Navigating Noncompete Clauses: A Legal Guide for Dentists

Navigating Noncompete Clauses: A Legal Guide for Dentists

Nearly 6,000 dentists graduate annually in the USA. Dental office staff recruiters often include non-compete clauses in both employment agreements and contractual arrangements between dentists and their employers. The dental industry is one of the most entrepreneurial sectors of healthcare, and nearly every dentist fresh from school considers practice ownership at some point in their life. However, without careful examination, employment agreements, especially the non-compete clause, could severely impede one’s potential to establish a dental practice down the line. The experienced dental attorneys at Brenden Kelley Law provide comprehensive insights into dentist non-compete clauses, from understanding basic terms to handling disputes. Contact us today if you need legal help navigating a dental employment dispute related to non-compete clauses. 

What Are Non-compete and Non-solicitation Clauses?

A non-compete clause, also known as a “restrictive covenant,” is a mechanism that aims to prevent an employee from entering into the same or similar line of business, either independently or for another employer, after their employment ends. It may be included as:

  • Scope: It outlines the geographical area, industry, and duration to specify where and for how long the employee is restricted from working.
  • Prohibited activities: The clause specifies the activities the employee is restricted from engaging in, including soliciting clients from former employers or working for an immediate competitor.
  • Consideration: refers to the compensation or benefits an employee receives in exchange for agreeing to the non-compete clause, such as a signing bonus or stock option.
  • Severability: Severability addresses what occurs if one part of the non-compete clause becomes unenforceable.

In contrast, a non-solicitation clause specifically targets dentist employees. It prevents them from actively trying to win over the employer’s fellow employees, customers, suppliers, or patients. Typically, such a provision addresses both the non-solicitation of fellow employees and patients within a single clause.

Why Do Employers Want Non-compete and Non-solicitation Agreements?

Generally, employers prefer not to see their dental staff open competing practices nearby, potentially drawing away patients. They may feel a sense of disappointment if employees they have nurtured and trained choose to depart. The employer uses the non-compete clauses to protect the practice from an employee-dentist who uses the connections and experience acquired during employment to establish a competing practice. Employers also argue that these clauses attract and reassure investors and safeguard their investment in human capital.

What Are the Implications of Non-compete Clauses on Dentist Employees?

Employers actively defend dentist non-compete clauses, arguing they’re essential to protect their practices and prevent employees from taking their skills to competitors. However, employees fiercely oppose these clauses, especially when loosely defined. They argue such restrictions unfairly limit their ability to find work within the dental field.

Here are some possible implications of non-compete clauses on employee-dentist:

  • Limited career mobility: Dentists bound by non-compete agreements may find their career mobility restricted. These clauses can restrict dentists from practicing their profession within a specific geographic area for a set period if they decide to change jobs or open their own practice. This hinders their ability to pursue new opportunities.
  • Reduced negotiating power: Non-compete clauses can weaken a dentist’s negotiating power when seeking new employment or negotiating terms with their current employer. A non-compete clause weakens a dentist’s bargaining power when negotiating salary, benefits, or working conditions.
  • Stifled innovation and entrepreneurship: Dentists with entrepreneurial aspirations may find it challenging to start their practices if they are subject to non-compete clauses. These clauses discourage innovation and competition within the dental industry by limiting dentists’ ability to establish new practices or offer specialized services.
  • Patient continuity: Non-compete clauses can disrupt the continuity of patient care. They can force patients to find new dentists, potentially disrupting ongoing treatment and severing established relationships with their preferred providers.

FTC and Non-compete Clauses for Dentists

Major Changes have just occurred with Non-competes, with new FTC rules going into effect soon. On April 23, 2024, The US Federal Trade Commission (FTC) voted to endorse a series of regulations known as the “Final Rule,” which will largely restrict the implementation of new non-compete agreements in employment settings and make many existing ones unenforceable. The FTC’s authority to enact the non-compete clause rule is expected to face legal challenges, which could stall or even halt the regulation’s implementation. Despite this, the Final Rule is still on track to take effect by late August 2024. On July 24, 2024, U.S. District Judge Kelley Hodge in Philadelphia upheld the FTC’s ban on noncompete agreements. While the FTC’s ban has survived this legal hurdle more persist. It is important to stay up to date as these cases develop.

Common Mistakes That Employers Make with Non-compete Clauses

There are myriad parts in a dentist non-compete clause that practices should review to ensure it is legally sound and fair to all parties. When an employer makes the clause too restrictive, it may violate an employee’s rights, leading to possible lawsuits. Here are some typical mistakes employers make:

  • Broad restrictions: Non-compete clauses should be carefully crafted to safeguard the employer’s legitimate interests without being overly expansive. For instance, a clause that bars an employee from engaging in any related work worldwide for any company is likely unenforceable.
  • Lengthy clauses: Non-compete agreements exceeding a reasonable duration, such as two years, may be deemed impractical and excessively limiting.
  • Compliance with labor laws: Non-compete contracts must adhere to labor laws, including provisions against discrimination. Failure to do so could render the clause unenforceable and lead to legal repercussions.
  • Voluntary agreement: It is crucial to ensure that employees sign non-compete clauses willingly, without coercion from colleagues or superiors.
  • Regular updates: Provisions should be routinely reviewed and amended to stay relevant and in line with current legal standards.

Tips to Avoid Disputes on Non-compete Clause for Dentists

Here are some of the tips for employers to avoid non-compete clause disputes:

Carefully Draft the Non-compete Agreement

A good non-compete clause should be reasonable. Identify the interests you seek to protect and tie them to the employee’s post-employment interests. Your non-compete clause may be deemed unreasonable if the two can’t be reconciled. You should also clearly describe the prohibited activity, the geographic boundaries for the registration, and its time frame. Generally, the rule of thumb is to include restrictions spanning a maximum of 36 months. Restrictions extending to over three years are typically hard to enforce. Some non-compete agreements define the scope of the agreement using existing boundaries such as city limits or county lines. Others may set a radius of miles around a central point, such as a specific job site or the company’s headquarters.

Consult a Business Attorney

Non-compete clauses are typically complex and have many nuances to navigate. An experienced business attorney is well-versed in the intricacies of these agreements. They can ensure that the clause complies with relevant laws and regulations in your jurisdiction. A good non-compete clause should be tailored to the specific circumstances of your business and industry. An attorney can draft a precise and effective clause that protects your legitimate business interests without being overly restrictive.

Find a Mutually Beneficial Resolution

In case of a dispute, litigation may seem a plausible remedy to resolve the disagreement. However, lawsuits are risky and expensive for either party. As an employer, it may be best to find an early resolution that protects your interest. Undertake a risk-benefit analysis to determine the best cause of action if a former employee violates the agreement.

Carefully Interview Candidates

Before hiring a candidate from a competitor, determine whether they are bound by a non-compete agreement or other restrictive covenants, like a non-solicitation agreement. It is vital to inquire about any such restrictions at the earliest opportunity, during an initial meeting, a phone call, or a formal interview.

Contact a Business Attorney Today to Navigate Dentist Non-Compete Clauses

At Brenden Kelley Law, our experienced business attorneys can help you understand whether your non-compete agreement is enforceable and whether it is likely to apply to your specific situation. If you have a legal dispute with your employer or employee, we can also advise on the next steps to resolve the dispute. Contact us today to schedule a free consultation. 

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New Rules, New Responsibilities: The Corporate Transparency Act and You

New Rules, New Responsibilities: The Corporate Transparency Act and You

The Corporate Transparency Act was passed in 2019, and updates requirements for many small businesses to report ownership details to the Financial Crimes Enforcement Network, commonly referred to as “FinCEN.” This rule is now being enforced against the majority of small businesses. It requires that you report Beneficial Ownership Information to FinCEN, that is the individuals with controlling interest in your business.

What Businesses Does This Apply To?

CTA compliance in 2024 applies to the vast majority of small businesses incorporated in the U.S. This means LLCs, S Corps, and C Corps, and is in addition to other LLC reporting requirements. Pass-through businesses taxed as individuals are not affected (as their ownership information is already being reported with their taxes). This includes if you have filed a DBA, obtained an EIN, or have a professional or occupational license.

23 types of entities are currently exempt. This includes publicly traded companies, certain large operating companies, and many nonprofits. However, these rules do not apply to the majority of small and medium-sized enterprises. However, you don’t have to file if your business is one of the following:

  • Money services business
  • Broker or dealer in securities, or any entity registered with the Exchange Act
  • Investment company or adviser
  • Venture capital adviser
  • Accounting firm
  • Inactive

It’s best to double-check with a legal or tax advisor before applying for an exemption, as you might well go to the trouble of applying and then have to file anyway. In most cases, exempt companies must file this information through other means. FinCEN enforces the Corporate Transparency Act and provides guidance.

What Is a Beneficial Owner?

The Act requires that you provide the identity of all “beneficial owners.” This means an individual who owns or controls at least 25% of the company and/or exercises substantial control over it. Beneficial owners are limited to natural persons, so trusts, corporations, or other legal entities are not beneficial owners.

“Substantial control” includes being a senior officer such as President or CFO, having the authority to appoint or remove officers, making important decisions, etc. Important decisions mean reorganizing the company, mortgaging a principal asset such as your office, and selecting or terminating business lines. List the person if in doubt.

Some individuals might be exempt from being listed. There are five exemptions:

  • The individual is a minor, so list their parent or guardian instead.
  • The individual is an agent of a beneficial owner, such as a tax advisor.
  • The individual is an employee, but not a senior officer.
  • The individual has a future interest through a right of inheritance, such as a will.

When Do You Need to Report By?

If your company was formed before January 1, 2024, you have until January 1, 2025, to file your report. Companies formed from January 1, 2024, have to file their report within 90 days of being formed.

If you have a change in beneficial owners, for example, if your CFO quits, file the update within 30 days. Also, file an update if certain information changes, such as if a beneficial owner moves.

What Are the Consequences for Not Reporting?

There are significant penalties for not reporting your BOI in the required timeframe. These could include civil penalties of $500 for each day you have a violation and potentially criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers may be held responsible.

Individuals who refuse to provide the required information or update it (for example, refusing to update their address) may face civil and/or criminal penalties, and you should warn them appropriately.

The BOI report can be handled by most business owners with assistance from resources provided by FinCen. Visit their FAQ Page and their Brochure Introduction to Beneficial Ownership Reporting for more details. If you have questions about your reporting requirements or need assistance reporting, our team at Brenden Kelley Law can help you. Contact our office to schedule a meeting today.

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Explore our other Blog Posts for Business Owners: Entrepreneurial Operating System: Align Your Team for Success, Navigating the Resources of Small Business Administration in the U.S. and Business Formation and Operation Using Series LLC in Ohio.