Your first employment contract

By Dennis Hursh, Esq.

Having devoted years to school and training, there will come a time when you are ready to begin to practice medicine. Whether you are working for a private group practice or some other employer, the terms and conditions of your future practice will likely be set forth in an employment agreement.

The purpose of this article is to give you some of the basic points which should be contained in that first employment agreement and to highlight potential concerns which should be avoided.

Ownership

For physicians entering private practice in a group, one of the biggest concerns raised is the track to ownership in the practice. As is the case with many other areas in contracting, there are no hard and fast rules in this regard. I have seen variations ranging from one to eight years to attainment of full and equal ownership. The variation is not based upon geographical location, specialty or size of the practice. Most likely, at the time the founder of the practice brought in his or her first partner, a waiting period was established. Whatever that period was then will in all likelihood be the period you will be expected to wait until ownership is offered.

Do not make the mistake of thinking that the practice which offers ownership faster is the better paying practice. In a free market economy, physicians with several years of experience in the community will tend to have fairly similar total compensation packages, be they owners or “just” employees.

It is unrealistic to assume that you will be guaranteed ownership. The practice of medicine is still a collegial endeavor, and the practice will be looking for a personal “fit,” as well as clinical competence, in those who are offered admittance to the inner circle. For that reason, it is not uncommon for agreements to state that after ‘X’ years the physician will be “considered in good faith” for ownership. Having said that, the agreement should address how a buy-in will take place if you are offered ownership.

Of particular interest in this regard is the determination of the purchase price. This may be a set figure or, more commonly, a methodology for determination of the price. Here again, there are wild variations among practices. Some practices offer stock at its par value, so that a pittance may purchase a major portion of the practice, while others have elaborate formulas for valuing the practice. Do not assume that buying in for a pittance is necessarily a good deal. In a cyclical industry such as health care, prior mistakes often turn into current trends, so a re-emergence of the phenomena of a physician practice management company (PPMC) buying up practices would not be shocking. If that occurs, as a younger physician, you will want to ensure that your senior partners will not be tempted to sell to a PPMC because of an artificially low price for their shares if they sell to their partners. However the price of a buy-in is determined, it should be clearly set forth in the agreement.

The agreement should also make it clear if you will be offered an equal ownership interest. Finally, there should be an agreement in place among the existing owners (often called a “Shareholders Agreement” or “Buy-Sell Agreement”) which sets forth how shares will be purchased from departing shareholders. You should ask to examine this document so you can compare the buy-in price with the buy-out price. To the extent that the price will be determined based upon the financial statements of the practice, it would be prudent to request to see these statements, or at least get an estimate of what the price would be if offered today.

Scope of Duties

The agreement should set forth exactly what is expected of you. While larger practices sometimes specify a 40-hour work week (exclusive of call coverage), smaller practices often cannot do so. Nevertheless, there should be some indication of how much you will be expected to work, even if this is only in reference to total time the practice has office hours, etc.

In addition, the method for allocation of call coverage should be addressed. Here again, larger practices sometimes have the luxury of giving precise schedules, while smaller practices generally can only promise that call will be allocated “equitably.” (No matter what the methodology, expect to work Christmas your first year—by a funny coincidence, this always seems to fall on the newest physician, no matter how call is allocated).

Compensation

Although many agreements still provide “just” a base salary, practices are increasingly using productivity-based compensation. It should go without saying that any productivity-based compensation formula should be clear and unambiguous. If you do not understand the formula as written, it is imperative that the agreement be modified until you are perfectly clear on how compensation will be determined.

To the extent that compensation is based predominately upon salary, however, it is not uncommon for the practice to retain significant discretion in how bonuses (if any) are awarded.

Benefits

Expect the practice to maintain total discretion in fringe benefit plans, such as health and disability insurance. Although frustrating, it is fairly common to agree that the practice may change these plans “from time to time in its sole discretion.”

Many practices will pay a disabled physician for some period of time. To the extent that the agreement presented contains this feature, you should examine the Summary Plan Description (SPD) of any disability insurance to determine how the payment period matches the waiting period of the insurance.

To the extent that you are evaluating more than one offer, it is prudent to examine the SPD of all benefit plans to better be able to compare what benefits are being offered by each competing practice.

You should also determine if the practice pays for benefits (including malpractice insurance) directly, or performs some kind of “charge back” against your compensation for these benefits.

Restrictive Covenants

A restrictive covenant is an agreement that you will not compete with the practice during employment, or for some period of time after employment terminates. The critical feature of this provision is the geographical scope of the area in which you are restricted from practice. Of less importance is the time period (since being out of the community for a year will probably cost you as many patients as being out of the community for two years). In today’s hectic market, you should not expect that you will be working for the first practice that hires you when you retire. Accordingly, careful attention should be paid to this provision.

Many physicians are offended with the very concept of a restrictive covenant. However, you should realize that, for the first year or so of your new practice, the patients you see will most likely have come to see one of the other physicians in the practice. In time, they will come (or be referred) to you, but you will be building your practice based upon the reputation of the people who hired you.

The geographical area should be large enough to prevent you from setting up practice so close to your old employer that patients think you are still with them, but should be small enough to allow you to stay in the community if you leave the employer. Although the size of this area obviously varies by community, I believe that a five-mile radius should provide adequate protection in all but the most rural areas in the state.

The restricted area should be based upon your office location at your employer—not any place where you practiced medicine during your employment (e.g., you should still be allowed to see patients in hospitals and nursing homes, regardless of their proximity to the employers’ office). Similarly, the restricted area should only relate to your new office location. In most counties in Pennsylvania, a requirement that you resign hospital privileges will be a de facto bar from working in the county. Even in the major cities, hospital privileges should not be implicated in the restrictive covenant (unless the practice has an exclusive hospital contract which would be rendered meaningless if a departing physician were allowed to maintain privileges).

The restrictive covenant should prevent your solicitation of patients or employees of the practice. Be aware of prohibitions against “direct or indirect” solicitation in this regard. Although reasonable, the agreement should make it clear that general media advertisements do not constitute an “indirect” solicitation of patients or employees.

The restrictive covenant should not apply if the agreement is terminated by you because of a breach by the practice, or if the practice terminates you without cause.

No contract will be perfect. Some issues will be more important to you than others. Be aware that very few employment agreements are “carved in stone”. Most employers will make modifications to the agreement to address what they perceive as reasonable objections.

The entire contracting process should be one of “give and take.” Both sides should be willing to compromise to reach an acceptable middle ground. Nevertheless, you must realize that the best time to address perceived deficiencies in an employment relation is during the initial contract negotiations. Your leverage with the practice declines markedly once you have committed to employment.

Consider utilizing the services of a competent attorney in the field. The first medical position is an important milestone in your life. Your job satisfaction is likely to be enhanced if you feel comfortable that the employment relationship is a fair and equitable one for both you and the practice.

Dennis Hursh, Esq., is a principal in Hursh & Hursh, P.C., a Harrisburg area law firm.