Government Agencies To Scrutinize Noncompetition Agreements in Employee Contracts

Friday, July 15, 2016
By George F. Indest III, J.D., M.P.A., LL.M., Board Certified by The Florida Bar in Health Law

Regulatory authorities in the United States are increasingly scrutinizing noncompetition provisions (sometimes called restrictive covenants) included as part of employment agreements. The main focus is close examination of provisions restricting junior-level and low-wage employees. Noncompetition agreements are becoming more common in other industries and increasingly appear in agreements with lower-level employees.

What is a Noncompetition Agreement?

Noncompetition agreements are restrictive covenants that require employees not to work for an employer's competitors after resigning or being terminated. This type of agreement is often set for a specific term, typically six months to two years, and often applies within a certain geography, typically tied to where the employer operates, such as within a certain number of miles from the employer's site of operations or where its customers are located.  However, I have seen these made as wide as a several counties, an entire state and the entire United States.

Do Noncompetition Agreements Benefit Competition?

The argument for the use of noncompetition agreements is that they can facilitate free exchange of sensitive information within companies, without employers having to worry that employees who change jobs will take proprietary information to a competitor. Noncompetition agreements also can encourage firms to provide better employee training by reducing the risk that employees will take their newfound knowledge and training to a competitor.

On the Other Hand.

Restrictive covenants have historically been questioned because they limit employees' ability to practice their chosen and preferred field of work and they restrict employee mobility.  In most states, these are constitutional rights that individuals have.  Additionally, noncompetition agreements may reduce a worker’s ability to switch jobs or negotiate higher wages and better working conditions. They may also result in unemployment if employees must leave a job and are unable to find a new job that meets the restrictions of the covenant-not-to-compete.

Given that indentured servitude was outlawed centuries ago and employees should have the right to work wherever their skills allow them to work, I, personally, do not believe that noncompetition agreements should be enforceable.  A restrictive covenant or a covenant not to compete seems to me to be, on its face, anti-competitive.  Employers have many other ways to protect their proprietary interests and confidential business information.  That being said, since many states, including Florida, do recognize them and allow them to be enforced, the law is the law, and I will use it to my clients' advantage.

Avoid the Increasing Noncompetition Agreement Scrutiny.

Employers should use noncompetition agreements only when their use reasonably could facilitate procompetitive benefits, such as with employees who are given access to trade secrets. At the same time, employers should avoid requiring restrictive covenants from employees who do not have access to sensitive information or specialized knowledge or skills learned from the employer.

Employers should use noncompetes closely to protect legitimate business interests, tailoring noncompetes to be corresponding with the interests the agreements are intended to protect. At the same time, noncompetes should not be used to punish employees who have left their positions as work. In particular, noncompetes that are broad in time frame, last more than two years, or are territorial are more likely to bring scrutiny and may not withstand challenge. Employers should consult with antitrust and labor counsel before establishing any noncompetes to limit liability and ensure their noncompetes and other employment agreements are permissible and will not face scrutiny.

Credit:  Much of the information in this blog came from the American Health Lawyers Association E-mail Alert of July 11, 2016, written by Kathryn Fenton and Peggy Ward.

To read more on noncompetes in employment contracts, click here to read one of my prior blogs.

Contact a Health Care Attorney Experienced in Negotiating and Evaluating Physician and Health Professional’s Business Transactions.

At the Health Law Firm we provide legal services for all health care providers and professionals. This includes physicians, nurses, dentists, psychologists, psychiatrists, mental health counselors, durable medical equipment suppliers (DME), medical students and interns, hospitals, ambulatory surgical centers, pain management clinics, nursing homes, and any other health care provider.

The services we provide include reviewing and negotiating contracts, preparing contracts, helping employers and employees enforce contracts, advice on setting aside or voiding contracts, litigation of contracts (in start or federal court), business transactions, professional license defense, opinion letters, representation in investigations, fair hearing defense, representation in peer review and clinical privileges hearings, litigation of restrictive covenant (covenants not to compete), Medicare and Medicaid audits, commercial litigation, and administrative hearings.
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About the Author: George F. Indest III, J.D., M.P.A., LL.M., is Board Certified by The Florida Bar in Health Law. He is the President and Managing Partner of The Health Law Firm, which has a national practice. Its main office is in the Orlando, Florida, area. The Health Law Firm, 1101 Douglas Ave., Altamonte Springs, FL 32714, Phone: (407) 331-6620.

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