By Melinda A. Balian
Whether it’s bringing a new physician into a practice group, hiring a nurse, or recruiting an administrator, health care entities face a number of considerations when initiating the employer-employee relationship.

Given that Michigan law now allows for individual liability in many employment-related claims, it has become even more important for health care entities — prior to formalizing an employment relationship — to implement precautionary policies that help to protect against potential litigation as well as the potential misdeeds of employees after the employment relationship has ended.

Therefore, we will suggest the adoption of two of the most simple and cost-effective ways a health care entity can begin building some necessary layers of protection into its employment agreements:

• The inclusion of a reasonable non-competition clause; and

• The implementation of a contractual modification of the statute of limitations for employment-related claims (reducing it from three years to six months).

Reasonable protections of a competitive business interest

Similar to other sectors of the economy, when an employee’s relationship with the company has been terminated, whether voluntarily or otherwise, health care entities are faced with a number of potential risks and concerns. These include a need to maintain the safety of business assets (such as patient lists), to protect proprietary operational details, and to prevent the dissemination of trade secrets to competitors.

Rather than passively waiting for difficult situations to rise to the level of litigation, however, health care businesses can adopt a more proactive approach and consider whether it is advisable to enter into non-competition agreements with certain employees at the beginning of their employment in order to reduce potential risks down the road.

In developing the language and scope of a non-competition clause or agreement, it is important to anticipate the analysis such a clause or agreement will receive if it becomes necessary to seek enforcement of its terms in court.

As an initial matter, Michigan courts will look to the Michigan Antitrust Reform Act of 1984 (MARA) to assess whether the non-competition agreement at issue protects the “employer’s reasonable competitive business interests.” MCL § 445.774a(1). In addition to this competitive business interest, MARA sets forth three particular terms of the non-competition agreement which must be “reasonable” in scope:

• The duration;

• The geographical area affected; and

• The type of employment or line of business involved.

These statutory requirements must be met because agreements in restraint of trade have historically been disfavored by courts throughout the country. In fact, Michigan courts have determined in recent cases “that the statute [ ] is an exception to the general policy which … must be limited in its enforceability,” holding that “the enforceability of non-compete agreements depends on their reasonableness” (Bristol Window and Door, Inc v Hoogenstyn, 250 Mich App 478, 482; 650 NW2d 670, 672 (Mich App 2002)).

Furthermore, the adoption of non-competition agreements has also been discouraged by the American Medical Association (AMA) which has taken the position that “[c]ovenants-not-to-compete restrict competition, disrupt continuity of care and potentially deprive the public of medical service” (AMA Principles of Medical Ethics, E-9.02 Restrictive Covenants and the Practice of Medicine).

Nonetheless, the AMA’s position statement also goes on to adopt a “reasonableness” standard akin to that found in the MARA statute in Michigan, whereby such covenants are only considered “unethical if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients’ choice of physician.” (See also St. Clair Medical, PC v Borgiel, 270 Mich App 260; 715 NW2d 914 (Mich App 2006) (holding that a restrictive covenant was not unethical under the AMA’s principles of medical ethics).)

Although some states have gone so far as to prohibit the use of non-competition agreements altogether, this is not the case in Michigan, as courts here have allowed the utilization of such agreements so long as they meet the “reasonableness” standard set forth above.

When a case involving the enforcement of a non-compete agreement makes it to court, the judge will typically consider the right of the individual to seek employment in accordance with his or her chosen field, as well as his or her general skills and knowledge. The judge will then weigh these individual rights against the need of the health care business to protect its trade secrets and prevent unfair competition.

This determination, and the question of what actually constitute “reasonable” restrictions on former employees, will ultimately be highly fact-specific and will vary across the many specialties within the healthcare profession, taking into account such things as the type of healthcare professional involved, the nature of the business, the extent of its operations, the number of competitors in the local market, and the local need for such employees.

For example, in Borgiel, the Michigan Court of Appeals held that a physician’s covenant-not-to-compete within a seven-mile radius from the clinic of a former employer protected a reasonable competitive business interest.

With these considerations about enforceability in mind, there are a number of steps that businesses in the healthcare field can take in order to be proactive in managing the competitive risks they might face with the loss of employees.

First, take time to identify the proprietary information and other trade secrets that might pose the greatest risk to your business if transferred to a competitor and identify those classes of employees which have access to that information.

Second, consider whether your business would benefit from the adoption of a policy instituting non-compete agreements for various classes of employees. Drafting separate agreements or clauses for each individual class of employee, as well as including provisions which clearly and explicitly describe the information that needs to be protected, are two relatively simple yet important steps health care entities can take to ensure the enforceability of any such agreement.

Third, it may also be helpful to look into whether a simple non-solicitation agreement (for example, where a physician would be precluded from soliciting patients of your business if he/she leaves to start his/her own practice) or a liquidated damages clause in a basic employment contract (which, for example, could impose a cost upon employees seeking employment within a certain proximity to their former employer) would better address the specific needs and goals of your practice.

Finally, if you decide to implement a policy of non-compete agreements with your employees, be sure to include terms that specifically address the competitive business interest involved, the duration of the agreement, its geographical scope, and the type of business and employment involved.

If you have taken the time to address each of these issues carefully and have adopted reasonable restrictions on the post-termination employment activities of your former employees, the courts of Michigan should look favorably upon — and, most importantly, uphold — the terms of your agreements.

Contractual modification of the statute of limitations for employment-related claims

All it takes is one disgruntled employee to cost the practice potentially hundreds of thousands of dollars in defending meritless claims of harassment or discrimination.

Generally, the statute of limitations for filing employment-related claims, such as discrimination or harassment, is three years. However, Michigan courts allow employers to reduce the three-year statute of limitations for employment related claims to six months by having employees agree to a contractual modification of the limitations period (Clark v DaimlerChrysler, 268 Mich App 138; 706 NW2d 471 (2005)).

The simplest way of doing the foregoing is by including the approved language in the application for employment and the employee handbook, if the practice has one; if the practice does not currently have a handbook in place, one should be prepared. Whether large or small, handbooks provide a practical benefit for the employers by providing one more piece of armor in defending lawsuits, and by providing answers to the many questions employees may have on a day to day basis.

Although plaintiffs have repeatedly attempted to defeat the modified limitations language by arguing that it is contrary to law or public policy, the Michigan Court of Appeals has rejected such arguments. As the Court pointed out in Clark, Michigan does not have a general policy or statutory enactment prohibiting the contractual modification of limitations provided by statute and, therefore, the provision is not contrary to law or public policy (Id., citing Rory v Continental Ins. Co., 473 Mich 457; 703 NW2d 23 (2005)).

Additionally, the Court has held that because the modified limitations language is typically contained in the employment application, and the employees have the ability not to accept employment under the terms offered by the employer, the modified period of limitations clause cannot be considered an “unconscionable contract of adhesion.” (Id. at 144.)

Lastly, Michigan courts have been very specific about the language that has been approved in reducing the limitations period from three years to six months. When considering whether to implement modified limitations language into your policies, you will want to make sure that you utilize the exact language that has been reviewed and approved in Michigan.

In conclusion, in an effort to streamline the goals of the employer in creating the necessary legal protections, it is often best to require employees to execute agreements at the outset of employment containing non-compete agreements and modifications of the statute of limitations.

Additionally, these agreements can contain clauses offering employers numerous other protections (for example, clauses prohibiting disclosure of confidential information, solicitation of patients and/or employees, and outlining the “at will” nature of the employment relationship).

Practically speaking, it is always better to enter into the employer-employee relationship with clear and concise terms and provisions than to risk costly and needless litigation in the future.

Melinda Balian is a senior associate attorney at Frank Haron Weiner.  Ms. Balian specializes in employment law and has successfully represented companies, including health care entities, in all facets of litigation and arbitration, as well as defense of administrative claims.