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Your first employment contract

By Jeffrey B. Sansweet, Esq.

The majority of residents in their first year of training will join an established private practice, as opposed to buying a practice or starting on their own. Some will work for an HMO and others will be employed by an institution or system. Once the interview process has led to a formal written offer, a resident is then faced with the choice of having an attorney review the contract.

Of course, being a health care attorney my bias is to almost always have an attorney review the contract. Although that may not lead to significant changes in the contract, you can at least have comfort that there is nothing outrageous in the contract. I have received many phone calls from physicians who did not have an attorney review their initial contracts and were now concerned about onerous provisions. The first sign that an attorney may be needed is that the contract is inconsistent with the verbal discussions. That usually occurs due to miscommunication between the practice and the attorney, the attorney or accountant convincing the practice that it was being too generous, or second thoughts by the practice.

The likelihood of the practice to make changes to the contract depends on the reasonableness of the physicians. Bargaining power is also a key factor. If the practice has hired another physician recently, most likely they will be hesitant to vary from the previous format and substance so as to not offend the employed physician. However, if you bring a special skill to the table, you may be able to get some variation. If the practice has not recently hired a physician, you are more likely to be able to negotiate. However, do not let the practice know you are committed before the contract is finalized. For example, do not commit to buying a house in the area and do not turn down other offers.

For the remainder of this article, I will outline the major provisions to be found in a typical contract, starting with compensation. Most physicians are paid a guaranteed salary, at least for the first year. Some, however, are paid purely on a percentage of collections or charges they generate. Often the salary in future years is not set forth. I believe it is worth pursuing a guaranteed raise in the second and third years (or until partnership) even if it is only a $5000 or $10,000 raise. Most contracts also provide for an incentive bonus. If there is a specific formula, it is usually tied to the collections you generate, but sometimes is based upon the senior physicians reaching a certain baseline compensation.

For example, if the salary is $100,000, the bonus may be 20 percent of collections generated from services rendered directly by you in excess of $250,000. Alternatively, you may be entitled to some set percentage of the profits of the practice after the senior physicians are paid salary at least equal to their salaries for the year prior to your joining the practice. If the bonus is tied to your productivity, the key issues to negotiate are the percentage and the collections level. The level is usually at least two times salary and does not usually exceed three times salary. This allows the practice to cover its overhead. If the practice is not incurring significant additional overhead upon your joining the practice, i.e., additional space, staff, equipment, you can usually negotiate a lower level.

The percentage varies from as low as 10 percent to as high as 50 percent. In addition, sometimes the percentages will vary by the collections level as the higher you get, presumably the overhead is lower. For example, your bonus may be 20 percent of collections between $250,000 and $300,000; 30 percent between $300,000 and $400,000; and 40 percent of collections in excess of $400,000. Also, you may be able to negotiate higher percentages in future years. On the other hand, if your bonus is dependent on other physicians producing and their complete control over overhead irrespective of the type of bonus formula, you should have the right to review the records to ensure that the calculation is done correctly.

Also, the contract should state when the bonus is payable. Most often, the bonus is not payable until after the end of the contract year and is not payable unless you complete the year. Sometimes, however, you may be able to get interim bonuses on a quarterly or semi-annual basis using a pro-rata collections figure. You should also ask that the bonus be payable on a pro-rata basis if the contract terminates prior to the end of the contract year for reasons other than your death or disability or termination by the practice for cause.

An important part of evaluating a compensation package is the fringe benefit package. The contract should clearly spell out all the benefits to be provided. If you are joining a health care system, the contract may simply refer to an Exhibit or Manual which outlines the benefits. If that is the case, be sure you look over it carefully so that any items that vary from what you were promised are addressed in the contract. Almost all practices provide and pay for malpractice insurance and health insurance. Health insurance should be provided for the entire family even if the practice does not do that for the staff.

The issue that arises with malpractice insurance is whether it is of the “occurrence” type or the “claims made” type. Occurrence coverage is more expensive and covers you no matter when the claim is made. Claims made only covers you as long as the policy is in place. Therefore, an endorsement or “tail” needs to be purchased once the policy is terminated to cover you against future claims. The issue that needs to be addressed in the contract is the responsibility of the tail payment. This varies from the practice being responsible, you being responsible, the parties splitting the tail equally, or it might depend on the reason for termination. Perhaps if you are leaving the practice, you should pay the tail, but if the practice terminates you without cause the practice should pay the tail.

If the practice maintains a retirement plan, the contract should simply state that you would become eligible for the plan once you meet its eligibility requirements. Most plans have either a one or two-year waiting period and there may be a vesting schedule. The most common types of plans are profit sharing plans, money purchase pension plans, and 401(k) plans. It might be helpful to ask for a Summary Plan Description which describes the basics of the plan. Many practices do not provide for disability insurance for two reasons. It is expensive and if the practice pays for it and deducts the payment for tax purposes without including it in your W-2, any benefits you receive upon disability would be taxable. On the other hand, if you personally pay the premium (which is not tax deductible), any insurance benefits would not be taxable.

The practice may also pay a signing bonus, but that is relatively uncommon absent special circumstances. Many practices will, however, reimburse you for moving expenses up to a reasonable dollar amount. Most practices will also pay for all expenses related to attendance at professional meetings up to a maximum dollar amount, often between $1500 and $2500. Other reimbursable expenses usually include professional society dues, hospital staff fees, business-related use of car phone, beeper and occasionally automobile expenses.

The contract should also set forth your duties and schedule, although that typically will not be set forth in much detail. If a particular call schedule is important to you, make sure that is in the contract. If a particular location of a multi-site practice has been promised, make sure that you cannot be moved without your approval. Leaves of absence should also be addressed. Most contracts provide for either two or three weeks of paid vacation plus one week of paid absence for meetings. The contract may also provide for up to 30 days of absence due to illness, disability, or maternity.

Another important issue is the term of the contract and the grounds for termination. Most contracts are for one, two or three-year terms. Some automatically renew from year-to-year unless either party gives the other notice of termination. Most contracts also provide that either party can terminate the employment upon 30, 60, or 90 days notice without cause. This in effect makes the contract a 30, 60, or 90-day contract: seemingly harsh, but it is reality. Occasionally with a larger group or in a situation when you are relocating a family, the practice will agree to no termination without cause in the first year. In addition, the longer notice period is typically better for you. If the practice is terminating a physician, they will often ask her to leave immediately and pay her salary for the notice period.

If you are leaving, you can usually time the notice to coincide with your new position. If you have a long-term contract that is not terminable by either party without cause (as may be the case with an institutional employer), keep in mind that you cannot be forced to stay if you want to leave during the term. However, the practice could sue you for breach of contract or a prospective employer may shy away from hiring you over a concern of being sued for interference with a contractual relationship. The contract will also typically allow the practice to terminate you immediately with notice under certain circumstances, including loss of license, uninsurability and conviction of a felony. Other more contentious cause reasons include breach of the contract or failure to adequately perform your duties. Those types of cause provisions should at least give you the right to cure the breach within perhaps 10 days after being notified. If certain other provisions of the contract hinge on a determination of cause (e.g., tail payment, restrictive covenant, pro-rate bonus), this definition should be looked at carefully.

Most contracts provide that all the income from any professional activities, including lectures, writings, expert testimony, chart reviews, etc. belong to the practice. If there is some activity you wish to except from this broad statement, be sure to raise it and have that included in the contract. Also, if you will be allowed to moonlight, make sure that is specified.

Although they may be difficult to enforce, almost all employment contracts include a restrictive covenant and a non-solicitation clause. In most states, restrictive covenants may be enforceable only if they are reasonable in terms of time and geographical restrictions and necessary to protect the patient-base of the employer. Most covenants apply for one or two years after termination. The geographic area varies depending on the location. A metropolitan area may have a restricted area of only a few miles, while a rural area may use 30 miles. Instead of using a radius from the practice site, sometimes townships may be listed or a map may be used. In addition to the restriction itself, the contract will usually set forth the remedy for violation thereof. These include an injunction, actual damages and liquidated damages. An injunction is typically difficult to obtain, therfore is preferable in the contract. A reasonable liquidated damages amount is one year’s salary. You may want to have the covenant not apply if the practice terminates you without cause or if the practice does not offer you partnership after two or three years, although that is generally difficult to accomplish.

Most practices are not willing to commit to partnership before you begin employment. The contract may not mention anything about partnership. However, it is certainly advisable to ask about the practice’s future plans. Ask when partnership is expected if things go well, what sort of buy-in formula will be used, how will the buy-in be structured from a tax standpoint, how will the net income be divided, and will I be an equal voting partner? Perhaps the practice will do a letter of intent with these answers so at least you have some idea what to expect before investing two or three years with the practice. Or, perhaps the contract itself can set forth a date by which the practice will either notify you that you will not become partner or provide you with the partnership documents. If the practice has recently made someone a partner, they should be more willing to give you more details about the future.

Once you have gone over the contract with an experienced health care attorney, you can either pursue the changes with the practice or have your attorney do the negotiating. Be sure to get a completely executed copy in case you need it down the road. You don’t want the practice to be suspicious if things are not going well and you ask for a copy of the contract.

Finally, try not to dwell on the fact that the contract is not perfect or even the best that you have seen or as good as your colleague’s contract. Each deal is unique. Even more important than the contract itself are the people in the practice. If the practice feels right, just go for the best deal you can!

Jeffrey B. Sansweet, Esq., is an attorney with the firm of Kalogredis, Tsoules and Sweeney, Ltd., located in Wayne, Pennsylvania.

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