MedHIRE, LLC

Understanding the Employment Contract

You're coming down the homestretch. After approximately 100,000 hours of training (assuming that you didn't sleep), the finish line is in sight. You're going into private practice and you've found the perfect place. Great! But, before you run out and buy that English Tudor by the river and sign up your kids for little league, take a good hard look at your contract.

Employment arrangements are so detailed and complex that even well intentioned people will forget terms that are verbally agreed upon. Don't jeopardize your career; get all agreements in writing.

Letter of Intent
Before you sign any employment contract with a group or solo practitioner, no matter how attractive it may seem on the surface, you should get a letter of intent from the practice that clearly describes its employment terms, as well as buy-in procedures and lays out a framework for sharing income and expenses should you become an owner. The letter will not be legally binding for you or for the practice, but it will let you know where you stand when your contract runs its course. If the practice is serious about taking you on, it should have no problem providing you with a letter of intent. In fact, it's not unusual for a practice to open its books to potential members, allowing them to see existing member's employment agreements and buy/sell agreements.

The Typical Contract
1. Term of employment
The first key element of most contracts is the term of employment.

Your agreement should clearly state the length of time you will be employed by the practice. Traditional employment terms range from one to two years, though the current trend is toward a two to three-year period.
Employment may be contingent upon your gaining staff privileges at the practice's hospitals, appropriate state and Drug Enforcement Agency (DEA) licenses, and liability insurance.
The contract may explain that your employment is "at will" and that either party may end the employment whenever it wishes, with a given notice period. Notice periods typically run from 45-90 days -- the longer the better.
Many contracts allow your employer to fire you immediately and without notice under certain circumstances, such as dishonesty, refusal to follow directions, or divulging confidential patient information. Make sure that these situations are specifically and unambiguously spelled out. Don't make it easy for them to fire you arbitrarily.
Some contracts set out a specific evaluation period as well as the criteria by which you will be evaluated typical criteria are commitment, level of productivity, efficiency and overall contribution to the practice; and interest in the practice from an entrepreneurial standpoint. Interpersonal factors also may come into play, including your relations with other physicians and staff, as well as your ability to earn the confidence of patients and referrers. This type of review, with the criteria laid out for you in the contract, is in your best interest, especially if the evaluations are used to determine an eventual co-ownership offer.

2. Compensation
The contract should lay out the compensation you will receive during the entire term of your employment. This could include base salary, incentive salary, and any other bonuses the practice offers.

Incentive Salaries

Break-Even Formula
Focuses on individual productivity. A practice pays you a percentage of the income you generate in excess of the practice's cost to employ you and profit on your efforts. The break-even point may be determined according to the practice's actual costs to employ you, which could include the cost of staff, supplies and equipment you use, in addition to your compensation.
Threshold Formula -- Net
Focuses on group productivity, so you have less control over the incentive you receive. The most typical approach provides that when the practice's net income (after covering your salary and expenses) exceeds a set percentage, perhaps 110% of the last year's net, you are entitled to some portion of the excess. By setting the threshold at 110% of the previous year's net income, the group is guaranteed at least a 10% return, before you receive a bonus.
Threshold Formula -- Gross
Another threshold formula states that if your efforts help the practice generate gross revenues in excess of a specified amount, you will receive a percentage of that excess.
Personal Discretion
Incentives based on personal discretion are the least advantageous for you. You have little control over this type of bonus, which can be given for any number of reasons, and the group is not required to put these criteria in writing. Often they are based on a subjective assessment of your overall contribution to practice success.

No Incentive Salary
On the other hand, many practices offer no incentive pay or regular bonuses whatsoever. This should not automatically rule them out as poor opportunities. If the practice is an appealing long-term opportunity for you, then an appropriate salary can be sufficient inducement to join. Once employed, the goal of building the practice in order to be promoted to partnership could also be sufficient motivation.

3. Business Expenses
It is generally accepted that the group will pay most of your employment-related general business expenses, including professional liability insurance, hospital staff fees, professional society dues, educational costs, and sometimes, work-related auto expenses.

4. Tail Coverage
If the practice's malpractice policy is maintained on a "claims" made basis, one of the most important issues to be detailed in the contract is whether or not the practice will pay for your "tail" coverage. The tail covers any claims brought after the period covered by the claims-made insurance. Typically, the tail becomes due when a doctor leaves the state or the area, or if a doctor changes professional liability carriers. Tail coverage is very expensive.

5. Benefits
Benefits should be detailed within the contract, as these often constitute trade-offs for your salary. Most group practices offer you a range of fringe benefits, including basic health and medical insurance for you and sometimes for your family, group term life insurance, coverage under the practice's retirement plan, and possibly disability insurance.

If the practice has a retirement plan, the contract should explain when you will become eligible to participate and how contributions will be made.
Vacation/CME/Sick Time

The 1st Year
The standard for paid vacation during your first year of employment is usually two to three weeks with an additional week for medical education, professional society meetings or board examinations. These weeks may be bundled into total time off, or may be allocated between vacation and professional absence. The contract should also explain in detail how much sick pay you will receive during each year of employment. Fifteen to thirty days of paid absence for illness or disability is standard. Pregnancy-related leave is usually treated as a disability under the practice's sick and disability leave policy.
After the 1st Year
Vacation time and professional time off usually increase with the length of employment; however, these periods almost always are less than a partner's share. Total paid absence often increases to four or five weeks during the second 12 months of employment; and then levels off at about six weeks, at least until you become a co-owner.

6. Senior's Death or Disability
If you are joining a solo practitioner or a group practice that has only one owner, the contract should clearly state what will happen if the senior physician dies before you or another doctor gains co-ownership.

The contract should give you the option to purchase the practice in the event of the senior's death or permanent disability. The financial and payment details should be worked out in broad terms in the contract, and these should be arranged so that you can reasonably meet the payment schedule. Nobody benefits if the financing terms are so steep that you cannot possibly meet them.
For multi-owner group practices such a provision is unnecessary, because other partners will typically buy out the departed individual's practice interest, according to the current buy/sell arrangements.

7. Restrictive Covenants
In the past, physicians opposed restrictive covenants on newly employed physicians, believing they were contrary to the principles of fair medical practice. In recent years, however, physicians are increasingly aware of the employer's legitimate interest in protecting the existing practice, and restrictive covenants are becoming commonplace in physician contractual arrangements. If your contract does include a restrictive covenant, have it reviewed carefully by an attorney familiar with state law. Many group practices, and especially small group practices ready to expand, find a restrictive covenant to be an essential protection. This type of agreement restricts you from practicing within a specified area around the practice should you decide to leave the practice. Some doctors, attorneys and practice advisors are skeptical about their enforceability, but restrictive covenants have been upheld in most states. While you obviously would do better with no restrictive covenant in the contract, you should be aware of the issues involved. Remember that your contract with a practice sets the stage for a long and productive relationship. The agreement should recognize your legitimate needs and interests, while protecting the investment dollars and sweat made by the group's current owners.

Reasonable Time
The restriction should be effective only for as long as is reasonably necessary to protect the practice's interests and moderate the risk of injury. A new doctor who leaves the service area for one or two years will typically lose much of any advantage gained directly through working with a practice. A longer restriction could be unreasonable and thus unenforceable.
Specific Geography
The covenant must be tied to the practice's actual primary service area. Geographic restrictions based on a set radius from the practice are often overly broad ? a practice's actual drawing capacity rarely translates into a nice round circle. Instead, the contract itself should define the primary practice service area in terms of specific geographic boundaries, such as roads, bodies of water, zip codes or municipal lines. We often recommend attaching to the agreement a map that defines the primary practice service area.
The Public Good
A court will not enforce a covenant that may harm the public health ? this becomes an issue if a particular specialty is in short supply in an area or if excluding a physician would adversely impact the delivery of medical services in that locale. A court will also look at the economic harm that a restrictive covenant could cause the general public. A court could find that enforcement of a covenant may lead to a monopoly ? potentially limiting the availability of public care in the event of an emergency, or driving up future fees.
Practice Protection
Restrictive covenants also must be reasonably necessary for protecting the practice's legitimate interests. For example, a group primarily servicing HMO patients would have difficulty justifying restrictions on you if you join a non-HMO related practice. Your contract should include a clear and concise review of the practice's specific medical interests.
Appropriate Timing
A restrictive covenant entered into after a doctor joins a practice could be challenged because it lacks "adequate consideration." In other word, there is no value to the new doctor for signing the restrictive covenant provision other than the concern of losing his/her job. It should also be clear whether the covenant would continue in effect until it is changed by a subsequent written agreement.
Specified Remedy
The contract should specify the remedy the practice will seek if you violate the covenant. The practice's best protection and the most generous for you is an absolute prohibition against competitive practice upon your termination of employment. This type of restriction is sometimes very hard to enforce. Alternatively, some covenants provide for specific money damages (liquidated damages). The amount of liquidated damages should be stipulated in the contract and must represent a reasonable estimate of the economic harm to the practice that your competition would cause. One appropriate approach is to tie that penalty to a portion of the cumulative salary actually paid you by the practice.
Non-solicitation Agreement
Some practices include a non-solicitation agreement to prevent you from soliciting a practice's patients, referrals, or contractual arrangements before or immediately after you leave the practice. Often it is used in addition to a restrictive covenant, because an associate restricted from competing within ten miles of an office under the restrictive covenant may choose to locate 10.1 miles away and immediately begin to solicit the patients seen in practice. If you violate a non-solicitation agreement, the practice may pursue an injunction against the solicitation of its patients and may seek liquidated damages. The practice should specify its chosen remedy within the contract.

8. Co-ownership / Buying In
Look for at least a broad outline of the process and terms the practice will use to evaluate your potential for co-ownership. This section should include a specific date by which the group will initiate the discussions, and another date by which the practice's current owners will make a firm decision about offering co-ownership. The general co-ownership terms should explain how the price of practice shares would be determined, the formula to be used to set the dollar value of the shares, and how many shares are to be purchased. If part of the buy-in is to be accomplished on a pre-tax basis, the section should set out the rough details of how your income will be discounted during the initial period of co-ownership. There are several cost components to a buy-in that should be outlined in the letter of intent.