained in a stand-alone agreement, enclose that agreement with the offer letter.
- Covenants not to compete are void as to employees whose annualized earnings do not exceed $100,000—and this threshold will be indexed to inflation going forward. For independent contractors, that inflation-indexed earnings threshold rises to $250,000.
While a Court can modify a covenant not to compete, under the new law if a court or arbitrator modifies the covenant, only enforces it in part, or determines that it violates the statute, the employee is entitled to be paid a statutory penalty of $5,000 in addition to reasonable attorney fees and costs. This elevates the risk for an employer seeking to enforce a restrictive covenant.
If you manage a medical practice, here are steps you should take now in anticipation of the effective date of this law:
- Modify the form of your offer letters to be specific about the terms of your noncompetition covenant in the letter or enclose the covenant with the letter. Be sure that your “new and improved” restrictive covenant is drafted to comply with the statute.
- If your current form of covenant not to compete extends longer than 18 months, communicate to the employees who are subject to that covenant that you will not seek to enforce it for longer than an 18 month term.
- Your practice may have nurses or medical assistants who are also subject to non-compete agreements that may no longer be enforceable under the new statute because of their pay rate. If that is the case, consider communicating to those personnel that you will not seek to enforce the covenant after January 1.
- Review the classification of individuals whom you have treated as independent contractors to determine whether they are properly classified or should be treated as employees. Recognize that if they are independent contractors, the earnings threshold for an enforceable non-compete is much higher.
- Review the annualized earnings for all part-time employees to determine if they meet the $100,000 annualized earnings threshold for an enforceable non-compete. If they do not, consider communicating with them that because of the change in the law, you will not seek to enforce the non-competition covenant.
- As before, if you are asking an existing employee to sign a new covenant not to compete, ensure that you give the employee some benefit or compensation in addition to and exceeding their regular compensation in exchange for their entering the agreement. This benefit could be a promotion, a raise, a one-time bonus or payment, additional vacation or PTO, or something else of value. Mere continued employment is not enough.
Why get out in front of this by narrowing your non-competes before January 1? In the absence of a pro-active employer, employed physicians who are subject to non-competition covenants that are no longer legally compliant will now have new leverage in negotiating their departures. Employers should avoid creating opportunities for employees to litigate over whether the restrictive covenants conflict with the statute. After all, one objective in ending any employment relationship is to avoid provoking the former employee into consulting with an attorney.