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Issue #50 - 7.22.08
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Is Your Associate Agreement Complete?
We are constantly reviewing associate agreements and often find two key components lacking: unrealistic terms for a restrictive covenant and the solicitation of office personnel by a departing associate.
Restrictive Covenants
In states that allow a restrictive covenant, the covenant must be both “reasonable” for enforcement, in geographic restriction as well as duration. We often see covenants in densely populated areas that extend 15 to 20 miles! In most jurisdictions, that restriction may well run into legal hurdles, if challenged by a former associate. Being reasonable in protecting your practice from a former associate should be your goal, and establishing a fair covenant will increase your odds of enforceability.
One way to establish your covenant area is to determine where 80% of your patient base resides. To establish a fair geographic restriction we suggest that you prepare a zip code analysis report to determine how far your patients are traveling. You may be surprised at the results! Once the report is run, calculate the distance wherein 80% of your patients travel. You can add an additional mile or two to incorporate a few more patients who may comprise a portion of the remaining 20%. This is a fair way to calculate a geographic restriction.
Another area to be considered is the covenant duration. Typical covenants for employees last one to two years. Any time frame beyond this range can be considered excessive, so be prudent in citing your time frame. Conversely, if you were to sell your practice, don’t be surprised if the Purchaser restricts you for five years from practicing in the covenant area. These post-sale covenants are often enforceable since you have sold your business and the purchaser has to be protected from interference. There is a big difference in covenant enforcement between being an employee and selling your practice.
Patient Solicitation
Patient solicitation is always a difficult offense to track. If patients are directly solicited by a departing associate, oftentimes they will be reluctant to call your office and request their records to be sent. Many times, practitioners learn of a solicited patient when they do not respond to recare notices or fail to show for a future appointment. Determining the economic loss of a solicited patient is difficult to quantify. One approach to take is dividing the number of active patients by your most recent year’s revenue. The result is average revenue per patient. However, this calculation is normally an underestimation for “active” patients as they more than likely participate on a regular basis in your recall program. In effect, their loss is an annuity of recare revenue over a number of years. Whatever damages you list in an employment agreement, it should be justified economically.
Additionally, associates who leave to either establish their own practice or join another practice outside of your covenant area are normally allowed to advertise in the community newspapers. However, they are not allowed to utilize your name in any future advertisements, as that would be considered direct solicitation.
Staff Solicitation
Most employment agreements that we have reviewed contain patient solicitation language but do not address staff solicitation. Loss of a key staff member can be a very critical, especially in a smaller practice. Not only are you losing a highly trained individual, but you are losing a staff member who has developed goodwill. This is particularly true with dental hygienists who may have worked with your patients for many, many years. If your associate were able to recruit one of your hygienists (or, for that matter, any key staff members), you certainly would suffer economically. We therefore specify certain damages for solicited staff in our employment agreement templates. Liquidated damages are not considered a penalty, but rather a genuine estimate of damages that are caused by a certain event—in this case, the loss of your employee. Recruiting new staff can cost you thousands of dollars, notwithstanding the cost of training new personnel. We use a rule of thumb in computing our liquidated damages at three times the monthly salary of a full- or part-time solicited employee. This damage payment will not fully compensate you for the loss of the good employee, but at least puts the associate on notice that if he or she decides to recruit your staff, a significant penalty will result.
Enforcing penalties for restrictive covenants or solicitation violations is not easy to deal with, but by having economic damages spelled out in your agreement you can increase the odds of receiving some compensation. Make sure to confer with your attorney to craft these important clauses in your employment agreement.
Dr. Thomas L. Snyder is Managing Partner of The Snyder Group, LLC, a nationwide practice transition and financial management consulting firm. With more than 75 years of experience in the field, The Snyder Group can provide you a full range of services relating to practice transition matters and retirement planning. They can be reached directly at 1-800-988-5674.
If you would like additional help, email Dr. Snyder at drsnyder@thedentistsnetwork.net.
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