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Are Physician Non-Compete Covenants Enforceable?
Although non-compete agreements with physicians have been held by courts to be enforceable, there is no per se rule that all such agreements involving physicians are enforceable. Courts “must still scrutinize whether the covenant, on the facts presented, is being legitimately employed to protect [the employer’s] legitimate interests, would not be harmful to the public, and would not be unduly burdensome to the defendant.” Oak Orchard Community Health Center v. Blasco, 8 Misc. 3d 927, 931 (Sup. Ct. Monroe County 2005) (citing BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 391 (1999)). In Oak Orchard, the Court declined to enforce the restrictive covenant in a pediatrician’s employment contract. Last month, another Monroe County Supreme Court justice denied the request for an injunction seeking to enforce a non-compete covenant contained in an anesthesiologist’s agreement.
Generally speaking, restrictive covenants in employment agreements will be enforced only if they are:
- Reasonable in time and area;
- Necessary to protect the employer’s legitimate interests;
- Not harmful to the general public; and
- Not unreasonably burdensome to the employee.
Employees challenging restrictive covenants in their employment agreements often focus on the employer’s claimed legitimate interest. In determining whether a restrictive covenant is necessary to protect the employer’s legitimate interests, the Court of Appeals has “limited the cognizable employer interests…to [1] the protection against misappropriation of the employer’s trade secrets or of confidential customer lists, or [2] protection from competition by a former employee whose services are unique or extraordinary.” BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 389 (1999).
In Westside Anesthesia Associates of Rochester, LLP v. Anesthesia Associates of Rochester, P.C. (Sup. Ct. Monroe County 2019 [Index No. E2019007444]), the Court denied plaintiff’s request for a preliminary injunction enforcing the restrictive covenant against two anesthesiologists and their new employer “because [plaintiff] has failed to set forth sufficient indicia that the non-competes are necessary to forestall unfair competition.” Id. at 9. “It is well-settled that an employer has no legitimate interest in stifling legitimate competition.” Id.
The Court found that there was no evidence that the defendant doctors were in possession of trade secrets worthy of protection, or that they otherwise accessed or sought to use their former employer’s alleged confidential information for the benefit of their new employer.
The Court also determined that there was no showing that the defendant doctors were “unique or extraordinary.” Plaintiff made no showing that either of the defendant doctors possessed skills that gave them an unfair advantage over their former employer, and the Court also noted that the practices of the defendant doctors were not portable:
An anesthesiologist provides anesthesia to a patient and a surgeon performs a surgical procedure at the same facility; in this scenario, the anesthesiologist does not develop a relationship with the patient. [Id.]
The Court concluded that the plaintiff “wholly failed to demonstrate a legitimate business interest” and therefore “the application for a preliminary injunction must fail because a likelihood of success on the merits [was] not shown.” Id. at 10.
Although every case must be analyzed under its own set of facts, this is an interesting development that may impact the hospitals and practice groups in Monroe County that include broad, sweeping restrictive covenants in their physician employment contracts. Under another set of facts, the covenant in this case may have been enforced. If you would like to schedule a consultation to talk about restrictive covenants in employment, please feel free to contact me at pweishaar@mccmlaw.com or (585) 512-3542.
Links to other articles I have written about non-compete agreements and related restrictive covenants are included below:
- New York Employers Could Soon Have More Difficulty Enforcing Restrictive Covenants
- Court of Appeals: Florida Choice-of-Law in Non-Solicitation Agreement is Unenforceable
My employment practice includes the representation of businesses and individuals in matters involving restrictive covenants, non-compete agreements, discrimination and failure to pay wages in State and Federal Courts, and before administrative agencies, including the New York State Division of Human Rights and the United States Equal Employment Opportunity Commission.
This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.
Anti-Harassment Policy and Training Available Now
I recently wrote about the sweeping workplace rules designed to prevent sexual harassment here. As of this month, employers are required to adopt a sexual harassment prevention policy and provide annual sexual harassment prevention training. Both the policy and the training are required to meet or exceed minimum standards set by a model policy and model training program provided by the Department of Labor and Division of Human Rights. At the time I wrote about these requirements, only drafts of the model policy and training were available.
The final model policy and training module are now available here.
If you would like to schedule a consultation to talk about how this legislation may impact your business, please feel free to contact me at pweishaar@mccmlaw.com or 585.512.3542.
This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.
Shareholders of Foreign Corporations Liable for Wages?
Last year, I wrote a post about amendments to the Wage Theft Prevention Act that added a provision to the New York Limited Liability Company Law, imposing personal liability on the members of a limited liability company with the ten largest ownership interests for the failure of the company to pay the wages of its employees. These amendments were similar to provisions already contained in Section 630 of the New York Business Corporation Law, which imposes personal liability on the ten largest shareholders of a corporation (other than a publicly-traded corporation) for the unpaid wages of employees of the corporation.
On November 20, 2015, the Governor signed an amendment to Section 630 [Chapter 421 of the Laws of 2015], which extends the reach of this provision to foreign corporations, when the unpaid services were performed within New York.
Although the law has been criticized because “it might turn business away from New York,” I do not necessarily see it this way. That’s because shareholder liability is not automatic. Before an employee can charge a shareholder for such unpaid wages, the employee must first provide a notice in writing to the shareholder, within 180 days after termination, advising the shareholder that he or she intends to hold the shareholder liable under this section. The employee cannot commence an action against the shareholder until after the return of an execution unsatisfied against the corporation upon a judgment recovered against it for such services. Once an execution is returned unsatisfied, the employee must then commence his or her action within ninety days.
Therefore, as long as the company has sufficient assets to cover the amount of any unpaid wages, the shareholders aren’t likely to be concerned about this possible liability. Also, depending on the amount owed, it may not be cost effective for the employee to hire an attorney to prosecute these two lawsuits–even with the prospect of attorney’s fees and liquidated damages that are both recoverable under Article 6 of the Labor Law. But, a word of caution. Even though lawsuits under Section 630 are rare, I can think of at least one time in my nearly 20 years of practice that I was able to recover against shareholders for failure to pay wages of a former employee.
The sponsor’s memorandum of support for this legislation includes some interesting historical background discussing the reasons why the Legislature originally imposed shareholder liability for unpaid wages, as well as a discussion of how it came to be that foreign corporations were not covered by these provisions. But, what should be highlighted here is the primary reason for this amendment, which was to eliminate discrimination against New York corporations in favor of foreign (out of state) corporations insofar as liability for unpaid wages is concerned:
It should be noted that this Legislature recently recognized the problem revealed during the recent economic collapse in which unscrupulous businesses opened and closed without paying wages due their employees. The Legislature increased the penalty for failure to pay wages to 100% of the wages owed. However, the penalty is meaningless if the employee lacks an effective remedy for recovering his or her unpaid wages. The amendment strengthens existing remedies.
The amendment will be effective on January 19, 2016.
Partial Enforcement of Non-Compete Still a Risky Proposition
Earlier this week, I wrote an article on our firm’s website about some recent developments regarding partial enforcement of restrictive covenants: New York Employers Could Soon Have More Difficulty Enforcing Restrictive Covenants. The article was primarily based upon a Fourth Department case of Brown & Brown, Inc. v. Johnson, a case that was recently argued at the New York Court of Appeals. Yesterday, the Court of Appeals decided the case. You can read the decision here.
This weekend, I will write a more extensive update about the case on our firms’ website, but there are still a few interesting takeaways to note.
Although partial enforcement under New York law was one of the issues under review, the threshold issue addressed by the Court of Appeals was whether or not to apply a Florida choice-of-law provision. The Appellate Division held that New York law should apply, and the Court of Appeals affirmed that part of the ruling. After an extensive review, comparing the laws of the two states on this issue, the Court held:
Considering Florida’s nearly-exclusive focus on the employer’s interests, prohibition against narrowly construing restrictive covenants, and refusal to consider the harm to the employee–in contrast with New York’s requirements that courts strictly construe restrictive covenants and balance the interests of the employer, employee and general public–defendants met their “‘heavy burden’ of proving that application of Florida law [to the non-solicitation provision of the parties’ agreement] would be offensive to a fundamental public policy of this State.”
There have been a number of occasions where I have reviewed non-compete agreements containing choice-of-law provisions from Florida or other more “employer-friendly” states. From now on, it seems very unlikely that such a provision would be enforced absent some significant distinguishing set of circumstances. Employers wishing to enforce restrictive covenants in New York should narrowly tailor them to meet the requirements for enforceability under New York law.
On the issue of partial enforcement, the Court of Appeals reversed the decision of the Appellate Division. But, the Court did so because it believed there were issues of fact that raised questions about whether the employer engaged in overreaching or used coercive dominant bargaining power to obtain the restrictive covenant at issue. That issue was remanded back to the lower courts for further proceedings. Partial enforcement is not assured, and employers should be concerned about the apparent trend by courts to decline to partially enforce over-broad restrictive covenants.
Capicola Confidential: Secrets of the Sandwich-Maker
I’ve never eaten at Jimmy John’s, but they must have some incredible sandwiches, made with either top secret ingredients or through a confidential process (or both!). It turns out that this sandwich chain requires its hourly workers to sign non-compete agreements, prohibiting its employees from working for a competitor for two years(!) after leaving Jimmy John’s. I don’t know how I missed that, but it was apparently widely reported back in October, in Business Insider and the New York Times, among other publications.
According to the New York Times article, this isn’t really all that uncommon, as more and more employers are requiring low- and moderate-wage workers to sign these agreements. But, it seems to me very unlikely that these agreements would be enforceable in New York. Plus, given the expense of enforcement, it is doubtful that any employer would truly think it worth the cost of litigating these agreements. But, a low-wage under threat of litigation and unable to afford a lawyer to defend them in such an action may not know that, and feel trapped in their current job.
In New York, these agreements are more common among professionals, executives, and higher-paid salespersons with access to confidential business-related information. And, even in those situations enforcement is not a sure thing. Restrictive covenants in employment—also referred to as non-compete clauses—are generally not favored, and will be enforced by the courts only to the extent they are reasonable and necessary to protect legitimate business interests, such as the protection of an employer’s trade secrets or confidential customer lists, or protection from an employee whose services are unique or extraordinary. Courts have also held that employers have a legitimate interest in preventing former employees from exploiting the goodwill of a client or customer, which had been created and maintained at the employer’s expense, to the employer’s competitive detriment. What legitimate interest would a sandwich chain have to justify preventing one of its sandwich-makers from leaving and working for a competitor?
This may all be moot if Congress passes the Mobility and Opportunity for Vulnerable Employees (MOVE) Act (not to be confused with the Military and Overseas Voter Empowerment Act). According to the press release issued by one of the sponsors, the legislation:
will enable low-wage workers to seek higher-paying jobs without fearing legal action from their current employer. The MOVE Act will ban the use of non-compete agreements for employees making less than $15 an hour, $31,200 per year, or the minimum wage in the employee’s municipality, and will require employers to notify prospective employees that they may be asked to sign a non-compete agreement.
According to the press release, it is estimated that 8-15% of low-wage workers are asked to sign non-compete agreements in an effort to dissuade those workers from seeking better, higher-paying jobs within the same industry. Although such agreements in these contexts may ultimately prove to be unenforceable in many jurisdictions, passage of the MOVE Act would remove any doubt with respect to these employees.
For more information about restrictive covenants and some recent developments in New York law, I invite you to read the latest posting on our firm’s website: New York Employers Could Soon Have More Difficulty Enforcing Restrictive Covenants.
New York Department of Labor Will Not Require Wage Notices in 2015
Two weeks ago, I wrote about two recent amendments to the Wage Theft Protection Act. One of those amendments eliminated the annual wage notice that employers were required to provide employees.
One of the problems identified by the Governor when he approved these amendments was the fact that the changes were not effective until 60 days after signed. The problem with that effective date (for 2015 at least) was that the notice required employers to provide the annual wage notices no later than February 1, 2015.
Thankfully, legislative leaders and the Governor have agreed to a chapter amendment to make this change effective immediately: “Accordingly, given the pending enactment of this chapter amendment, the Department will not require annual statements in 2015.” You can see the notice for yourself here.
Talk about good timing. Tomorrow I am scheduled to conduct my staff reviews. That’s one less thing I have to prepare tonight.
LLC Members Personally Liable For Failure To Pay Wages?
As I wrote in a post earlier today [Annual Notice Provision Eliminated From Wage Theft Prevention Act], Governor Cuomo signed legislation yesterday amending certain provisions of the Wage Theft Prevention Act. In addition to eliminating the annual notice provision, the amendments enhance certain penalties and make it easier to pursue repeat violators who attempt to evade the provisions of the act by setting up new businesses with similar operations and ownership.
One of the other significant provisions of this legislation [L.2014, ch.537], is the inclusion of an amendment to the New York Limited Liability Company Law. The amendments now impose personal liability on the members of a limited liability company with then ten largest ownership interests for the failure of the company to pay the wages of its employees. These amendments are similar to provisions already contained in the New York Business Corporation Law. Although the liability is also joint and several, employees wishing to take advantage of these provisions must first satisfy certain conditions, including providing written notice to the member against whom a claim will be made.
Over the last several years, the Legislature has made it a priority to protect employees from employers who fail to pay wages. These amendments are part of that effort, and the they simply bring the provisions of the Limited Liability Company Law more in line with the provisions that already apply to most other business entities in New York.
Annual Notice Provision Eliminated From Wage Theft Prevention Act
In January, I wrote about the notice requirements of the Wage Theft Prevention Act that apply to both new employees and existing employees. [See Employers: Do Not Forget Your Annual Employee Wage Theft Prevention Act Notice]. The Act required employers in New York to provide all new employees with a written notice setting forth the employee’s rate of pay and other pay-related information. The Act also required employers in New York to provide another written notice containing the same information to all other employees annually, before February 1 of each year.
Not surprisingly, the annual notice provision was roundly criticized by employers and business groups across the state because of the administrative burden and expense imposed on employers. The Rochester Business Alliance noted that the required written notice contained the same information that employees already receive on their paystubs.
Earlier this year, the Legislature passed an amendment to the Wage Theft Prevention Act, eliminating the annual notice requirement, and yesterday, Governor Cuomo signed the bill into law (L.2014, ch.537). The amendments also increase certain penalties for non-compliance and include provisions making it easier to establish successor liability against employers who attempt to evade the provisions of the law by purporting to set up new companies.
In his approval memorandum, the Governor noted that he was signing the bill into law, even though there were some technical and substantive problems that will need to be addressed. I would expect the Legislature to act on these issues early in the new year.
Employers: Do Not Forget Your Annual Employee Wage Theft Prevention Act Notice
Commencing this year, one of my new management tasks at our law firm will be to conduct staff reviews. We have a wonderful, experienced staff, and I am looking forward to meeting with all of them in the coming days. It has been our practice to provide our employees with a written document setting forth each employee’s rate of pay and other information at the time of this review. While this is good practice, it is also now the law. I thought I’d take the time to write a short post to remind employers what the requirements are in New York.
As I prepared for my new role, I reviewed the requirements and model forms, which must be provided to all employees annually on or before February 1. We previously wrote about those requirements in a series of articles on our firm’s website, and rather than repeat them, I will include links below. The article about the forms also contains links directly to the state’s model forms, which can also be found on the Department of Labor website.
Here are links to our previous series of articles on the Wage Theft Prevention Act and its notice requirements:
New Notice Requirements for New York Employers
Expanded Notice and record Keeping Requirements for New York Employers
New York Enhances Penalties for Failure to Comply with Labor Law
Wage Theft Prevention Act Model Notices Issued by the NYS Department of Labor
The Albany Business Review recently reported here that the Business Council of New York estimated that the private sector spends $50 million a year complying with this notice provision. The same article also reported that the Executive Deputy Commissioner of Labor testified at a hearing in November, that even though Department of Labor investigators have processed roughly 7,000 new cases since the law was enacted three years ago, none of the complaints cited the annual notice requirement.
While the notice provision continues to be criticized, efforts to eliminate it have not passed the legislature (yet?). So, for now, each employer in New York must continue to provide this annual notice before February 1, as I will do later this week.
MCCMLAW Employment Law Update is Available Here
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