Transitions Roundtable

We ask two experts to answer the same question on a complex issue.

We ask two experts to answer the same question on a complex issue.

Question:

Should a brand-new associate sign a contract containing a restrictive covenant? If not, how long into the associateship is it appropriate to wait to sign a restrictive covenant?

Gary Schaub
The answer
to this question is simple - consult an attorney who specializes in dental practice transitions.

Restrictive covenants are also interchangeably known as noncompete covenants. They usually restrict a dentist employee from engaging in the practice of dentistry within a reasonable geographic boundary and in a reasonable time frame. From a dentist-owner standpoint, it makes sense to try to protect your practice from associates who leave the practice and may take patients and staff with them. From an associate standpoint, signing a restrictive covenant could limit the ability of the associate to buy or start a practice in the community. Resolving these two issues to the satisfaction of the owner and the associate can be very challenging.

One way to resolve the issue is to have a honeymoon, or grace, period before the covenant becomes effective. Thus, the covenant can be signed at the beginning of employment, but not be effective until 90 or more days. Any potential harm to the practice and to the associate's future flexibility is minimized in case the relationship does not work out.

More importantly, a nonsolicitation covenant should also be part of the restrictive covenant. This restricts the associate from soliciting patients, referral sources, and staff after leaving the practice. This covenant is probably more important than the noncompete covenant, since it deals directly with the fears of most owner dentists.

The contract should also be assignable to a new owner dentist. Even if a practice transition is not contemplated, the lack of an associate restrictive covenant can seriously limit the marketability of the practice in case of death or disability of the owner.

Different states have different laws in terms of when a covenant needs to be signed, what it can contain, and the enforceability of the contract. So I will repeat my answer - consult an attorney.

Tom Snyder, DMD, MBA

As a thresholdconsideration, we need to know whether or not the associate is being employed on a part-time or full-time basis. Typically, in most jurisdictions, having a part-time associate sign a restrictive covenant is more problematic than requesting one to be signed by a full-time associate. So, if the associate works part-time, chances are a covenant may not be binding. However, it is essential that you retain an attorney with health-care law experience, as states vary about the enforceability of restrictive covenants. Conversely, if your associate is practicing with another doctor in your community, chances are that he or she will be unwilling to sign a contract containing such a provision. Nevertheless, it is still recommended that the associate be bound by a nonsolicitation agreement covering the patients and staff from day one of the employment term. Moreover, the associate should also be bound by standard confidentiality requirements in the employment agreement to protect the employer.

If the associate has been employed on a full-time basis, there is typically a probationary period during which time the restrictive covenant would not apply. In some instances, covenants can be structured on an ascending scale basis, meaning that, once the enforceability of the restrictive covenant is triggered, the duration of the restriction would gradually increase, for example, from a proportionate time worked to restrictive covenant time duration, to ultimately be in full force and effect after one year of employment. It is our experience that goodwill takes approximately one year or more to develop, so having a graduated covenant waiting period during the first year of employment is not an unreasonable stipulation.

One final note, if you are practicing in a small town, chances are most doctors will not sign a restrictive covenant. So if this occurs, you can consider a liquidated damages clause that effectively will allow the doctor to buy out his or her restrictive covenant.

In the end, having a restrictive covenant negotiated into an employment agreement prior to the commencement of employment is good business and necessary to protect your practice in states where the covenant is enforceable.


Gary Schaub is the founder of HELP Appraisals & Sales Inc., a dental and medical appraisal and brokerage firm in Portland, Oregon. He is a member of American Dental Sales and can be reached at (503) 223-4357 or (855) 463-0101.

Tom Snyder, DMD, MBA, is the director of transition services for Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or Tom.Snyder@henryschein.com.

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