By Patrick M. Connolly, Esq., Gambrell & Stolz, Atlanta, GA; and Terry Lane, Staff Writer, Pinnacle Health Group, Atlanta, GA
While it’s not the most critical element in an employment contract, it is important to understand, and be aware of, any restrictive covenants between an employer and employee. This article covers the basics with a focus on physician-related issues.
The Restrictive Covenant—an agreement between a physician and his or her employer which prevents the physician from practicing in the same geographic area for a given period of time if the physician’s employment terminates.
The restrictive covenant is based on the assumption that the employer has spent money and time enabling the physician to develop a patient base and a reputation in the community, and may have exposed the physician to the employer’s existing client base. Therefore, it is a protective mechanism for employers seeking to protect their patient bases and referral sources. If the physician leaves and becomes “competition”, he or she might take patients which have been cultivated with the employer’s resources.
However, restrictive covenants can be beneficial to physicians too. If a physician is employed by a group where all of the physicians’ contracts contain restrictive covenants, a degree of safety is maintained. If none of the physicians in the group can leave and take the group’s patients along, the individual physicians benefit as well.
While restrictive covenants are illegal (with certain exceptions) in a few states, such as Colorado and Delaware, and are difficult to enforce in a number of others, they are still commonly written into physician employment contracts. Many physicians believe that restrictive covenants are never enforceable; restrictive covenants are generally enforceable if narrowly drawn and reasonable, and it is important to physicians that they closely examine the language and restrictions of covenants that may be included in their contract. According to Patrick M. Connolly, an attorney with Gambrell and Stolz, Atlanta, “The covenant not to compete should be explained clearly in the contract; it must be reasonable in terms of time, distance, and money (liquidated damages, if any).
What is considered reasonable?
Connolly explains that a restrictive covenant is considered reasonable if “the provisions are no broader than necessary to protect a legitimate interest of the Covenantee (employer), are not unduly burdensome to the Covenantor (physician), and are not harmful to the public interest. The analysis of reasonableness examines the duration, geographic scope, and nature of the business or medical practice being restricted.”
Duration
Generally, restrictive covenants restrict a physician from competing for periods of up to two years. Courts tend to uphold the two-year limit as a maximum because that should give the employer adequate time to recoup any losses incurred due to the departing physician.
Geographic Scope
“Five to fifteen miles is the most commonly acceptable radius,” says Connolly, adding “Generally, the restricted activity must be reasonable in scope and limited to activities which are in actual competition with the business of the Covenantee, ordinarily meaning common areas of specialization.” As a rule of thumb, most practices use a mileage radius that covers 80 percent of the practice’s patient base as the scope of its geographic restriction. A radius of five or 10 miles from a practice may be upheld as reasonable in a suburban practice setting, but it may also be reasonable for a rural practice to have a restrictive covenant with a 50-mile radius or an inner-city practice to have a radius of several city blocks.
Nature of the Business or Medical Practice
Some restrictive covenants may prevent a physician from practicing a certain specialty within a geographic range. For example, he/she may be able to practice family medicine but not obstetrics. However, a restrictive covenant may not be enforceable if there is a shortage of physicians in the restricted area, especially if it is a rural area; if there is a shortage of a particular specialty in the restricted area; and/or if the courts uphold the patient’s freedom of choice. Says Connolly, “A court will look to the public interest to decide whether to enforce a restrictive covenant. The public policy of access to quality health care will prevail when it outweighs the individual employer’s need for protection.”
Enforceability
Courts generally protect the interests of a medical practice because the practice invests time and money to train its employees. But occasionally, covenants are found unenforceable.
In addition to reasons previously stated, covenants have been found unenforceable:
- Where the term of employment was not set forth in writing;
- Where compensation was not fixed; and
- Where the employer was able to terminate the employment contract without cause
What Happens When the Covenant is Breached?
The restrictive covenant usually contains language providing recourse to the employer should the physician not abide by the covenant. If a breach of contract can be proven, the employer may be able to sue the physician for compensation or prevent him or her from continuing to compete. These two methods of recourse are:
Injunctive Relief
An injunction will force the physician to abide by the restrictive covenant or risk being held in contempt of Court.
Monetary Damages
An employer may be entitled to monetary damages if actual damages can be proven, or if the contract contains a liquidated damages clause. A liquidated damages clause will require the competing physician to pay the employer a previously negotiated set amount as long as that amount is “reasonable” under the circumstances.
Because restrictive covenants are widely used in physician contracts, and because they are often enforceable, it is important for physicians to understand the potential ramifications of a restrictive covenant. Physicians are encouraged to seek legal counsel to review their contracts prior to signing, and particularly, to review the covenant language in their contract.
Because physicians are generally bound by a restrictive covenant, if they decide to leave their existing employer, they usually make a significant geographical move, often involving a change of schools for their children, and selling and buying a new home. In this situation, a physician recruiting firm would be the most efficient means of finding a new opportunity. Pinnacle Health Group (Atlanta), for example, visits every opportunity in person, and is experienced in helping the physician to find a new opportunity and relocate to the new location. Pinnacle Health Group is also able to quickly fill the need left by the departing physician.
Finally, keep in mind that a restrictive covenant is in place simply to maintain fairness in a competitive market. If you have questions or concerns about your employment contract, discuss them with your recruiter. He or she will be happy to help you!
Gambrell & Stolz of Atlanta, GA provides legal counsel regarding restrictive covenants and employment contracts. Contact Gambrell and Stolz, L.L.P. at: 404-577-6000.