When buying an existing dental practice, you're investing in more than just equipment and office space—you're acquiring the goodwill, patient relationships, and reputation that the seller has built over time. To ensure a seamless transition for patients and staff, many buyers choose to retain the seller for a transition period. But this brings up an important decision: should the seller be brought on as an independent contractor or as an employee? Understanding the difference can impact everything from restrictive covenants to legal protections for your practice.
A recent case, Dentalcorp Health Services Ltd. et al. v. Dr. Kenneth Hamin Dental Corporation et al., illustrates how hiring the seller as an independent contractor affects the enforceability of restrictive covenants, particularly around non-compete and non-solicitation clauses. Here's what you need to know as a buyer about these clauses and why the independent contractor model may work best.
Why Restrictive Covenants Matter in Dental Practice Sales
Restrictive covenants are contractual clauses that protect your investment by limiting the seller's ability to compete with your new practice or to solicit patients. In a sale, these covenants might restrict the seller from setting up a competing practice within a certain radius or contacting former patients. They help ensure that the goodwill you're buying—the trust and loyalty patients have in the practice—stays intact.
Independent Contractor vs. Employee: Key Differences
One of the biggest takeaways from Dentalcorp v. Hamin is that the type of relationship—independent contractor versus employee—affects how the court views restrictive covenants. When the seller is classified as an independent contractor, courts apply a less stringent standard to restrictive covenants because they see this as part of a business sale transaction, rather than an employment relationship. This generally makes it easier to enforce non-compete and non-solicitation agreements that protect your investment.
In contrast, if the seller is hired as an employee, the court is likely to scrutinize these covenants more strictly, since restrictive clauses in employment contracts can hinder an individual's ability to earn a livelihood. For example, a court would closely examine the geographic and temporal scope of non-compete clauses in an employment context, often resulting in narrower restrictions.
How Dentalcorp v. Hamin Applied These Standards
In Dentalcorp v. Hamin, the buyer, Dentalcorp, hired Dr. Hamin as an independent contractor after purchasing his practice. The purchase agreements included restrictive covenants, which prohibited Dr. Hamin from practicing within a five-kilometer radius of his former clinic and from soliciting patients. These covenants aimed to protect Dentalcorp's investment in the goodwill and patient relationships it had acquired.
When Dr. Hamin later set up a nearby practice, Dentalcorp argued that he was breaching these restrictions. Dr. Hamin contended that the restrictions were unreasonable, claiming that he should be viewed as an employee, which would invoke a stricter test for the covenants' enforceability. However, the court disagreed, finding that Dr. Hamin was clearly an independent contractor. This classification allowed the court to apply a more lenient standard to the restrictive covenants, enforcing them to protect Dentalcorp's proprietary interests.
Why Hiring as an Independent Contractor Can Be Advantageous
By hiring the seller as an independent contractor, you gain several benefits:
- Stronger Restrictive Covenants: Courts are more likely to enforce non-compete and non-solicitation clauses in a sale of business context when the seller is an independent contractor, protecting your new patient base and reducing competition.
- Clear Role Boundaries: With an independent contractor agreement, you define specific services and responsibilities for the seller, ensuring they help with the transition without any long-term obligations typical of employment.
- Focus on Goodwill Transfer: The seller's role as an independent contractor emphasizes the handover of patient relationships rather than forming an ongoing employment relationship. This reinforces that their primary responsibility is a temporary transition.
Key Considerations for Your Practice Purchase
- Draft Specific Covenants: Work with your legal team to draft non-compete and non-solicitation clauses tailored to your practice's location and market area. Ensure the covenants are clear and reasonable for an independent contractor role.
- Specify the Contractor Status: Clearly outline in the contract that the seller is being retained as an independent contractor, not an employee. Define their role, responsibilities, and the length of the transition period.
- Evaluate Geographic and Temporal Scope: Although courts may be more flexible in a sale context, it's still wise to keep the restrictions reasonable. A five-kilometer radius and two- to three-year term are common and generally enforceable, depending on your location and the specifics of your practice.
- Plan for Patient Retention: Beyond covenants, consider ways to retain patients, such as introducing yourself gradually with the seller's endorsement or scheduling meet-and-greets with patients. This can help ease patient concerns and reinforce the continuity of care under your ownership.
Final Thoughts
Buying a dental practice is an exciting but complex process, and
retaining the seller during the transition can be invaluable for
patient retention and goodwill transfer.
However, to protect your investment, it's crucial to set up the
relationship correctly. Hiring the seller as an independent
contractor, rather than as an employee, not only clarifies their
role but also strengthens the enforceability of restrictive
covenants designed to safeguard your practice's future. With
these legal safeguards in place, you'll be better positioned to
succeed as the new owner of a thriving practice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
