Restrictive covenants complicate employment offers.

Q We just interviewed an exceptionally talented tech with supervisory experience in several areas critical to our current hospital-laboratory needs. We were all set to hire her when we got a call from her current employer, a physician with an in-office lab. He says her contract has a non-compete

A Let us start with the last question. Whether or not a restrictive covenant can be enforced depends on a number of things, not the least of which is the jurisdiction in question. Some states are very hostile to non-compete agreements; others less so. Generally, states will recognize an employer's legitimate interest in preventing an employee from competing with him for an initial term following the end of the employment relationship (non-compete agreements), and in preventing a former employee from recruiting away additional staff (non-solicitation agreements).

In most cases, in order to enforce a restrictive covenant, the employer must have provided some consideration to the employee (given him something in exchange for the restriction of rights), and the covenant must protect a legitimate business interest and must be reasonable both in scope and time. Restrictive covenants must also be in writing and agreed to by both parties. The first step is to check with your institutional attorney about the status of controlling law in your state. Some states exempt certain types of employees from being subject to restrictive covenants; you need to know the particulars that will govern this situation.

Assuming that restrictive covenants involving laboratory personnel are permitted, a non-compete clause can still be found invalid for a number of reasons. Showing a lack of consideration invalidates the non-compete agreement but is difficult to accomplish. Some courts will find consideration for the restrictive covenant in the fact of employment. If employees can be found who did not sign a restrictive covenant and secured both employment and received the same pay however, your potential employee might have an argument against enforcement.

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Most challenges to non-compete agreements are made on the basis of reasonableness of terms. In general, a restrictive covenant that does not exceed the business service area of the employer and does not last longer than two years is likely to be reasonable in scope. Some of this depends on local conditions and customs, as well as previous precedent established by courts. Courts are probably less likely to enforce a long covenant against a laboratory technologist, for example, than against a physician. Further, the covenant must be specific and narrow in what it restricts an employee from doing after termination. A non-compete that prevents an employee from going to work for another physician's office might be enforceable; one that restricts an employee from all gainful employment would not be.

Perhaps the most important test is whether a restrictive covenant protects an employer's legitimate interest, and that is why broad covenants are not enforceable. In the example above, an employer might have a legitimate interest in his office manager not going to work for his major competitor, but articulating a legitimate business interest that would prevent her from going to work for the local congressman would be difficult. A restrictive covenant cannot be so strict and broad that its result is indentured servitude for the employee.

Here might be the area in which this particular covenant is vulnerable to attack. A physician might have a legitimate interest in preventing a competing physician office or independent lab from hiring this person away, but that the in-house hospital lab competes in any way with the physician's office lab is not at all clear. If a court can be convinced that the in-house hospital lab does not, the non-compete might be declared invalid.

Alternatively, the non-compete might be redefined by the court (the "blue pencil" rule that allows courts to edit an unreasonable covenant down to reasonable terms) to permit working for the hospital lab but prevent working in another physician's office or outreach laboratory that competes with the lab for which she currently works.

Because the employee bears the brunt of the non-compete agreement, the employer's responsibility is to show that the non-compete is reasonable and permitted under the law--and therein lies the rub. Finding out whether a non-compete clause is enforceable generally involves at least lawyers and often the courts, which becomes an expensive proposition. If a negotiated agreement cannot be reached between employer and employee, the employer wishing to enforce a non-compete agreement will either 1) notify prospective employers of its existence in order to forestall employment, or 2) file an injunction asking the court to prevent employment of the employee in the new job, or 3) file suit once the employee has taken a prohibited new job.

Hiring an employee when an employer has been given notice of a restrictive covenant can involve that employer in litigation; and, as a consequence, many simply choose not to take that risk. In addition to requesting an injunction preventing employment, the prior employer may sometimes be able to sue the new one directly, claiming that the new employer wrongly interfered with the employment relationship. This is especially true if the hire was made with knowledge of a non-compete agreement that, on its face, would prevent the hire. The likelihood of the latter is small, but sometimes, these fights over restrictive covenants are both prolonged and expensive. Unless the hire involves a truly remarkable individual with truly unique talents, walking away is easier.

From the perspective of a prospective employer, withholding an offer might be wise until and unless written confirmation can be obtained from the former employer that there is no contractual barrier to hiring this employee. The institutional legal department may wish to discuss the matter with the former employer, if, in fact, this person is valuable enough. Reaching an agreement is not uncommon, especially if the terms can be construed as over-reaching.

From an employee's perspective, your situation should serve as a warning. Although the enforceability of a restrictive covenant may be uncertain, an employee will pay a price to find out. Signing a non-compete agreement is unwise, unless the contract specifies that the employee will receive something specific for it and unless the employee is willing to live

with its terms. A restrictive covenant, after all, requires the signer to give up some real and valuable rights in the workplace--a sacrifice that should not be taken lightly.

Barbara Harty-Golder is a pathologist-attorney consultant in Chattanooga, TN. She maintains a law practice with a special interest in medical law. She writes and lectures extensively on healthcare law, risk management, and human resource management.

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By Barbara Harty-Golder, MD, JD

MLO's "Liability and the Lab" is intended to provide risk management and human resource management education; it is not intended to provide specific legal advice. If you require legal advice, the services of an attorney should be sought. Dr. Harty-Golder welcomes your questions, which can be sent to her at toadehall@comcast.net. Unless otherwise noted as "confidential" by readers, all queries will be considered for publication without further notice to them. Names, institution, city, and state will be removed before publication.