Navigating Restrictive Covenants in Physician Employment Agreements

There is a false belief among many young doctors reviewing their first employment agreements that covenants are unenforceable. Nothing could be further from the truth.

It’s a busy time of year for reviewing and preparing employment agreements for young residents and fellows across the country. In the next few blogs, I will talk about some common contract issues that arise in these employment agreements.

One frequent provision worth discussion in such contracts is the restrictive covenant. There is a false belief among many young doctors reviewing their first employment agreements that covenants are unenforceable. Nothing could be further from the truth (in most states) and it is important for every physician, whether taking a job or offering one, to understand restrictive covenants as well as their enforceability.

From the perspective of an employer, a lengthy and broad prohibition seems like a great idea. While the fear factor associated with such covenants may be effective in deterring competition in some cases, most states take a common approach to covenants by enforcing those that have restrictions which are reasonable in terms of length, scope, and geography.

There is no one covenant that suits all practices. Covenants are generally enforceable in most states if they apply during the term of employment and for a period of one to three years thereafter. The covenant should prohibit the physician from rendering competitive services only and not simply from practicing medicine or treating patients.

In terms of geography, the covenant should be carefully planned to cover the actual service area of the practice around the offices or facilities at which practice patients are seen. In a rural area, as well as among certain subspecialties, this can mean that covenants of 25 miles or greater may be acceptable. In an urban area, and especially among less specialized physicians, a mile or less may be appropriate.

Covenants which are properly drafted will preserve the protectable interest of the practice without being so overbroad as to be deemed unenforceable in a court of law. Some states allow a court to redraw an overly broad covenant so as to make it more enforceable - other courts may not allow such an approach and will refuse to enforce the covenant completely. For this reason, a properly drafted covenant is important in order for a practice to protect its interests.

Employers should keep in mind that covenants may be unenforceable, depending on state law, until an employee has worked for the practice from 12 months to 18 months, and a covenant introduced to a physician after he or she has already been employed by a practice may not be enforceable unless accompanied by some additional remuneration from the practice to the physician.

From a physician’s perspective, a properly drafted covenant will allow the physician more freedom to live within the same area as the practice without breaching the agreement between the parties. I always suggest that my physicians try to have the covenant waived in the event the physician is terminated without-cause, the physician terminates for-cause, or the physician is not offered partnership. While some practices will agree to these ideas, others will not. A physician should always be willing, no matter how poorly a covenant is drafted, to abide by it upon termination. Proving a covenant is unenforceable is a long and expensive process that is rarely worth the battle.

One final issue to consider regarding covenants is that they typically are prohibited by most recruitment and support agreements requiring a physician to remain in the service area following termination of employment in order for hospital loans to be forgiven. From the physician’s perspective, it’s important that employment agreements not contain these restrictions or they may find themselves in the unenviable position of relocating and repaying loans that could have been worked off. Your counsel should coordinate covenant restrictions contained in the employment agreement and any recruitment agreement.

Whether preparing or reviewing an employment agreement, talk to counsel about the effectiveness and enforceability of the covenant. There are some special considerations with regard to covenants for practices such as hospital-based groups, telemedicine practices, and nursing home or home health physicians. An experienced health lawyer should be able to guide you through the nuances of writing and reviewing these types of employment covenants.

Find out more about Ericka Adler and our other Practice Notes bloggers.

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