By George F. Indest III, J.D., M.P.A., LL.M., Board Certified by The Florida Bar in Health Law
This is intended to provide an introductory review of the basics of contracting for new physicians and health professionals, primarily by discussing employment agreements. We will highlight many of the common provisions found in employment contracts, along with many of the mistakes and pitfalls that we see in our day-to-day practice. After reading this, it is our hope that new physicians and other health professionals will understand the common language and terms found in employment contracts. Therefore, they can recognize mistakes commonly made by physicians and health professionals when negotiating them. We hope to help make both employers and employees more knowledgeable about employment contracts so they can avoid potential problem areas and legal entanglements.
Our comments here are meant to provide general rules we have learned from our experience. However, please remember, every situation is different and there are exceptions to every rule.
Tip 1 - There is No Such Thing as a "Standard" or "Routine" Physician Employment Agreement."
No two employment agreements are identical. Each must be reviewed on its own terms. It is important to consult with a healthcare lawyer experienced in negotiating employment contracts and evaluating health care business transactions.
Tip 2 - Everything is Negotiable.
Even though an employer may have what appears to be a "standard" employment contract for all physician employees, this can have changes, amendments, schedules, exhibits or terms that are varied from physician to physician or professional to professional. Generally, large employers are less likely to change their form to accommodate the physician than small organizations, but they can and often will. Small employers are often willing to make more changes to their written agreements.
If there are any changes, additions or clarifications you need to make to the contract, then put them in writing, sign them, incorporate them into the contract and attach them to the contract.
Tip 3 - Be sure the Wording of the Contract Represents Exactly the Agreements you Made Orally.
If it is different or not specified, the language in the contract will govern in any future dispute.
Tip 4 - Make sure the parties are identified.
In many contracts we review, the correct names of the parties, especially the employer, are not included. Often, the only identification of the employer is a fictitious business name or part of a fictitious business name. Additionally, many business entities are not incorporated in the state in which the job is located. There is a misconception that a corporation or limited liability company, its owners and directors have far greater legal protections in states such as Delaware. Therefore, a disproportionately greater number are incorporated or organized there.
Often, a large institution such as a hospital system or health maintenance organization (HMO) has a business entity to hire and manage its physician and other health professional employees. Sometimes a potential employee may incorrectly believe that he or she is being employed by the larger organization. More often, the business entity that employs the health professional is actually a wholly owned subsidiary corporation or company. Always be sure that the contract includes the complete name of any corporation or company, the state in which it is incorporated (or organized or registered), its address and its fictitious business name (sometimes called a d/b/a or "doing business as" name). We include the complete identities and addresses of each party to the contract in an addendum, if they are not included in the main contract.
Tip 5 - Make sure that the employee or contractor is fully and consistently identified and treated as such throughout the contract.
In the case of physicians and many other health professionals, a medical group or business with which that person contracts may seek to treat him or her as an independent contractor instead of an employee. Independent contractors have far fewer rights and protections against the party with which they are contracting and have to incur a number of expenses that a true employer would have to pay otherwise.
It may be legally incorrect for a group or business to attempt to treat someone as an independent contractor instead of an employee. This may be attempted by someone who has received incorrect advice on how to evade taxes or to avoid paying legally required taxes and fees (such as Social Security deductions and workers compensations insurance payments). If the Internal Revenue Service (IRS), Department of Labor or Department of Finance scrutinizes the employing entity, it may result in an assessment of back taxes and penalties, stop work orders and other sanctions being taken against the employer.
In most cases, doctors, nurses, physical therapists, dentists, psychologists, nurse practitioners, physician assistants, mental health counselors, massage therapists and other health professionals should be treated as employees. The law requires that an employer pay a portion of the taxes, social security and other government assessments for those employees. Being an employee usually requires the employer to include the employee in any health insurance, retirement plans or other employer benefit plans which the employer has. The employer is also required to incur the costs of withholding taxes, unemployment compensation assessments, social security payments and other government-required deductions and forwarding them to the correct government entity. This saves administrative costs an employee might otherwise have to incur.
If the health professional has his or her own professional service corporation (sometimes called a professional association or "P.A.") or limited liability company (LLC) then this business entity can be contracted by another group or business as an independent contractor. The individually-owned P.A. or LLC is the employer of the health professional. Employees receive an IRS Form W-2 at the end of the year. This recaps the withholdings, Social Security, Medicare, unemployment compensation and other taxes and assessments deducted from their pay. Independent contractors receive an IRS Form 1099 at the end of the year with the total compensation paid to them reflected on it.
Employers are vicariously liable for the negligent acts of their employees while they are within the scope and practice of their jobs. The company or group that retains an independent contractor is not liable for the negligent acts of the independent contractor under the same circumstances. Regardless, it is important that a contract accurately identify whether the health professional is an employee or an independent contractor. It must also consistently refer to and treat the individual as either an employee or independent contractor throughout the contract. If the contract is one that an employer has taken and tried to modify without the help of an attorney, it may use the term, incorrectly or include conditions that violate the law or that negate the treatment desired.
It is almost always far more advantageous for the individual being hired to be treated as an employee.
Tip 6 - Be Sure That You Receive a Signed, Dated Copy Back Before You First Start Working.
If you are an employee, be sure that you receive a copy of the contract back that has actually been signed and dated by the employer. One of the most common legal problems we encounter when we consult with an employee whose employer has broken the contract, is the absence of a signed or dated copy of the contract. Anyone can type up a blank contract. There may be many preliminary drafts of a contract that are not agreed to or executed by the parties. How can you prove that this is the actual agreement between the parties if you do not have a copy that is signed by the parties?
Tip 7 - Make Sure That all Exhibits, Schedules, Addendums and Referenced Documents are Attached to the Contract.
We often see contracts which refer to attached exhibits for job requirements, bonus calculations, benefits, employer handbooks, employer code of ethics or conduct, etc. However, in many cases these are not completed or not attached to the contract when it is signed. Make sure that any documents that are referred to by the contract are actually attached to it and are completed. These are part of the contract. Your copy is not complete without them.
Tip 8 - Amend the Contract, By Hand if Necessary, to Make It Consistent with the Agreement of the Parties.
A contract is not a sacred document. You may write on it, if necessary, to amend it. You may attach separate handwritten amendments to it. Just make sure any handwritten changes on the contract itself are initialed by each party. Make sure any amendments attached to it are signed and dated by each party to the contract. Remember, also, that the changes must be understandable. If a judge is later called on to read it and interpret it, it must be clear to the judge.
Under the general rules used to construe contracts, typed changes and amendments to preprinted forms take precedence over the preprinted portions. Handwritten changes and amendments take precedence over typed or preprinted portions, and spelled out numbers and dates supercede numerical ones (if there is a conflict). However, there must be evidence that these were agreed to by both parties (such as initials or signatures prove).
Tip 9 - Restrictive Covenants (Sometimes Referred To As Covenants Not To Compete) Are Enforceable By Law in Florida.
A covenant not to compete is common in most physician contracts. This clause prevents a departing physician from competing with the employer in a specific geographic area for a specific period of time. These restrictive covenants are, as a general rule, enforceable under Florida law. There are exceptions and defenses that can be used to defeat or prevent the enforcement of a restrictive covenant, especially in the case of a physician. However, unless you have money set aside to pay for litigation, expect to honor it if it is in the agreement. As an employee, your negotiation strategy should be to have it removed completely or reduce the period of time and reduce the geographic area as much as possible. Also, it should be worded so as to only apply to the office or location in which you actually work and not to the medical sub-specialty or type of practice in which you will work.
If you decide you are going to leave a group or practice and you may need to work in violation of a restrictive covenant, it is very important to plan ahead for this. Often strategies can be developed that will avoid litigation.
Tip 10 - Avoid Agreeing to Pay the Premium for Tail Coverage For Professional Liability (Medical Malpractice) Insurance, Especially If The Employer Terminates The Employment.
If you are not able to negotiate this away completely: a) reduce the percentage you agree to pay to fifty percent (50 %) or have it reduced to twenty five percent (25%) for each year you are in the practice, and b) insert a provision that if you maintain the same insurance company or obtain retroactive coverage, this will be substituted for tail coverage. If you maintain your insurance with the same company, in reality your "tail" is covered and you should need no additional tail coverage policy.
Tip 11 - Carefully Consider Clauses That Allow the Employer to Terminate the Agreement Without Cause on a 30 Day, 60 Day, 90 Day or 180 Day Notice.
Many agreements contain a clause allowing one party or both parties to terminate the agreement "without cause" by giving advance notice of so many days. With such a clause in your contract, you no longer have a one or two-year agreement. Instead, you have a 30 day, 60 day, 90 day or 180 day contract. Termination without cause provisions can work for you or against you. Regardless, the term of employment is shortened if there is one. Think about whether or not you can find another job and relocate in 30 days.
Tip 12 - Include a "Cure" Provision If There Is a "For Cause" Termination Provision in The Contract.
This a provision which requires the employer to provide you written notice of any deficiency or breach and allows you a certain period of time (usually anywhere from 10 to 30 days) to cure it.
Tip 13 - In the Contract Specify All Material Terms in a Promise to Make You a "Partner" or "Shareholder."
A promise to make you a "partner" or "shareholder" in the practice after a certain period of time will not be enforceable unless all of the terms are specified in order for a court to enforce it (price, timing, percentage of ownership, method of payment of the buy-in, etc.). Think of an option to purchase a house. Unless all of the terms for a binding contract are set forth in writing and agreed to by the parties, it will not be enforceable. Also remember that a promise to "consider" you as a "partner" or "shareholder" in a contract is just as worded. You may be considered and denied this important opportunity.
Tip 14 - A Good Contract Identifies Typical Schedule, Where the Physician Will Work and Expectations About Call.
A contract that simply states the physician will "perform the usual duties of a physician" does not give either party much information about the expectations of the other party. Attention to this section is particularly important for physicians who wish to work part time, to work only a specific schedule, to work in a specific clinic; or who have special arrangements concerning call. This section can also be used to answer questions about what level of involvement in administrative duties is anticipated and whether certain community activities are expected.
Tip 15 - A Physician's Compensation Should Be Set at a "Fair Market Value."
Physician employment and compensation is subject to anti-kickback laws. Generally a physician's compensation must be set at a fair market value demonstrating reasonable compensation. Fair market value is determined by comparing the entire compensation package, including benefits, insurance and signing bonuses to industry standards for the relevant specialty and geographic market. In almost any compensation arrangement, the physician and the employer will be protected from legal scrutiny when the compensation is determined to be fair market value, as long as other requirements are also met (such as a written contract, signed by the parties, at least a year duration, etc.).
Compensation usually has two components: salary and benefits. The typical employment agreement will provide for a guaranteed salary for the first one to two years. After that, the physician is usually compensated based on production. It is important to remember that some medical groups might offer an employed physician an opportunity to buy into the group after a period of time as an employee. This type of an agreement in which the physician would be able to purchase shares or options in the group may or may not be part of the initial employment agreement.
Such arrangements might be referred to as a "buy-in" clause or "partnership" arrangement. It is very important to understand that if the group is a corporation or professional association (P.A., a type of corporation), than the ownership interest will be "shares" and the physician will become a "shareholder." If the group is a limited liability company (LLC), than the ownership interest is referred to as a "membership" and the physician will become a "member." The term "partner" is often incorrectly used to refer to either one.
It is preferable to have these types of arrangements drafted separately from the employment agreement since their duration is likely to be longer than the employment agreement. It is always necessary to have all of the details spelled out, including the buy-in price and how it will be paid. Otherwise, it will not be legally enforceable. Common benefits include: family health insurance, dental insurance, life insurance, an allowance for continuing medical education (CME), paid time off or vacation and sick pay, short-term disability insurance, long-term disability insurance and retirement plans.
Tip 16 - Determine How Outside Employment and Compensation is Handled.
If outside employment is allowed, it's imperative you know who is entitled to the income. Some employers prohibit outside employment, while others allow it but require that the income be turned over to the employer. If the physician anticipates "moonlighting," the physician should negotiate to minimize the employer's control over outside employment and income from it. If the physician expects to be involved in significant volunteer activities working as a physician, the contract should say whether the employer has the right to approve or reject such volunteer activities.
Tip 17 - Pay Close Attention to the Termination Clause.
This is the single most important clause of a contract because it can dash the expectations of one or both parties. Close attention should be paid to the terms and the conditions. The termination section usually allows the employer to immediately terminate the physician's employment if certain events occur, such as the physician losing his or her medical license, being convicted of a felony or dying. Many contracts also permit immediate termination if the employee's license is restricted, if privileges are significantly restricted, or if the employee becomes disabled.
Almost all contracts also permit early termination by either party by simply giving notice. While the notice periods range from 30 to 180 days, most physician employment agreements permit either party to terminate the agreement with 60 to 90 days notice. This type of term essentially leaves the physician with a contract which lasts only for the stated notice period.
Tip 18 - Negotiate Reasonable Access to Patient Records.
Most employment agreements provide that any patient records created by the employee belong to the employer. However, the physician should negotiate for reasonable access to those records even after the physician leaves the employer for the purposes of defending a malpractice action, a credentials committee investigation, or a Florida Department of Health (DOH) inquiry. Access to such records is very helpful, and sometimes necessary, to defend these kinds of actions.
Tip 19 - Intellectual Property Usually Belongs to the Employer.
If an employee performs research, or publishes books or papers during work time or even after hours, that intellectual property usually belongs to the employer. That is unless there is a written agreement that gives the physician ownership rights to these materials. An employee may want to negotiate the ownership of that intellectual property before signing the contract.
Tip 20 - Attorney Fees in Contract Disputes.
Ordinarily disputes are resolved in the courts, and each party will pay their own litigation costs and attorney fees. Sometimes, however, the parties will agree to use arbitration as an alternative way of resolving disputes. While each process has its advantages and disadvantages, arbitration is generally faster and less expensive than litigation. Unless the parties agree otherwise, each party to a lawsuit, mediation or arbitration ordinarily will pay his or her own attorney's fees and costs. However, most physician employment agreements include a clause obligating the losing party to an enforcement action to pay for all legal fees of both parties.
Most places in the U.S. follow the American Rule with regards to attorney fees. Under the American Rule each party is responsible for their own attorney fees unless a statute or contract provides otherwise. Employment agreements very often include a provision that provides that the prevailing party is entitled to his/her attorney fees in any dispute under the contract.
Tip 21 - Read the "Boilerplate" Provisions.
Most employment agreements have a series of "boilerplate" provisions that usually come at the end of the agreement. These provisions may include important provisions and should be considered carefully. For example, very often there will be a provision that states the written contract in the final agreement of the parties. If something was negotiated that is not included in the contract it will be precluded by the boilerplate provision. Anyone negotiating a contract should be concerned with any promise to work it out later.
Tip 22 - Be Detailed and Specific on What Income Will Go to Employer and Any That May Be Kept by the Employee.
This tip is an expansion on Tip 16 - Determine How Outside Employment and Compensation is
Handled. Typical physician employment agreements will contain statements such as: "The physician agrees to devote his/her complete time and attention to the business of the employer." Or they may contain a clause stating: "All income derived from professional services delivered by the employee shall belong to the employer," or something similar.
This can be problematic if the employee:
A. Moonlights, for example by pulling shifts at a hospital's emergency department on the weekends;
B. Has a separate medical practice or business on the side such as providing diagnostic studies, testing, counseling, etc.;
C. Works part time somewhere else, such as at a walk-in or urgent care clinic;
D. Consults as a practice management consultant, a risk management consultant, etc.;
E. Serves as a medical expert reviewing patient records for attorneys and providing expert opinions;
F. Serves as medical director of nursing homes, or home health agencies;
G. Invents new medical inventions or technologies on his/her own time;
H. Teaches; or
I. Lectures or writes and receives honoraria.
I have been involved in several court cases where the physician took employment with a large healthcare system and had an oral understanding, never in writing or included in his/her written contract, that the employee could continue a part-time medical practice and keep all of the income from it. This only became a problem (a big problem) years later when the employer found out about it and decided to sue the employee. The employer wanted all of the extra income that the employee had made and had not turned over to the employer.
Make sure that if there are any activities that you will participate in on your own time, including other part-time employment or moonlighting, this is specifically spelled out in the contract and the party who is entitled to receive the income from it is also specified. Furthermore, in the case of government employees such as military or Veterans Administration (VA) physicians, these types of activities may be illegal without advance written permission from the government.
Tip 23 - Make Sure You Receive a Copy of the Contract Back Signed and Dated by the Other Side.
As we have written before, one of the biggest problems we see again and again is when a dispute arises, the party coming to us (usually the employee) does not have a copy of the contract that is signed or dated by the other party (usually the employer).
Can you imagine buying or selling a house without getting a contract signed by each party? Can you imagine buying a car without getting a copy of the contract signed by the other party? Then how can you enter into a contract covering years of time for something as important as a profession without obtaining a signed and dated copy from the other side? Think of employment contracts as prenuptial agreements. As long as everyone does what he or she is supposed to do and things work out okay, the contract is not needed or referred to in most cases. It is only if things start going wrong, for example, if the employee does not work the hours he is supposed to, if the employer does not pay the bonuses it agreed to pay, that the contract gets pulled out for possible enforcement.
In litigation in which I have been involved over physician employment agreements, I have had the following defenses raised by employers when sued for breach of contract by an employee:
A. The employer never agreed with the changes the employee wanted in the contract, so the employer never signed it.If you are the employer, never let the employee start working before you have a copy of the contract back signed and dated by the employee. If you are the employee, never start working, not even a day, before you have a copy of the contract back signed and dated by the employer.
B. The employer and employee were involved in negotiations on a possible contract but could never reach an agreement, so the employee has no contract and is merely an "at will" employee;
C. There was never a signed contract so the employment agreement is unenforceable under the applicable statute of fraud.
D. There was never a signed contract so the employment agreement is illegal and unenforceable under the Stark Act and the Anti-Kickback Statute.
When we review contracts we often add an addendum or amendment to the contract that states: "This agreement shall not be valid or enforceable unless Employee actually receives a copy signed and dated by the employer on or before (date) and employee shall not be expected to begin work until then."
Adhering to these types of requirements keeps everyone honest.
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About the Author: George F. Indest III, J.D., M.P.A., LL.M., is Board Certified by The Florida Bar in Health Law. He is the President and Managing Partner of The Health Law Firm, which has a national practice. Its main office is in the Orlando, Florida area. www.TheHealthLawFirm.com The Health Law Firm, 1101 Douglas Ave., Altamonte Springs, FL 32714, Phone: (407) 331-6620.
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