5
EMPLOYMENT
New Jersey Supreme Court Upholds Restrictive
Covenants in Cases Involving Physicians and Hospitals
(CONTINUED FROM PAGE 1)
Dr. More appealed the Appellate Division decision to the New
Jersey Supreme Court. Dr. More first contended that
restrictions such as those that Community Hospital sought to
impose on Dr. More were per se unlawful because they were
against the public interest. Relying extensively on its prior
decision in Karlin v. Weinberg, 77 N.J. 408 (1978), the Court
rejected this argument. According to the Court, while cognizant
of the importance of the public’s interest in assuring patient
choice, and the similarity of attorney-client relationships (in which
it had outlawed restrictive covenants) to the physician-patient
relationship, the Court concluded that “on the record before us,
we find insufficient justification to overrule Karlin and adopt a
per se rule.” Instead, the Court concluded that a case-by-case
review was the appropriate analysis to apply in that it “struck a
proper balance between an employer’s and employee’s freedom to
contract on the one hand and the public interest on the other.”
The Court proceeded to review the case under the standards
previously articulated in Karlin. According to the Court, the
first prong of the Karlin test — that the restriction served the
legitimate interests of Community Hospital — could be satisfied
by demonstrating that the restrictions protected confidential
business information, protected patient and patient referral bases
or protected the investment in the training of the physician.
According to the Court, Community Hospital had provided
sufficient evidence to satisfy this standard. Further, although the
restrictions could be no greater than what was reasonably neces-
sary to protect the hospital’s legitimate interests, the two-year
restriction contained in the employment agreement was not overly
broad and was consistent with the hospital’s legitimate needs.
The Court concurred with the Appellate Division determina-
tion that enforcement of the restrictions would not pose an undue
hardship on Dr. More. This inquiry required the Court to focus
on the likelihood of the physician finding other work in his or her
field and the burden the restriction placed on the physician.
Because Dr. More had received other offers of work within a rea-
sonable distance that would not have violated the restrictions, the
Court concluded that the restrictions did not pose an undue bur-
den on him. Moreover, whenever the employee voluntarily termi-
nates the employment relationship, as Dr. More did here, a court
is less likely to find an undue hardship.
Despite the foregoing analysis, the Court concluded that the
thirty-mile restriction imposed by the restrictive covenant was
overly broad and against the public interest. The Court noted
that Dr. More had presented convincing evidence of a shortage
of neurosurgeons in the area and specific evidence of a shortage
at Somerset Hospital where he intended to continue his prac-
tice. Given these factors, the Court referred the case back to the
trial court to fashion a more appropriate geographic restriction
for the covenant. The Court included the instruction that the
restriction ultimately determined by the trial court should not
exceed thirteen miles, the distance at which Somerset Hospital
was located.
The second case decided by the Court — Pierson v. Medical
Health Centers, et al. (A-10-04) — presented the Court with only
one issue to resolve: i.e., whether a restrictive covenant between a
physician and his employer was per se unreasonable. The parties to
the case had previously stipulated that the three-year and twelve-
mile restrictive covenant contained in Dr. Pierson’s employment
agreement satisfied the reasonableness standard of Karlin.
Therefore, the case presented an easy call for the Court given that
it had already held in Community Hospital that restrictive
covenants were not per se unlawful.
The opinion of the Court in these two cases suggests the con-
tinuing vitality and enforcement of properly crafted restrictive
covenants between physicians or between physicians and
hospitals. Both employers and physicians should be cognizant of
the enforceability of such covenants when entering into
employment agreements containing such restrictions. ◆
Clarifying Supreme Court
Opinion Protecting IRAs
BY ELLIOT D. RAFF
Some news reports stating that the
U.S. Supreme Court’s recent opinion in
Rousey v. Jacoway protects an Individual
Retirement Account (“IRA”) held by an
individual debtor in Federal bankruptcy
proceedings have overstated the scope of
the Court’s opinion. Rousey does con-
clude that, as a matter of law, an IRA may
be exempted from the debtor’s bankruptcy estate. However, a
debtor must still demonstrate that the IRA is “reasonably
necessary” for his support and the IRA is protected only to that
extent. Thus, under the Federal Bankruptcy Code, where an
individual debtor has other sources of support, some or all of
the IRA assets may not be protected. Further, Rousey does not
affect state law that would otherwise exclude or exempt IRA
assets. Thus, Rousey affords no new protection for residents of
states like New Jersey, where state law already excludes an IRA
from a debtor’s bankruptcy estate, or Pennsylvania, where state
law already provides a bankruptcy exemption for an IRA to the
extent reasonably necessary for the debtor’s support. ◆
www.flastergreenberg.com
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A Newsletter from the Employee Benefits and Employment and Labor Practice Groups SPRING 2005
New Jersey Supreme Court Upholds Restrictive Covenants in
Cases Involving Physicians and Hospitals
BY PAUL J. RUSSONIELLO
In two decisions anticipated by employ-
In This Issue. . .
ment law and healthcare practitioners alike, Understanding the Audit and Investigation
Process for Qualified Plan Audits ..............................2
the New Jersey Supreme Court addressed
the enforceability of restrictive covenants Recent Supreme Court Decision on
between physicians and between hospitals Age Discrimination Impacts Employers ....................3
and physicians. Both cases involved physi-
Clarifying Supreme Court Opinion Protecting IRAs ....5
cians who had entered into a non-competi-
tion agreement as part of an employment
two-year period. Following nearly seven years of employment
agreement with their employers: in one case,
with the hospital, Dr. More submitted his resignation and accepted
the employer was a hospital; in the other, a medical practice. In
employment with a new medical practice with one existing neu-
each case, the physicians argued that it was against public policy to
rosurgeon. In addition, Dr. More received medical staff privileges
subject them to restrictions that would limit the scope of their prac-
tice and that such restrictions were per se invalid. The fact that the
at Somerset Medical Center (“Somerset”), which was located
EMPLOYEE BENEFITS AND EMPLOYMENT AND LABOR PRACTICE GROUPS within the thirty-mile restricted radius and thirteen miles from
Jeffrey A. Cohen Kenneth S. Goodkind Vincent J. Nolan III
Supreme Court even agreed to hear and decide these two cases
raised a substantial question whether such restrictive covenants
Community Hospital. Based on its concern that Dr. More was
Jeff.Cohen@flastergreenberg.com Ken.Goodkind@flastergreenberg.com Vincent.Nolan@flastergreenberg.com violating the restrictive covenant provisions contained in his
856-382-2240 856-661-2273 856-661-2275
would remain viable following the Court’s decisions.
employment agreement with it, Community Hospital filed a
The Supreme Court resolved this issue in the cases of The complaint seeking to prohibit Dr. More from the practice of
Nicole T. Donoian Stephen M. Greenberg Elliot D. Raff
Community Hospital Group, Inc. v. Jay More, M.D., et al. neurosurgery within the restricted area.
nicole.donoian@flastergreenberg.com Steve.Greenberg@flastergreenberg.com Elliot.Raff@flastergreenberg.com
856-382-2253 856-661-2261 856-382-2241 (A-75/76-03) and in Pierson v. Medical Health Centers, et al.
Following a procedural history that included a trial court
(A-10-04). In both cases, the Court rejected the physicians’ posi-
Allen P. Fineberg Lizanne V. Hoerst Paul J. Russoniello decision that refused to enjoin Dr. More from practicing within the
Allen.Fineberg@flastergreenberg.com liz.hoerst@flastergreenberg.com Paul.Russoniello@flastergreenberg.com tions that such restrictive covenants were per se invalid and instead
restricted area, the rejection of an appeal of that decision by the
856-661-2264 856-382-2215 856-661-2270 concluded that they were enforceable when drafted and applied in
Appellate Division, and a Supreme Court decision directing that
Richard J. Flaster Michael D. Homans a fashion that was consistent with presently existing New Jersey law.
the Appellate Division consider the appeal, the Appellate Division
Rick.Flaster@flastergreenberg.com Michael.Homans@flastergreenberg.com According to the Court, if the restrictive covenants served a legiti-
856-661-2260 856-661-2271 reversed the trial court decision and awarded Community Hospital
mate interest of the employer, did not pose an undue burden on
the injunctive relief it had sought. The decision of the appellate
Marc R. Garber * J. Philip Kirchner the physicians, and were not detrimental to the public interest, they
court was based on its determination that the restrictive covenant
Marc.Garber@flastergreenberg.com Phil.Kirchner@flastergreenberg.com would be upheld.
856-382-2237 856-661-2268 * Of Counsel protected a legitimate interest of the hospital, namely its patient
The Community Hospital case involved a not-for-profit and referral relationships. Further, the appellate court determined
hospital in Edison, New Jersey, which specialized in the diagnosis that enforcement of the covenant would not impose an undue
and treatment of neurological diseases and neurosurgical condi- hardship on Dr. More, especially given that he had terminated the
tions (“Community Hospital”). Community Hospital had relationship with the hospital and had had numerous other offers
entered into several employment agreements with Dr. Jay More of employment from outside of the area of the restrictions. Lastly,
PRACTICE AREAS during the period of his employment, all of which contained
Bankruptcy • Business and Corporate Services • Closely-Held and Family Businesses • Commercial Litigation • Commercial Real Estate • Construction the appellate court concluded that it was not against the public
numerous post-employment limitations including a restrictive interest to restrict the area within which Dr. More could practice,
Law • Employee Benefits • Employment and Labor Law • Environmental Law • Estate Planning and Administration • Family Law and Adoption •
covenant that prohibited Dr. More from engaging in the practice especially given that there were numerous other hospitals within
Financial Work-Outs • Health Care • Land Use • Pension and Retirement Plans • Securities Regulation • Taxation • Technology and Emerging
of neurosurgery within a thirty-mile radius of the hospital for a
Businesses • Trademark and Copyright Licensing and Protection the restricted area that provided neurosurgery services.
(continued on page 5)
Copyright © 2005 Employment & Benefits Law Report • Flaster/Greenberg P.C.
 2 3
Understanding the Audit and Investigation Process
for Qualified Plan Audits
BY ALLEN P. FINEBERG MARC R. GARBER
AND
Allen P. Fineberg Marc R. Garber
Every private business owner dreads receiving notice that its
retirement plan is being audited. Typically, no reason is provided;
however, the notice includes the name of the auditor, a list of doc-
uments to be produced and a due date. This article is a guide to the
agency audit and investigation process of qualified retirement plans
and suggests guidelines for the plan sponsor under audit.
Qualified retirement plans are regulated by the Internal
Revenue Service (“IRS”) and the Department of Labor (“DOL”).
Defined benefit pension plans are also subject to regulation by the
Pension Benefit Guaranty Corporation (“PBGC”). However, given
the limited role of the PBGC, this article will address only IRS and
DOL audits and investigations.
The IRS audits retirement plans to determine whether they
comply with the myriad of highly technical rules contained in the
Internal Revenue Code and related regulations and published rul-
ings. Retirement plans that are not in compliance are disqualified
and the sponsor loses the tax advantages associated with such plans.
The IRS reviews plan and trust documents and related documents
and records as well as plan operational issues to determine compli-
ance. Because evaluating operational compliance cannot always be
accomplished by reviewing documents alone, the auditor may also
seek to question persons responsible for plan operations.
The DOL is authorized to investigate retirement plans to
determine compliance with the Employee Retirement Income
Security Act (“ERISA”). Where IRS has Audit Guidelines, DOL uses
an Enforcement Manual. The Pension and Welfare Benefits
Administration (“PWBA”) of the DOL conducts the investigation. If
appropriate, when violations are discovered, the PWBA may refer a
case for litigation. Also, the Office of the Inspector General of the
DOL has authority to investigate retirement plans to look for
criminal matters, usually involving theft or misuse of plan assets.
Under ERISA, the DOL or IRS can:
• Require the plan sponsor or service provider to provide all
plan and trust documents, amendments, books and
records related to a plan.
• Enter places of business (without a warrant) to inspect
these documents.
Employment & Benefits Law Report • Flaster/Greenberg P.C.
• Interview employees who are involved with plan administration.
• Issue subpoenas for the requested documents for the prior
three years (or more if reasonable cause is demonstrated) or the
production of individuals with knowledge about the plan.
PWBA’s investigations of plan sponsors typically focus on
prohibited transactions, compliance with ERISA’s prudence and
asset diversification rules, plan funding policies and plan invest-
ments. Many times DOL investigations are initiated by participant
complaints. IRS audits are intended to be random, but it is gener-
ally believed that certain “wrong” responses on the Form 5500
annual information return can increase the likelihood of an audit.
The following practices are recommended for a plan sponsor
under a plan audit or investigation:
• The initial response to the audit letter should come quickly and
typically should be made directly by counsel. In the case of the
IRS, the plan sponsor must designate counsel as its authorized
representative on an IRS Form 2848.
(continued on page 4)
Practice Group Services
Employee Benefits
◆ Design and implementation of qualified retirement plans
◆
◆
Fiduciary counseling
ERISA and other employee benefits litigation
◆ Design and implementation of Employee Stock Ownership Plans
(ESOPs) and use of ESOPs in corporate buy-outs
◆ Executive compensation and other
non-qualified deferred compensation programs
◆ Stock options, phantom stock and other incentive
stock programs
◆ Cafeteria plans and other welfare benefit programs
◆ IRS and DOL audits and compliance
Employment and Labor
◆ Employment discrimination counseling and litigation
◆ Preparation and enforcement of noncompete agreements
◆ Human Resource counseling and training
◆ Preparation of employee handbooks
◆ Guidance concerning sexual harassment and discrimination issues
◆ Hiring and disability, termination and discipline counseling
◆ Union-management relations advice
◆ Whistleblower litigation
◆ Wrongful discharge and/or breach of employment agreements
Recent Supreme Court Decision on Age Discrimination
Impacts Employers
BY MICHAEL D. HOMANS
Employers are suddenly more vulnerable
to claims of age discrimination — even if
the employee lacks any direct evidence of
age bias or intent — following a recently
issued decision by the United States
Supreme Court. Many employers will be
disturbed to learn that they could now be
liable for age discrimination for neutral, non-discriminatory
business decisions, if those decisions happen to have a dispro-
portionate impact on older workers.
In Smith v. City of Jackson, Miss., a group of police officers, aged
40 and over, sued the city under the federal Age Discrimination in
Employment Act (“ADEA”). The officers claimed that a pay raise
plan that gave greater increases to employees with less than five years
of tenure had a “disparate impact” on older employees, who tended
to have more seniority. In other words, the employees claimed that
the pay raise was unlawful because the net result was to give greater
pay raises, on average, to younger workers than to older workers.
Proving “Disparate Treatment”
The trial court and lower court of appeals dismissed the claim,
holding that the federal law did not provide for such
“disparate impact” claims of age discrimination. Instead, these
courts concluded that an employee had to prove “disparate treat-
ment” — intentional age discrimination — not just unequal
impact, in order to successfully assert a claim.
Prior to this case, the Supreme Court had held that
“disparate impact” claims could be brought under federal law
relating to sex, race, religion and national origin employment
discrimination, but had never resolved the issue with regard to
age discrimination. In Smith, the Supreme Court addressed this
issue and concluded that “disparate impact” claims are viable
under ADEA, even if the employee has no direct evidence of
age bias or intentional discrimination.
Expecting More “Disparate Impact” Suits
This decision is expected to lead to a surge in “disparate
impact” lawsuits by older employees who lose their jobs in mass
layoffs, who lose benefits under changes in benefit plans, or who
are never hired due to criteria, tests and qualifications that have a
disproportionate impact on older people.
Despite the foregoing, Smith is not all bad news for employers.
The Supreme Court clarified that an employer can defeat a
“disparate impact” claim if it can establish a “reasonable factor
other than age” for the challenged employment practice or policy.
An employer often will be able to meet this burden by showing
legitimate, age-neutral reasons for challenged employment
practices. For instance, if the employer can establish “reasonable”
4
Understanding the Audit and Investigation
Process for Qualified Plan Audits
(CONTINUED FROM PAGE 2)
motivations such as cost-cutting, the need for physical fitness, or
• It will often be necessary to request a postponement of the
the need for a certain level of education or certification for the job,
examination date to have sufficient time to compile and
then the employer should prevail in the case, even if the facially
review all of the requested materials. Within reason, such
neutral practice or policy has a disproportionate, negative impact
on older workers. requests are routinely granted.
• Counsel should also change the audit location to its office
Importantly, this defense under ADEA is less demanding of
(rather than the employer’s). This limits the examiner’s
employers than the “business necessity” an employer must establish
access to the employer’s personnel and to any records that
under Title VII of the Civil Rights Act of 1964, as amended, to
defeat “disparate impact” claims of sex or race discrimination. were not specifically requested in the initial notice. If addi-
tional documents are needed or other individuals are to be
Impact on Large and Small Employers questioned, the auditor must provide a list of things or
persons to be produced. This allows the sponsor and
The Smith decision will probably have its greatest impact on
larger employers, such as manufacturers, casinos, hotels, retail counsel to review past events and develop responses to
chains and public entities, which engage in hiring practices, anticipated questions.
reductions in force and other employment changes that affect
• Ideally, only counsel meets with the examiner. This again
greater numbers of employees and can be tracked statistically, since
allows for subsequent consultation if necessary to investigate
plaintiffs commonly prove “disparate impact” through the use of
a problem and develop an accurate, but considered, response
statistical analysis. However, smaller employers also will be
that will minimize the sponsor’s liability.
vulnerable to “disparate impact” claims because they often
• You will typically have an opportunity to agree with the
implement “facially neutral” rules and decisions without first
auditor on a reasonable post-examination document
taking the time to analyze the impact on older workers.
production request deadline.
Aggressive plaintiffs’ attorneys can be expected to vigorously
push these lawsuits in response to the Smith decision. Plaintiffs will
analyze reductions in force from every possible angle in search of
• If you are unclear as to precisely what the auditor seeks,
ask for clarification.
some “disparate impact” — whether that be to persons over 40, over
50, over 60, or whatever age band fits the disgruntled employee’s
• If you must be interviewed by the examiner, do so with
your counsel present. Answer questions directly and
“disparate impact” theory.
with precision, but do not volunteer information. Saying,
Further complicating the analysis in New Jersey, under the
state’s Law Against Discrimination, employees over the age of 18
“I do not recall” is fine if it is true. It is a much better
answer than trying to guess why a matter under review
Office Locations
cannot be discriminated against because of age — young or old.
may have occurred.
New Jersey’s law even protects young workers against discrimina-
Most important, when that letter arrives, pick up the
Commerce Center
tion in favor of older workers. Thus, New Jersey employers could
telephone and call an attorney well versed in handling agency 1810 Chapel Avenue West
face the daunting challenge of trying to ensure that every employ-
ment policy and action has an equal impact across the spectrum of audits and investigations. You will have everything to gain and Cherry Hill, NJ 08002-4609
ages in the workforce — with no adverse effect to any age group. nothing to lose. ◆ 856-661-1900
11 Penn Center
What does this mean for our client employers?
1818 Market Street, Suite 3402
• Employers should review all employment practices, hiring
Philadelphia, PA 19103
tests or layoff/termination criteria to determine if any of
them disproportionately affects workers based on age. This 215-569-1022
can involve detailed and complicated statistical analyses.
190 S. Main Road
• If the employer does identify a disparate impact, the
Vineland, NJ 08360
employer must examine the reason(s) for the practice, test or
856-691-6200
criteria. If the employer can justify the practice, test or
criteria on some basis other than age, then the employer may This report is for general use and information, and the
have a defense. content should not be interpreted as rendering legal advice 2900 Fire Road, Suite 102A
on any matter. Specific situations may raise additional or Egg Harbor Township, NJ 08234
• Legal counsel should be consulted early on to determine
whether implementation will expose the employer to a different issues and such information should be coordinated 609-645-1881
“disparate impact” claim, and if so, what can be done to with professional legal advice.
eliminate or mitigate that risk. ◆
www.flastergreenberg.com Employment & Benefits Law Report • Flaster/Greenberg P.C.
 2 3
Understanding the Audit and Investigation Process
for Qualified Plan Audits
BY ALLEN P. FINEBERG MARC R. GARBER
AND
Allen P. Fineberg Marc R. Garber
Every private business owner dreads receiving notice that its
retirement plan is being audited. Typically, no reason is provided;
however, the notice includes the name of the auditor, a list of doc-
uments to be produced and a due date. This article is a guide to the
agency audit and investigation process of qualified retirement plans
and suggests guidelines for the plan sponsor under audit.
Qualified retirement plans are regulated by the Internal
Revenue Service (“IRS”) and the Department of Labor (“DOL”).
Defined benefit pension plans are also subject to regulation by the
Pension Benefit Guaranty Corporation (“PBGC”). However, given
the limited role of the PBGC, this article will address only IRS and
DOL audits and investigations.
The IRS audits retirement plans to determine whether they
comply with the myriad of highly technical rules contained in the
Internal Revenue Code and related regulations and published rul-
ings. Retirement plans that are not in compliance are disqualified
and the sponsor loses the tax advantages associated with such plans.
The IRS reviews plan and trust documents and related documents
and records as well as plan operational issues to determine compli-
ance. Because evaluating operational compliance cannot always be
accomplished by reviewing documents alone, the auditor may also
seek to question persons responsible for plan operations.
The DOL is authorized to investigate retirement plans to
determine compliance with the Employee Retirement Income
Security Act (“ERISA”). Where IRS has Audit Guidelines, DOL uses
an Enforcement Manual. The Pension and Welfare Benefits
Administration (“PWBA”) of the DOL conducts the investigation. If
appropriate, when violations are discovered, the PWBA may refer a
case for litigation. Also, the Office of the Inspector General of the
DOL has authority to investigate retirement plans to look for
criminal matters, usually involving theft or misuse of plan assets.
Under ERISA, the DOL or IRS can:
• Require the plan sponsor or service provider to provide all
plan and trust documents, amendments, books and
records related to a plan.
• Enter places of business (without a warrant) to inspect
these documents.
Employment & Benefits Law Report • Flaster/Greenberg P.C.
• Interview employees who are involved with plan administration.
• Issue subpoenas for the requested documents for the prior
three years (or more if reasonable cause is demonstrated) or the
production of individuals with knowledge about the plan.
PWBA’s investigations of plan sponsors typically focus on
prohibited transactions, compliance with ERISA’s prudence and
asset diversification rules, plan funding policies and plan invest-
ments. Many times DOL investigations are initiated by participant
complaints. IRS audits are intended to be random, but it is gener-
ally believed that certain “wrong” responses on the Form 5500
annual information return can increase the likelihood of an audit.
The following practices are recommended for a plan sponsor
under a plan audit or investigation:
• The initial response to the audit letter should come quickly and
typically should be made directly by counsel. In the case of the
IRS, the plan sponsor must designate counsel as its authorized
representative on an IRS Form 2848.
(continued on page 4)
Practice Group Services
Employee Benefits
◆ Design and implementation of qualified retirement plans
◆
◆
Fiduciary counseling
ERISA and other employee benefits litigation
◆ Design and implementation of Employee Stock Ownership Plans
(ESOPs) and use of ESOPs in corporate buy-outs
◆ Executive compensation and other
non-qualified deferred compensation programs
◆ Stock options, phantom stock and other incentive
stock programs
◆ Cafeteria plans and other welfare benefit programs
◆ IRS and DOL audits and compliance
Employment and Labor
◆ Employment discrimination counseling and litigation
◆ Preparation and enforcement of noncompete agreements
◆ Human Resource counseling and training
◆ Preparation of employee handbooks
◆ Guidance concerning sexual harassment and discrimination issues
◆ Hiring and disability, termination and discipline counseling
◆ Union-management relations advice
◆ Whistleblower litigation
◆ Wrongful discharge and/or breach of employment agreements
Recent Supreme Court Decision on Age Discrimination
Impacts Employers
BY MICHAEL D. HOMANS
Employers are suddenly more vulnerable
to claims of age discrimination — even if
the employee lacks any direct evidence of
age bias or intent — following a recently
issued decision by the United States
Supreme Court. Many employers will be
disturbed to learn that they could now be
liable for age discrimination for neutral, non-discriminatory
business decisions, if those decisions happen to have a dispro-
portionate impact on older workers.
In Smith v. City of Jackson, Miss., a group of police officers, aged
40 and over, sued the city under the federal Age Discrimination in
Employment Act (“ADEA”). The officers claimed that a pay raise
plan that gave greater increases to employees with less than five years
of tenure had a “disparate impact” on older employees, who tended
to have more seniority. In other words, the employees claimed that
the pay raise was unlawful because the net result was to give greater
pay raises, on average, to younger workers than to older workers.
Proving “Disparate Treatment”
The trial court and lower court of appeals dismissed the claim,
holding that the federal law did not provide for such
“disparate impact” claims of age discrimination. Instead, these
courts concluded that an employee had to prove “disparate treat-
ment” — intentional age discrimination — not just unequal
impact, in order to successfully assert a claim.
Prior to this case, the Supreme Court had held that
“disparate impact” claims could be brought under federal law
relating to sex, race, religion and national origin employment
discrimination, but had never resolved the issue with regard to
age discrimination. In Smith, the Supreme Court addressed this
issue and concluded that “disparate impact” claims are viable
under ADEA, even if the employee has no direct evidence of
age bias or intentional discrimination.
Expecting More “Disparate Impact” Suits
This decision is expected to lead to a surge in “disparate
impact” lawsuits by older employees who lose their jobs in mass
layoffs, who lose benefits under changes in benefit plans, or who
are never hired due to criteria, tests and qualifications that have a
disproportionate impact on older people.
Despite the foregoing, Smith is not all bad news for employers.
The Supreme Court clarified that an employer can defeat a
“disparate impact” claim if it can establish a “reasonable factor
other than age” for the challenged employment practice or policy.
An employer often will be able to meet this burden by showing
legitimate, age-neutral reasons for challenged employment
practices. For instance, if the employer can establish “reasonable”
4
Understanding the Audit and Investigation
Process for Qualified Plan Audits
(CONTINUED FROM PAGE 2)
motivations such as cost-cutting, the need for physical fitness, or
• It will often be necessary to request a postponement of the
the need for a certain level of education or certification for the job,
examination date to have sufficient time to compile and
then the employer should prevail in the case, even if the facially
review all of the requested materials. Within reason, such
neutral practice or policy has a disproportionate, negative impact
on older workers. requests are routinely granted.
• Counsel should also change the audit location to its office
Importantly, this defense under ADEA is less demanding of
(rather than the employer’s). This limits the examiner’s
employers than the “business necessity” an employer must establish
access to the employer’s personnel and to any records that
under Title VII of the Civil Rights Act of 1964, as amended, to
defeat “disparate impact” claims of sex or race discrimination. were not specifically requested in the initial notice. If addi-
tional documents are needed or other individuals are to be
Impact on Large and Small Employers questioned, the auditor must provide a list of things or
persons to be produced. This allows the sponsor and
The Smith decision will probably have its greatest impact on
larger employers, such as manufacturers, casinos, hotels, retail counsel to review past events and develop responses to
chains and public entities, which engage in hiring practices, anticipated questions.
reductions in force and other employment changes that affect
• Ideally, only counsel meets with the examiner. This again
greater numbers of employees and can be tracked statistically, since
allows for subsequent consultation if necessary to investigate
plaintiffs commonly prove “disparate impact” through the use of
a problem and develop an accurate, but considered, response
statistical analysis. However, smaller employers also will be
that will minimize the sponsor’s liability.
vulnerable to “disparate impact” claims because they often
• You will typically have an opportunity to agree with the
implement “facially neutral” rules and decisions without first
auditor on a reasonable post-examination document
taking the time to analyze the impact on older workers.
production request deadline.
Aggressive plaintiffs’ attorneys can be expected to vigorously
push these lawsuits in response to the Smith decision. Plaintiffs will
analyze reductions in force from every possible angle in search of
• If you are unclear as to precisely what the auditor seeks,
ask for clarification.
some “disparate impact” — whether that be to persons over 40, over
50, over 60, or whatever age band fits the disgruntled employee’s
• If you must be interviewed by the examiner, do so with
your counsel present. Answer questions directly and
“disparate impact” theory.
with precision, but do not volunteer information. Saying,
Further complicating the analysis in New Jersey, under the
state’s Law Against Discrimination, employees over the age of 18
“I do not recall” is fine if it is true. It is a much better
answer than trying to guess why a matter under review
Office Locations
cannot be discriminated against because of age — young or old.
may have occurred.
New Jersey’s law even protects young workers against discrimina-
Most important, when that letter arrives, pick up the
Commerce Center
tion in favor of older workers. Thus, New Jersey employers could
telephone and call an attorney well versed in handling agency 1810 Chapel Avenue West
face the daunting challenge of trying to ensure that every employ-
ment policy and action has an equal impact across the spectrum of audits and investigations. You will have everything to gain and Cherry Hill, NJ 08002-4609
ages in the workforce — with no adverse effect to any age group. nothing to lose. ◆ 856-661-1900
11 Penn Center
What does this mean for our client employers?
1818 Market Street, Suite 3402
• Employers should review all employment practices, hiring
Philadelphia, PA 19103
tests or layoff/termination criteria to determine if any of
them disproportionately affects workers based on age. This 215-569-1022
can involve detailed and complicated statistical analyses.
190 S. Main Road
• If the employer does identify a disparate impact, the
Vineland, NJ 08360
employer must examine the reason(s) for the practice, test or
856-691-6200
criteria. If the employer can justify the practice, test or
criteria on some basis other than age, then the employer may This report is for general use and information, and the
have a defense. content should not be interpreted as rendering legal advice 2900 Fire Road, Suite 102A
on any matter. Specific situations may raise additional or Egg Harbor Township, NJ 08234
• Legal counsel should be consulted early on to determine
whether implementation will expose the employer to a different issues and such information should be coordinated 609-645-1881
“disparate impact” claim, and if so, what can be done to with professional legal advice.
eliminate or mitigate that risk. ◆
www.flastergreenberg.com Employment & Benefits Law Report • Flaster/Greenberg P.C.
 2 3
Understanding the Audit and Investigation Process
for Qualified Plan Audits
BY ALLEN P. FINEBERG MARC R. GARBER
AND
Allen P. Fineberg Marc R. Garber
Every private business owner dreads receiving notice that its
retirement plan is being audited. Typically, no reason is provided;
however, the notice includes the name of the auditor, a list of doc-
uments to be produced and a due date. This article is a guide to the
agency audit and investigation process of qualified retirement plans
and suggests guidelines for the plan sponsor under audit.
Qualified retirement plans are regulated by the Internal
Revenue Service (“IRS”) and the Department of Labor (“DOL”).
Defined benefit pension plans are also subject to regulation by the
Pension Benefit Guaranty Corporation (“PBGC”). However, given
the limited role of the PBGC, this article will address only IRS and
DOL audits and investigations.
The IRS audits retirement plans to determine whether they
comply with the myriad of highly technical rules contained in the
Internal Revenue Code and related regulations and published rul-
ings. Retirement plans that are not in compliance are disqualified
and the sponsor loses the tax advantages associated with such plans.
The IRS reviews plan and trust documents and related documents
and records as well as plan operational issues to determine compli-
ance. Because evaluating operational compliance cannot always be
accomplished by reviewing documents alone, the auditor may also
seek to question persons responsible for plan operations.
The DOL is authorized to investigate retirement plans to
determine compliance with the Employee Retirement Income
Security Act (“ERISA”). Where IRS has Audit Guidelines, DOL uses
an Enforcement Manual. The Pension and Welfare Benefits
Administration (“PWBA”) of the DOL conducts the investigation. If
appropriate, when violations are discovered, the PWBA may refer a
case for litigation. Also, the Office of the Inspector General of the
DOL has authority to investigate retirement plans to look for
criminal matters, usually involving theft or misuse of plan assets.
Under ERISA, the DOL or IRS can:
• Require the plan sponsor or service provider to provide all
plan and trust documents, amendments, books and
records related to a plan.
• Enter places of business (without a warrant) to inspect
these documents.
Employment & Benefits Law Report • Flaster/Greenberg P.C.
• Interview employees who are involved with plan administration.
• Issue subpoenas for the requested documents for the prior
three years (or more if reasonable cause is demonstrated) or the
production of individuals with knowledge about the plan.
PWBA’s investigations of plan sponsors typically focus on
prohibited transactions, compliance with ERISA’s prudence and
asset diversification rules, plan funding policies and plan invest-
ments. Many times DOL investigations are initiated by participant
complaints. IRS audits are intended to be random, but it is gener-
ally believed that certain “wrong” responses on the Form 5500
annual information return can increase the likelihood of an audit.
The following practices are recommended for a plan sponsor
under a plan audit or investigation:
• The initial response to the audit letter should come quickly and
typically should be made directly by counsel. In the case of the
IRS, the plan sponsor must designate counsel as its authorized
representative on an IRS Form 2848.
(continued on page 4)
Practice Group Services
Employee Benefits
◆ Design and implementation of qualified retirement plans
◆
◆
Fiduciary counseling
ERISA and other employee benefits litigation
◆ Design and implementation of Employee Stock Ownership Plans
(ESOPs) and use of ESOPs in corporate buy-outs
◆ Executive compensation and other
non-qualified deferred compensation programs
◆ Stock options, phantom stock and other incentive
stock programs
◆ Cafeteria plans and other welfare benefit programs
◆ IRS and DOL audits and compliance
Employment and Labor
◆ Employment discrimination counseling and litigation
◆ Preparation and enforcement of noncompete agreements
◆ Human Resource counseling and training
◆ Preparation of employee handbooks
◆ Guidance concerning sexual harassment and discrimination issues
◆ Hiring and disability, termination and discipline counseling
◆ Union-management relations advice
◆ Whistleblower litigation
◆ Wrongful discharge and/or breach of employment agreements
Recent Supreme Court Decision on Age Discrimination
Impacts Employers
BY MICHAEL D. HOMANS
Employers are suddenly more vulnerable
to claims of age discrimination — even if
the employee lacks any direct evidence of
age bias or intent — following a recently
issued decision by the United States
Supreme Court. Many employers will be
disturbed to learn that they could now be
liable for age discrimination for neutral, non-discriminatory
business decisions, if those decisions happen to have a dispro-
portionate impact on older workers.
In Smith v. City of Jackson, Miss., a group of police officers, aged
40 and over, sued the city under the federal Age Discrimination in
Employment Act (“ADEA”). The officers claimed that a pay raise
plan that gave greater increases to employees with less than five years
of tenure had a “disparate impact” on older employees, who tended
to have more seniority. In other words, the employees claimed that
the pay raise was unlawful because the net result was to give greater
pay raises, on average, to younger workers than to older workers.
Proving “Disparate Treatment”
The trial court and lower court of appeals dismissed the claim,
holding that the federal law did not provide for such
“disparate impact” claims of age discrimination. Instead, these
courts concluded that an employee had to prove “disparate treat-
ment” — intentional age discrimination — not just unequal
impact, in order to successfully assert a claim.
Prior to this case, the Supreme Court had held that
“disparate impact” claims could be brought under federal law
relating to sex, race, religion and national origin employment
discrimination, but had never resolved the issue with regard to
age discrimination. In Smith, the Supreme Court addressed this
issue and concluded that “disparate impact” claims are viable
under ADEA, even if the employee has no direct evidence of
age bias or intentional discrimination.
Expecting More “Disparate Impact” Suits
This decision is expected to lead to a surge in “disparate
impact” lawsuits by older employees who lose their jobs in mass
layoffs, who lose benefits under changes in benefit plans, or who
are never hired due to criteria, tests and qualifications that have a
disproportionate impact on older people.
Despite the foregoing, Smith is not all bad news for employers.
The Supreme Court clarified that an employer can defeat a
“disparate impact” claim if it can establish a “reasonable factor
other than age” for the challenged employment practice or policy.
An employer often will be able to meet this burden by showing
legitimate, age-neutral reasons for challenged employment
practices. For instance, if the employer can establish “reasonable”
4
Understanding the Audit and Investigation
Process for Qualified Plan Audits
(CONTINUED FROM PAGE 2)
motivations such as cost-cutting, the need for physical fitness, or
• It will often be necessary to request a postponement of the
the need for a certain level of education or certification for the job,
examination date to have sufficient time to compile and
then the employer should prevail in the case, even if the facially
review all of the requested materials. Within reason, such
neutral practice or policy has a disproportionate, negative impact
on older workers. requests are routinely granted.
• Counsel should also change the audit location to its office
Importantly, this defense under ADEA is less demanding of
(rather than the employer’s). This limits the examiner’s
employers than the “business necessity” an employer must establish
access to the employer’s personnel and to any records that
under Title VII of the Civil Rights Act of 1964, as amended, to
defeat “disparate impact” claims of sex or race discrimination. were not specifically requested in the initial notice. If addi-
tional documents are needed or other individuals are to be
Impact on Large and Small Employers questioned, the auditor must provide a list of things or
persons to be produced. This allows the sponsor and
The Smith decision will probably have its greatest impact on
larger employers, such as manufacturers, casinos, hotels, retail counsel to review past events and develop responses to
chains and public entities, which engage in hiring practices, anticipated questions.
reductions in force and other employment changes that affect
• Ideally, only counsel meets with the examiner. This again
greater numbers of employees and can be tracked statistically, since
allows for subsequent consultation if necessary to investigate
plaintiffs commonly prove “disparate impact” through the use of
a problem and develop an accurate, but considered, response
statistical analysis. However, smaller employers also will be
that will minimize the sponsor’s liability.
vulnerable to “disparate impact” claims because they often
• You will typically have an opportunity to agree with the
implement “facially neutral” rules and decisions without first
auditor on a reasonable post-examination document
taking the time to analyze the impact on older workers.
production request deadline.
Aggressive plaintiffs’ attorneys can be expected to vigorously
push these lawsuits in response to the Smith decision. Plaintiffs will
analyze reductions in force from every possible angle in search of
• If you are unclear as to precisely what the auditor seeks,
ask for clarification.
some “disparate impact” — whether that be to persons over 40, over
50, over 60, or whatever age band fits the disgruntled employee’s
• If you must be interviewed by the examiner, do so with
your counsel present. Answer questions directly and
“disparate impact” theory.
with precision, but do not volunteer information. Saying,
Further complicating the analysis in New Jersey, under the
state’s Law Against Discrimination, employees over the age of 18
“I do not recall” is fine if it is true. It is a much better
answer than trying to guess why a matter under review
Office Locations
cannot be discriminated against because of age — young or old.
may have occurred.
New Jersey’s law even protects young workers against discrimina-
Most important, when that letter arrives, pick up the
Commerce Center
tion in favor of older workers. Thus, New Jersey employers could
telephone and call an attorney well versed in handling agency 1810 Chapel Avenue West
face the daunting challenge of trying to ensure that every employ-
ment policy and action has an equal impact across the spectrum of audits and investigations. You will have everything to gain and Cherry Hill, NJ 08002-4609
ages in the workforce — with no adverse effect to any age group. nothing to lose. ◆ 856-661-1900
11 Penn Center
What does this mean for our client employers?
1818 Market Street, Suite 3402
• Employers should review all employment practices, hiring
Philadelphia, PA 19103
tests or layoff/termination criteria to determine if any of
them disproportionately affects workers based on age. This 215-569-1022
can involve detailed and complicated statistical analyses.
190 S. Main Road
• If the employer does identify a disparate impact, the
Vineland, NJ 08360
employer must examine the reason(s) for the practice, test or
856-691-6200
criteria. If the employer can justify the practice, test or
criteria on some basis other than age, then the employer may This report is for general use and information, and the
have a defense. content should not be interpreted as rendering legal advice 2900 Fire Road, Suite 102A
on any matter. Specific situations may raise additional or Egg Harbor Township, NJ 08234
• Legal counsel should be consulted early on to determine
whether implementation will expose the employer to a different issues and such information should be coordinated 609-645-1881
“disparate impact” claim, and if so, what can be done to with professional legal advice.
eliminate or mitigate that risk. ◆
www.flastergreenberg.com Employment & Benefits Law Report • Flaster/Greenberg P.C.
 5
New Jersey Supreme Court Upholds Restrictive
Covenants in Cases Involving Physicians and Hospitals
(CONTINUED FROM PAGE 1)
Dr. More appealed the Appellate Division decision to the New
Jersey Supreme Court. Dr. More first contended that
restrictions such as those that Community Hospital sought to
impose on Dr. More were per se unlawful because they were
against the public interest. Relying extensively on its prior
decision in Karlin v. Weinberg, 77 N.J. 408 (1978), the Court
rejected this argument. According to the Court, while cognizant
of the importance of the public’s interest in assuring patient
choice, and the similarity of attorney-client relationships (in which
it had outlawed restrictive covenants) to the physician-patient
relationship, the Court concluded that “on the record before us,
we find insufficient justification to overrule Karlin and adopt a
per se rule.” Instead, the Court concluded that a case-by-case
review was the appropriate analysis to apply in that it “struck a
proper balance between an employer’s and employee’s freedom to
contract on the one hand and the public interest on the other.”
The Court proceeded to review the case under the standards
previously articulated in Karlin. According to the Court, the
first prong of the Karlin test — that the restriction served the
legitimate interests of Community Hospital — could be satisfied
by demonstrating that the restrictions protected confidential
business information, protected patient and patient referral bases
or protected the investment in the training of the physician.
According to the Court, Community Hospital had provided
sufficient evidence to satisfy this standard. Further, although the
restrictions could be no greater than what was reasonably neces-
sary to protect the hospital’s legitimate interests, the two-year
restriction contained in the employment agreement was not overly
broad and was consistent with the hospital’s legitimate needs.
The Court concurred with the Appellate Division determina-
tion that enforcement of the restrictions would not pose an undue
hardship on Dr. More. This inquiry required the Court to focus
on the likelihood of the physician finding other work in his or her
field and the burden the restriction placed on the physician.
Because Dr. More had received other offers of work within a rea-
sonable distance that would not have violated the restrictions, the
Court concluded that the restrictions did not pose an undue bur-
den on him. Moreover, whenever the employee voluntarily termi-
nates the employment relationship, as Dr. More did here, a court
is less likely to find an undue hardship.
Despite the foregoing analysis, the Court concluded that the
thirty-mile restriction imposed by the restrictive covenant was
overly broad and against the public interest. The Court noted
that Dr. More had presented convincing evidence of a shortage
of neurosurgeons in the area and specific evidence of a shortage
at Somerset Hospital where he intended to continue his prac-
tice. Given these factors, the Court referred the case back to the
trial court to fashion a more appropriate geographic restriction
for the covenant. The Court included the instruction that the
restriction ultimately determined by the trial court should not
exceed thirteen miles, the distance at which Somerset Hospital
was located.
The second case decided by the Court — Pierson v. Medical
Health Centers, et al. (A-10-04) — presented the Court with only
one issue to resolve: i.e., whether a restrictive covenant between a
physician and his employer was per se unreasonable. The parties to
the case had previously stipulated that the three-year and twelve-
mile restrictive covenant contained in Dr. Pierson’s employment
agreement satisfied the reasonableness standard of Karlin.
Therefore, the case presented an easy call for the Court given that
it had already held in Community Hospital that restrictive
covenants were not per se unlawful.
The opinion of the Court in these two cases suggests the con-
tinuing vitality and enforcement of properly crafted restrictive
covenants between physicians or between physicians and
hospitals. Both employers and physicians should be cognizant of
the enforceability of such covenants when entering into
employment agreements containing such restrictions. ◆
Clarifying Supreme Court
Opinion Protecting IRAs
BY ELLIOT D. RAFF
Some news reports stating that the
U.S. Supreme Court’s recent opinion in
Rousey v. Jacoway protects an Individual
Retirement Account (“IRA”) held by an
individual debtor in Federal bankruptcy
proceedings have overstated the scope of
the Court’s opinion. Rousey does con-
clude that, as a matter of law, an IRA may
be exempted from the debtor’s bankruptcy estate. However, a
debtor must still demonstrate that the IRA is “reasonably
necessary” for his support and the IRA is protected only to that
extent. Thus, under the Federal Bankruptcy Code, where an
individual debtor has other sources of support, some or all of
the IRA assets may not be protected. Further, Rousey does not
affect state law that would otherwise exclude or exempt IRA
assets. Thus, Rousey affords no new protection for residents of
states like New Jersey, where state law already excludes an IRA
from a debtor’s bankruptcy estate, or Pennsylvania, where state
law already provides a bankruptcy exemption for an IRA to the
extent reasonably necessary for the debtor’s support. ◆
www.flastergreenberg.com
EMPLOYMENT
PRSRT STD
U.S. POSTAGE
PAID
& BENEFITS
Bellmawr, NJ
Permit No. 58
LAW REPORT
1810 Chapel Avenue West Return Service Requested
Cherry Hill, NJ 08002-4609
A Newsletter from the Employee Benefits and Employment and Labor Practice Groups SPRING 2005
New Jersey Supreme Court Upholds Restrictive Covenants in
Cases Involving Physicians and Hospitals
BY PAUL J. RUSSONIELLO
In two decisions anticipated by employ-
In This Issue. . .
ment law and healthcare practitioners alike, Understanding the Audit and Investigation
Process for Qualified Plan Audits ..............................2
the New Jersey Supreme Court addressed
the enforceability of restrictive covenants Recent Supreme Court Decision on
between physicians and between hospitals Age Discrimination Impacts Employers ....................3
and physicians. Both cases involved physi-
Clarifying Supreme Court Opinion Protecting IRAs ....5
cians who had entered into a non-competi-
tion agreement as part of an employment
two-year period. Following nearly seven years of employment
agreement with their employers: in one case,
with the hospital, Dr. More submitted his resignation and accepted
the employer was a hospital; in the other, a medical practice. In
employment with a new medical practice with one existing neu-
each case, the physicians argued that it was against public policy to
rosurgeon. In addition, Dr. More received medical staff privileges
subject them to restrictions that would limit the scope of their prac-
tice and that such restrictions were per se invalid. The fact that the
at Somerset Medical Center (“Somerset”), which was located
EMPLOYEE BENEFITS AND EMPLOYMENT AND LABOR PRACTICE GROUPS within the thirty-mile restricted radius and thirteen miles from
Jeffrey A. Cohen Kenneth S. Goodkind Vincent J. Nolan III
Supreme Court even agreed to hear and decide these two cases
raised a substantial question whether such restrictive covenants
Community Hospital. Based on its concern that Dr. More was
Jeff.Cohen@flastergreenberg.com Ken.Goodkind@flastergreenberg.com Vincent.Nolan@flastergreenberg.com violating the restrictive covenant provisions contained in his
856-382-2240 856-661-2273 856-661-2275
would remain viable following the Court’s decisions.
employment agreement with it, Community Hospital filed a
The Supreme Court resolved this issue in the cases of The complaint seeking to prohibit Dr. More from the practice of
Nicole T. Donoian Stephen M. Greenberg Elliot D. Raff
Community Hospital Group, Inc. v. Jay More, M.D., et al. neurosurgery within the restricted area.
nicole.donoian@flastergreenberg.com Steve.Greenberg@flastergreenberg.com Elliot.Raff@flastergreenberg.com
856-382-2253 856-661-2261 856-382-2241 (A-75/76-03) and in Pierson v. Medical Health Centers, et al.
Following a procedural history that included a trial court
(A-10-04). In both cases, the Court rejected the physicians’ posi-
Allen P. Fineberg Lizanne V. Hoerst Paul J. Russoniello decision that refused to enjoin Dr. More from practicing within the
Allen.Fineberg@flastergreenberg.com liz.hoerst@flastergreenberg.com Paul.Russoniello@flastergreenberg.com tions that such restrictive covenants were per se invalid and instead
restricted area, the rejection of an appeal of that decision by the
856-661-2264 856-382-2215 856-661-2270 concluded that they were enforceable when drafted and applied in
Appellate Division, and a Supreme Court decision directing that
Richard J. Flaster Michael D. Homans a fashion that was consistent with presently existing New Jersey law.
the Appellate Division consider the appeal, the Appellate Division
Rick.Flaster@flastergreenberg.com Michael.Homans@flastergreenberg.com According to the Court, if the restrictive covenants served a legiti-
856-661-2260 856-661-2271 reversed the trial court decision and awarded Community Hospital
mate interest of the employer, did not pose an undue burden on
the injunctive relief it had sought. The decision of the appellate
Marc R. Garber * J. Philip Kirchner the physicians, and were not detrimental to the public interest, they
court was based on its determination that the restrictive covenant
Marc.Garber@flastergreenberg.com Phil.Kirchner@flastergreenberg.com would be upheld.
856-382-2237 856-661-2268 * Of Counsel protected a legitimate interest of the hospital, namely its patient
The Community Hospital case involved a not-for-profit and referral relationships. Further, the appellate court determined
hospital in Edison, New Jersey, which specialized in the diagnosis that enforcement of the covenant would not impose an undue
and treatment of neurological diseases and neurosurgical condi- hardship on Dr. More, especially given that he had terminated the
tions (“Community Hospital”). Community Hospital had relationship with the hospital and had had numerous other offers
entered into several employment agreements with Dr. Jay More of employment from outside of the area of the restrictions. Lastly,
PRACTICE AREAS during the period of his employment, all of which contained
Bankruptcy • Business and Corporate Services • Closely-Held and Family Businesses • Commercial Litigation • Commercial Real Estate • Construction the appellate court concluded that it was not against the public
numerous post-employment limitations including a restrictive interest to restrict the area within which Dr. More could practice,
Law • Employee Benefits • Employment and Labor Law • Environmental Law • Estate Planning and Administration • Family Law and Adoption •
covenant that prohibited Dr. More from engaging in the practice especially given that there were numerous other hospitals within
Financial Work-Outs • Health Care • Land Use • Pension and Retirement Plans • Securities Regulation • Taxation • Technology and Emerging
of neurosurgery within a thirty-mile radius of the hospital for a
Businesses • Trademark and Copyright Licensing and Protection the restricted area that provided neurosurgery services.
(continued on page 5)
Copyright © 2005 Employment & Benefits Law Report • Flaster/Greenberg P.C.
 5
New Jersey Supreme Court Upholds Restrictive
Covenants in Cases Involving Physicians and Hospitals
(CONTINUED FROM PAGE 1)
Dr. More appealed the Appellate Division decision to the New
Jersey Supreme Court. Dr. More first contended that
restrictions such as those that Community Hospital sought to
impose on Dr. More were per se unlawful because they were
against the public interest. Relying extensively on its prior
decision in Karlin v. Weinberg, 77 N.J. 408 (1978), the Court
rejected this argument. According to the Court, while cognizant
of the importance of the public’s interest in assuring patient
choice, and the similarity of attorney-client relationships (in which
it had outlawed restrictive covenants) to the physician-patient
relationship, the Court concluded that “on the record before us,
we find insufficient justification to overrule Karlin and adopt a
per se rule.” Instead, the Court concluded that a case-by-case
review was the appropriate analysis to apply in that it “struck a
proper balance between an employer’s and employee’s freedom to
contract on the one hand and the public interest on the other.”
The Court proceeded to review the case under the standards
previously articulated in Karlin. According to the Court, the
first prong of the Karlin test — that the restriction served the
legitimate interests of Community Hospital — could be satisfied
by demonstrating that the restrictions protected confidential
business information, protected patient and patient referral bases
or protected the investment in the training of the physician.
According to the Court, Community Hospital had provided
sufficient evidence to satisfy this standard. Further, although the
restrictions could be no greater than what was reasonably neces-
sary to protect the hospital’s legitimate interests, the two-year
restriction contained in the employment agreement was not overly
broad and was consistent with the hospital’s legitimate needs.
The Court concurred with the Appellate Division determina-
tion that enforcement of the restrictions would not pose an undue
hardship on Dr. More. This inquiry required the Court to focus
on the likelihood of the physician finding other work in his or her
field and the burden the restriction placed on the physician.
Because Dr. More had received other offers of work within a rea-
sonable distance that would not have violated the restrictions, the
Court concluded that the restrictions did not pose an undue bur-
den on him. Moreover, whenever the employee voluntarily termi-
nates the employment relationship, as Dr. More did here, a court
is less likely to find an undue hardship.
Despite the foregoing analysis, the Court concluded that the
thirty-mile restriction imposed by the restrictive covenant was
overly broad and against the public interest. The Court noted
that Dr. More had presented convincing evidence of a shortage
of neurosurgeons in the area and specific evidence of a shortage
at Somerset Hospital where he intended to continue his prac-
tice. Given these factors, the Court referred the case back to the
trial court to fashion a more appropriate geographic restriction
for the covenant. The Court included the instruction that the
restriction ultimately determined by the trial court should not
exceed thirteen miles, the distance at which Somerset Hospital
was located.
The second case decided by the Court — Pierson v. Medical
Health Centers, et al. (A-10-04) — presented the Court with only
one issue to resolve: i.e., whether a restrictive covenant between a
physician and his employer was per se unreasonable. The parties to
the case had previously stipulated that the three-year and twelve-
mile restrictive covenant contained in Dr. Pierson’s employment
agreement satisfied the reasonableness standard of Karlin.
Therefore, the case presented an easy call for the Court given that
it had already held in Community Hospital that restrictive
covenants were not per se unlawful.
The opinion of the Court in these two cases suggests the con-
tinuing vitality and enforcement of properly crafted restrictive
covenants between physicians or between physicians and
hospitals. Both employers and physicians should be cognizant of
the enforceability of such covenants when entering into
employment agreements containing such restrictions. ◆
Clarifying Supreme Court
Opinion Protecting IRAs
BY ELLIOT D. RAFF
Some news reports stating that the
U.S. Supreme Court’s recent opinion in
Rousey v. Jacoway protects an Individual
Retirement Account (“IRA”) held by an
individual debtor in Federal bankruptcy
proceedings have overstated the scope of
the Court’s opinion. Rousey does con-
clude that, as a matter of law, an IRA may
be exempted from the debtor’s bankruptcy estate. However, a
debtor must still demonstrate that the IRA is “reasonably
necessary” for his support and the IRA is protected only to that
extent. Thus, under the Federal Bankruptcy Code, where an
individual debtor has other sources of support, some or all of
the IRA assets may not be protected. Further, Rousey does not
affect state law that would otherwise exclude or exempt IRA
assets. Thus, Rousey affords no new protection for residents of
states like New Jersey, where state law already excludes an IRA
from a debtor’s bankruptcy estate, or Pennsylvania, where state
law already provides a bankruptcy exemption for an IRA to the
extent reasonably necessary for the debtor’s support. ◆
www.flastergreenberg.com
EMPLOYMENT
PRSRT STD
U.S. POSTAGE
PAID
& BENEFITS
Bellmawr, NJ
Permit No. 58
LAW REPORT
1810 Chapel Avenue West Return Service Requested
Cherry Hill, NJ 08002-4609
A Newsletter from the Employee Benefits and Employment and Labor Practice Groups SPRING 2005
New Jersey Supreme Court Upholds Restrictive Covenants in
Cases Involving Physicians and Hospitals
BY PAUL J. RUSSONIELLO
In two decisions anticipated by employ-
In This Issue. . .
ment law and healthcare practitioners alike, Understanding the Audit and Investigation
Process for Qualified Plan Audits ..............................2
the New Jersey Supreme Court addressed
the enforceability of restrictive covenants Recent Supreme Court Decision on
between physicians and between hospitals Age Discrimination Impacts Employers ....................3
and physicians. Both cases involved physi-
Clarifying Supreme Court Opinion Protecting IRAs ....5
cians who had entered into a non-competi-
tion agreement as part of an employment
two-year period. Following nearly seven years of employment
agreement with their employers: in one case,
with the hospital, Dr. More submitted his resignation and accepted
the employer was a hospital; in the other, a medical practice. In
employment with a new medical practice with one existing neu-
each case, the physicians argued that it was against public policy to
rosurgeon. In addition, Dr. More received medical staff privileges
subject them to restrictions that would limit the scope of their prac-
tice and that such restrictions were per se invalid. The fact that the
at Somerset Medical Center (“Somerset”), which was located
EMPLOYEE BENEFITS AND EMPLOYMENT AND LABOR PRACTICE GROUPS within the thirty-mile restricted radius and thirteen miles from
Jeffrey A. Cohen Kenneth S. Goodkind Vincent J. Nolan III
Supreme Court even agreed to hear and decide these two cases
raised a substantial question whether such restrictive covenants
Community Hospital. Based on its concern that Dr. More was
Jeff.Cohen@flastergreenberg.com Ken.Goodkind@flastergreenberg.com Vincent.Nolan@flastergreenberg.com violating the restrictive covenant provisions contained in his
856-382-2240 856-661-2273 856-661-2275
would remain viable following the Court’s decisions.
employment agreement with it, Community Hospital filed a
The Supreme Court resolved this issue in the cases of The complaint seeking to prohibit Dr. More from the practice of
Nicole T. Donoian Stephen M. Greenberg Elliot D. Raff
Community Hospital Group, Inc. v. Jay More, M.D., et al. neurosurgery within the restricted area.
nicole.donoian@flastergreenberg.com Steve.Greenberg@flastergreenberg.com Elliot.Raff@flastergreenberg.com
856-382-2253 856-661-2261 856-382-2241 (A-75/76-03) and in Pierson v. Medical Health Centers, et al.
Following a procedural history that included a trial court
(A-10-04). In both cases, the Court rejected the physicians’ posi-
Allen P. Fineberg Lizanne V. Hoerst Paul J. Russoniello decision that refused to enjoin Dr. More from practicing within the
Allen.Fineberg@flastergreenberg.com liz.hoerst@flastergreenberg.com Paul.Russoniello@flastergreenberg.com tions that such restrictive covenants were per se invalid and instead
restricted area, the rejection of an appeal of that decision by the
856-661-2264 856-382-2215 856-661-2270 concluded that they were enforceable when drafted and applied in
Appellate Division, and a Supreme Court decision directing that
Richard J. Flaster Michael D. Homans a fashion that was consistent with presently existing New Jersey law.
the Appellate Division consider the appeal, the Appellate Division
Rick.Flaster@flastergreenberg.com Michael.Homans@flastergreenberg.com According to the Court, if the restrictive covenants served a legiti-
856-661-2260 856-661-2271 reversed the trial court decision and awarded Community Hospital
mate interest of the employer, did not pose an undue burden on
the injunctive relief it had sought. The decision of the appellate
Marc R. Garber * J. Philip Kirchner the physicians, and were not detrimental to the public interest, they
court was based on its determination that the restrictive covenant
Marc.Garber@flastergreenberg.com Phil.Kirchner@flastergreenberg.com would be upheld.
856-382-2237 856-661-2268 * Of Counsel protected a legitimate interest of the hospital, namely its patient
The Community Hospital case involved a not-for-profit and referral relationships. Further, the appellate court determined
hospital in Edison, New Jersey, which specialized in the diagnosis that enforcement of the covenant would not impose an undue
and treatment of neurological diseases and neurosurgical condi- hardship on Dr. More, especially given that he had terminated the
tions (“Community Hospital”). Community Hospital had relationship with the hospital and had had numerous other offers
entered into several employment agreements with Dr. Jay More of employment from outside of the area of the restrictions. Lastly,
PRACTICE AREAS during the period of his employment, all of which contained
Bankruptcy • Business and Corporate Services • Closely-Held and Family Businesses • Commercial Litigation • Commercial Real Estate • Construction the appellate court concluded that it was not against the public
numerous post-employment limitations including a restrictive interest to restrict the area within which Dr. More could practice,
Law • Employee Benefits • Employment and Labor Law • Environmental Law • Estate Planning and Administration • Family Law and Adoption •
covenant that prohibited Dr. More from engaging in the practice especially given that there were numerous other hospitals within
Financial Work-Outs • Health Care • Land Use • Pension and Retirement Plans • Securities Regulation • Taxation • Technology and Emerging
of neurosurgery within a thirty-mile radius of the hospital for a
Businesses • Trademark and Copyright Licensing and Protection the restricted area that provided neurosurgery services.
(continued on page 5)
Copyright © 2005 Employment & Benefits Law Report • Flaster/Greenberg P.C.