Practitioner pointer: How to handle non-compete and non-solicitation clauses

Find out what to consider when presented with restrictive covenants in employment contracts.

You are a licensed psychologist with the opportunity to join a prominent practice. They have offered you an excellent compensation package in a specialty area you are interested in pursuing. It is perfect for your plan to learn about the specialty under excellent mentorship for three years before striking out on your own. All you have to do is sign a contract. But, hold on: The contract says that if you resign or are terminated, you are prohibited from practicing for five years, either for a competitor or on your own, within 100 miles of the practice.

The pay, working conditions and learning experience are top-notch. What should you do?

This scenario involves a restrictive covenant — a clause that limits what a party to the contract is allowed to do. It is not unusual for employers to include these covenants when hiring, even in the health care field. 

Employment contracts that include these covenants often focus on two restrictions: 

  • Noncompete clauses, which prohibit employees from working in a certain geographic area for a period of time.
  • Nonsolicitation clauses, which prohibit employees from securing the business of existing customers, clients or patients before — and sometimes after — leaving the organization. 

Practice owners like to use these clauses to keep valuable employees from leaving the practice and becoming competitors. Employees resist these clauses, as they potentially compromise the ability to earn a living should the employee be fired or decide to leave. Further, a prospective employee facing such restrictions is put in the uncomfortable position of having to decide if it is worth the attempt to negotiate.

The enforceability of these clauses in employment contracts depends heavily on state law. Some states, such as California1 and Colorado2, reject restrictive covenants as a matter of law with limited exceptions, whereas states like Illinois3 rely upon the reasonableness of the terms when deciding to enforce them. If the state in which you practice provides for restrictive covenants in employment contracts, be prepared to discuss the issue with your prospective employer during negotiations after you have consulted with a knowledgeable licensed attorney in your state. 

Here are a few things to keep in mind as you deliberate whether the terms are reasonable: 

Is the restriction no greater than is required to protect the business interest of the employer? 

Employers often impose limitations on territory and time frame to protect the business they have worked hard to build. The limitations, however, should not go too far. 

What is “no greater than required” is fact-specific, and courts will look at many factors when deciding whether the restriction exceeds this threshold. If you are prohibited from practicing within 25 miles of the practice location(s), for example, the court may consider the population density, the number of practice locations the employer runs and number of providers offering the same service. The type of practice may also impact how reasonable the terms are — for example, if there is only one other psychologist within 100 miles who specializes in the type of treatment in question or who serves the particular population involved.

Does the restriction unduly burden the employee? 

Some terms may make it very difficult for you to earn a living, which could arguably place a substantial burden on you. But not every restriction is considered to be unduly burdensome. 

For example, a prohibition that you cannot provide testing to existing patients of the practice for a year after leaving might pass muster with the court. A clause that says you cannot practice psychology within the city limits for a period of two years, by contrast, will likely be unenforceable, since it is hard to picture a scenario where the employer can prove that this restriction is not overly broad and is necessary to protect the business. 

Is the restriction injurious to the public? 

One could argue that restrictive covenants which prevent you from continuing to treat your patients is injurious. APA Ethics Code 10.09 seems to speak most directly to this matter: 

10.09 Interruption of Therapy
When entering into employment or contractual relationships, psychologists make reasonable efforts to provide for orderly and appropriate resolution of responsibility for client/patient care in the event that the employment or contractual relationship ends, with paramount consideration given to the welfare of the client/patient. (See also Standard 3.12, Interruption of Psychological Services.)

This potential impact on patients is something you will want to discuss during negotiations. You might predict a scenario in which a patient will benefit greatly from uninterrupted service by you after you leave. Talk to the potential employer up front about how to address these situations and see if you can agree on how to handle difficult cases, with careful consideration given to the welfare of the patient/client.

Bottom Line

If you have received a job offer with restrictive covenants in the contract, you should seek advice from a licensed attorney in your state to help you avoid undue burdens upon separation. Employers wishing to include restrictive covenants should be aware of the limitations and consult with an attorney to draft language that will be enforceable in the particular state. Taking these extra steps up front may avoid costly legal fees and bad feelings when the employment relationship ends.

Please note: Legal issues are complex and highly fact specific and require legal expertise that cannot be provided by any single article. In addition, laws change over time and vary by jurisdiction. The information in this article does not constitute legal advice and should not be used as a substitute for obtaining personal legal advice and consultation prior to making decisions regarding individual circumstances.

Cal Business and Professions Code §§ 16600-16602.5
C.R.S. 8-2-113 (2014)
Reliable Fire Equipment Co.v. Arredondo, 965 N.E.2d 393, 358 Ill. Dec. 322