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What Should Physicians Know About Restrictive Covenants in Employee Contracts?

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Restrictive covenants may be one of the most discussed yet least understood aspects of working in the medical field. They create parameters that can limit where a doctor or practitioner can work after finishing employment at a facility and for how long. Usually, it prevents a professional from building a client base at an established practice or hospital, then branching into private practice with that client list.

Typically, the restrictive covenant enters as part of the initial contract signed by the doctor and the employing facility. Sometimes, it allows the employee to only work at that facility and bars any research or teaching outside the system. Sometimes, it creates a no-compete clause for a specific geographic area over a set period of time, like not working for any other providers within a five-mile radius two years after ending employment.

Some people may believe these covenants are not legal nor enforceable, but this is not the case. As the health care industry continues to consolidate with larger providers, these may serve to dissuade employees from leaving or attempting to leverage the threat for more favorable conditions. Years of faithful service and goodwill accrued may not extricate one from the terms of these covenants when terminating employment.

How Should Physicians Approach These Covenants When Signing a Contract?

While going over an initial contract of employment with a health care system, more attention may go towards compensation, shift demands, and other terms. However, do not neglect the restrictive covenants. Ask questions, advocate for one’s position, be certain of what the restrictions are and if one can abide by them. If involved in research or planning to speak at a conference, mention that and negotiate. If concerned, bring in a physician lawyer to help.

If the employee questions the covenant early in the process, it will likely be more advantageous. For instance, if a physician is being recruited by a health care entity but still has active research going on at a different company, it should be mentioned. The lack of direct competition should allow for provisions to exist allowing both to happen simultaneously, providing the research and subsequent work does not overtly interfere with patient care. More direct competition may complicate matters.

Make sure the restrictive covenants implemented in the first contract make sense for however long one expects to be employed by the health care provider. Many contracts come with evergreen clauses, which automatically renew the terms once the original term expires and continues at that interval. If offered a chance to renegotiate, look at those covenants before signing a new deal. Should circumstances change, revisit the covenants and create new ones that better fit one’s current scenario.

What Happens When Employment Ends?

Generally, restrictive covenants come most into play as a contract is ending or has ended. These clauses usually loom largest when a with-cause termination occurs. If a physician has egregiously violated terms of a contract to warrant casual dismissal, the restrictions of the contract are strong and likely to be upheld in a court of law.

On the contrary, physicians terminated without clause are most likely to be released from a restrictive covenant. Arguing that a doctor should not be allowed to practice in a certain area is tougher to accept when the dismissal comes from budget cuts or something more arbitrary.

Pennsylvania courts have limited the geographic and durations of restrictive covenants, as they often attempt to level the unequal bargaining position doctors often face with health care employers. However, they do acknowledge the covenants serve a purpose as they protect the employers in a reasonable and necessary manner.

When scrutinizing the reasonableness of a restrictive covenant, factual analysis focuses around three questions:

  • Is there a protectable interest in the employer?
  • Is the restrictive covenant narrowly tailored to further that interest?
  • Is the restrictive covenant prejudicial to the public interest?

Serving the public interest creates a significant advantage for doctors. Even before the Coronavirus (COVID-19) pandemic, there is always a need for medical professionals in all geographic areas. This allows employees to limit the scope of the restrictive covenants. Prior cases have created a rule of thumb that minimizes how far doctors will have to go to find new work in urban and rural areas. Given the increasing shortage of health care to rural counties in places like Pennsylvania, it might be time to re-assess the rural scopes and trim those in the public interest.

What if I Want to Open a Private Practice?

Leaving a major health care system to start a new private group, alone or with partners, may be the most overt possibility of violating a restrictive covenant. Attempting to lure away patients, referring physicians, or co-workers usually does not sit well with former employers, even if the split is amicable. Health care systems usually invest a lot of time and money to build up their client base and hire medical professionals. If someone wants to branch out, it usually requires moving outside the coverage area to abide by restrictive covenants or making some financial arrangements.

However, doctors may have a chance to work around these covenants if planning to focus on a specific area of practice. For instance, the number of maternity wards has dropped in Philadelphia because hospitals have cut these departments over insurance costs. For an obstetrician, it should be theoretically easier to open an office in a neighborhood that has seen the local hospital stop offering these services, even if they worked for that health care system.

Doctors who are looking to leave practice to teach may face some restrictions as well. Any research completed may not transfer freely to a new role, especially if it lands one at a competing research facility. However, a change in focus or other circumstances might make the transition easier.

When Should I Pursue Legal Action?

A lawsuit against a former employer must be carefully considered as it can take up a large amount of time and money. Usually, some scrutiny during the initial or most recent contract negotiations can prevent a greater investment of capital to correct problems when employment ends.

If one find the terms of a restrictive covenant onerous, they should speak to a lawyer to make sure their case has merit. More courts now have struck down terms where the time periods are too long. Two years is the longest a reasonable covenant can be in effect. Also, consider one’s location when challenging geographical scopes.

Some health care employers have recently become bolder in their restrictive covenants. Anything that is broad or uses multiple elements of restriction should be examined closely. Multiple restrictions can have a long-term affect on a career beyond the allotted timeframe. Anything that is considered too broad or not specific can be challenged in court. Employment contracts can be difficult; however, working with an expert during the initial process can make the process easier.

Philadelphia Physician Lawyers at Sidney L. Gold & Associates, P.C. Help Physicians Understand Restrictive Covenants

A Philadelphia physician lawyer at Sidney L. Gold & Associates, P.C. is ready to assist with restrictive covenants or any other concerns that arise when taking a new job or signing a new contract. Call us at 215-569-1999 or contact us online for a free consultation. Located in Philadelphia, we serve clients throughout Wilkes-Barre, Scranton, northeast Philadelphia, Bucks County, Chester County, Delaware County, and Montgomery County.

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