Goodwill hunting – contractor entitlement to goodwill

This article forms part of the series “Contractors – Shifting Sands for Medical and Allied Health Practices”

Goodwill is the essence of any business, and can often be a business’ most valuable (albeit intangible) asset. The value of goodwill lies in brand identity or recognition, customer networks, positive customer and employee relations, and broadly speaking, reputation.

But, how do you determine who, or what, will be entitled to the benefit of the goodwill in circumstances where it will substantially be established by individuals you want to engage as contractors? What difference does it make who owns the goodwill?

Who owns the goodwill in a practice?

While the work of an employee creates goodwill for the employer’s business that can be protected by including reasonable post-employment restraints and other terms in employment contracts, true independent contractors should typically be entitled to the goodwill they generate, for their own business.

While it is still possible, in appropriate cases and by appropriate contractual terms, to reserve for yourself the benefit of goodwill generated by independent contractors, there is some inherent contradiction where a medical practice wants to engage practitioners as “independent contractors”, as well as wanting to keep the benefit of the goodwill generated by those practitioners.

This issue particularly arises where practitioners or other allied health professionals are engaged as purported contractors, and will bring their own body of clients to the practice, or gain new clients while at the practice, who may be willing to follow the practitioner to another practice.

The impact of restraints

Leaving practitioners free to compete and take away “their” clients when they leave can help to exclude the existence of an employment relationship, but if the goodwill of the practice is fragmented between the practice and the practitioners, this has the potential to, for example, heavily reduce the value of the practice in the event of a sale.

If your intention is that the goodwill generated by a practitioner will be owned by the practice, and you want to restrain the practitioner from using that goodwill after the practitioner leaves, then you should be aware that this is one factor that will make it more probable that the practitioner will be considered to be an employee, and not a true independent contractor.

In weighing up whether a practitioner should be engaged by your practice as an employee or an independent contractor, and how best to protect your business assets, goodwill is only one of the many issues which needs to be considered.

Next steps

Consider your current arrangements and review your practice structure. We invite you to contact us with any questions.

Rod Payne
Principal
T: 03 5226 8541
E: rpayne@ha.legal

Paul Gray
Principal Lawyer
T: 03 5225 5231
E: pgray@ha.legal

Sonia McCabe
Senior Associate
T 03 5226 8558
E: smccabe@ha.legal

Harriet Burton
Associate
T: 03 5225 5215
E: hburton@ha.legal