Incisal Edge is proud to introduce our readers to our newest contributors, Casey Crafton, DDS, Esq. and Stephen Kaufman, Esq. Dr. Crafton’s perspective is one rarely, if ever, seen in dentistry. Not only is he a practicing, board-certified pediatric dentist in Columbia, Maryland, he is also an attorney, dealing solely with the dental industry. His partner, Atty. Kaufman, has been in legal practice for more than 20 years and chairs the Health Care Practice group at the Offit Kurman Law Firm. They represent doctors in all types of business and litigation matters, including leasing and real estate purchases, practice purchases and sales, contracts, wills, employment issues and insurance and commercial disputes. Hailed “the dentists’ lawyers”, the duo will answer your questions on pressing issues affecting dental practices, offering straight-talk (no legaleze, we promise!) on best practices to avoid disputes, save money and make more informed decisions.

Pros and Cons of Non-Compete Agreements

Dear Casey and Steve:
We are considering using a non-competition provision in our revised associate employment agreement. Are they enforceable? If so, what is a reasonable mileage and time period?
Dr. L. - Virginia  

Dear Dr. L.:
First, some background for our readers who may be unfamiliar with non-competition agreements, sometimes called non-competes or restrictive covenants. When a doctor with a non-compete leaves his or her job, he or she will be forbidden from practicing for a certain time within a defined geographic area. Sometimes, the prohibited area is a radius around the office. For example: “Upon termination of his contract, Dr. Smith shall not practice pediatric dentistry for two years within a three-mile radius of the practice location on Oak Street.” Sometimes, the area is defined by zip codes, political boundaries (“no practicing in Alexandria”) or any other easily defined area (between four intersecting roads, for example). The proper purpose of a non-compete is to prevent a departing doctor from taking with him or her the patients that you, as employer, spent considerable time and money attracting.

Now, to answer your first question, non-competes are legal in most states, including Virginia. Some states, like California, have legal prohibitions against using noncompetes. So, always check with a lawyer before using a non-compete. However, just because a non-compete is legal does not mean that a court will enforce it. To be enforceable, in general, the time and geographic restrictions: (1) must be no more than reasonably necessary to protect the practice’s business and goodwill; (2) must not impose undue hardship on the departing doctor; and (3) must take into account the public’s need for skilled dentists. Unfortunately, there is no definite yardstick for measuring reasonable time or geography. There is no categorical definition of undue hardship, and there are no precise scales to weigh the public interest. Every case is different. Here are some general principles that might help you reach a fair, enforceable agreement.

To guard against losing patients, practices often seek a large geographic restriction. We have seen restrictions that covered an entire state. However, if the mileage restriction is too big, it may scare off job applicants who are concerned about an excessive commute to a new job, or worse, having to move and start over in a new town. Also, too large a distance may be voided if challenged in court. An effort to get overwhelming protection may result in no protection. So, what’s a reasonable restriction? For distance, consider how far patients travel for treatment. If most patients live within two miles, a 15-mile restriction is likely excessive. Generally, the more urban the community where the practice is located, the smaller the acceptable distance. For a reasonable time restriction, look at how long it will reasonably take the practice to consolidate its patient base after a dentist leaves. Courts often agree that one or two years are acceptable.

So what happens if you demand a 50-mile non-compete, and your prospective new associate wants 5 miles? You could find another job candidate, or you could compromise. A common compromise is a smaller geographic area, perhaps 10 miles in this example. You could also agree to exceptions. Perhaps, the doctor could work within the radius for a noncompetitive practice, like an HMO or the government. Or, you could agree that if you fire the new doctor within the first three months of hire, the covenant will not be enforceable. That way, the new doctor will not need to move if the job doesn’t work out, and you won’t get hurt too badly if he or she leaves. After all, how many patients could a new doctor take after such a short time on the job?

Whatever you decide to do, Dr. L., remember, a poorly written covenant may not be enforced, and ambiguity breeds lawsuits. That is an expense and distraction well worth avoiding.

New Associate: Employee vs. Contractor 

Casey and Steve:
I’m hiring an associate. Should she be an employee or an independent contractor? Which is correct?
Dr. C – Maryland

Dear Dr. C:
Either might be correct, depending on your specific situation; but beware, getting it wrong can be an expensive mistake. Employers like to classify workers as independent contractors because it saves them money. When workers are independent contractors, employers avoid paying Social Security, Medicare, workers’ compensation and unemployment taxes and they do not withhold taxes. And, independent contractors do not receive benefits like health insurance and retirement plans. Given these advantages, why not always claim that all your workers are independent contractors? The reason is that your classification is not binding with the IRS. If you are audited, and the IRS decides that you misclassified your workers as independent contractors, you can be forced to pay unpaid taxes, penalties and interest. This is not an idle risk. In an effort to collect more taxes, the IRS recently began cracking down on employers who improperly misclassify their workers.

To properly classify a worker, you need to look at how much control you have over the worker. In general, a worker is an employee when the boss has the right to control and direct what work is done, and how and when it must be done. This IRS has a list of 20 factors to make the determination. While all factors should be considered, the following six are usually applicable to dentists:

1. Are there set work hours? Employees tend to have their hours set by the boss. Independent contractors decide when they will work. Think of the contractors who painted your house. They came and left on their own schedule.
2. Is the work done at the employer’s office? If so, that suggests an employee relationship.
3. Paying a worker for work by hour, week, month or year indicates an employee. A commission indicates an independent contractor.
4. Do you provide the tools and equipment that your associate needs to work? That tends to indicate that he or she is an employee.
5. Working for more than one practice at a time is an indication that the worker is an independent contractor. If you require a full-time commitment and a restrictive covenant, that indicates that he or she is an employee.
6. The rights to fire and quit are important. Employers exercise control by threatening to fire employees. Independent contractors usually cannot be fired so long as they produce the contracted-for result. If a worker can quit at any time without liability, that indicates an employee.

So Dr. C, if your new dentist will work only occasionally, on days and times chosen by her, brings her own instruments, is paid a commission and can freely work elsewhere, she is likely an independent contractor. If she will work for you full time on a schedule set by you, use your equipment, be paid a salary and have a restrictive covenant, she is probably an employee. In between these two situations is a large gray area open to interpretation. Fortunately, even if the IRS disagrees with your decision in the gray zone, liability can be avoided if three requirements are met. All three requirements must be met to create a “safe harbor,” free from extra tax and penalties:

• You must treat all workers who do the same job the same. You can’t have one associate who is an independent contractor and another with the same job who is an employee.
• All your tax returns must have been filed, identifying the worker as an independent contractor.
• Your classification must have a reasonable basis. This can be satisfied with a written opinion from a lawyer. We frequently give these opinions.

In sum, Dr. C., the safest way to avoid tax liability is to classify your new associate as an employee. If you decide to classify her as an independent contractor, consult your lawyer and follow the safe harbor rules. Good luck and congratulations on the expansion of your practice.

Casey Crafton, DDS, Esq. is a member of the Health Care Group at the Offit Kurman law firm’s office in Baltimore, MD. He is also a board-certified pediatric dentist practicing in Columbia, Maryland with his wife, Dr. Lisa Crafton, a General Dentist. He has been a faculty member at the Baltimore College of Dental Surgery, University of Maryland Dental School since 1989, and is a member of several renowned dental societies. Dr. Crafton can be reached at ccrafton@offitkurman.com 

Steve Kaufman, Esq. is Chair of the Health Care Group at Offit Kurman representing healthcare dentists in all aspects of their professional and personal lives. Mr. Kaufman lectures at dental schools on health and employment-related issues. He is a past member of the Publisher’s Advisory Board for Doctor of Dentistry magazine and is a former adjunct professor of law at Stevenson University. Steve Kaufman can be reached at skaufman@offitkurman.com.