The 10 Biggest Legal Mistakes Physicians Make in Negotiating Contracts with Physician Employees

Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them

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Executive Summary

“Would you be willing to put that in writing?”— the skeptic’s challenge. There was indeed a time when deals were routinely done on a handshake and controversies were no more prevalent, and probably less so, than today. The current regulatory climate, though, and the perceived expedience of litigation make it imperative that physician employment relationships be in writing. Few physicians have the interest, time, or experience to negotiate employment contracts with employees, but employers should understand that a contract properly prepared by an experienced attorney will help to prevent violations of regulatory compliance laws and avert or minimize the consequences of misunderstandings or disputes.

Mistake 1 Failing to Consult Counsel

Any employment relationship, especially involving physicians, is saturated with legal implications and ramifications. Experienced counsel can guide the employer through legal issues from recruitment to hiring, and help to ensure compliance with state or federal statutes and health care regulations, such as those governing compensation, referrals, insurance, credentialing, tax and benefits considerations, and partnership issues. For formal agreements, an off-the-shelf contract form downloaded from a professional society website or adapted from a form used by a large medical center may look impressive, but “more” is not necessarily better, and may be worse, if its terms are not tailored to the practice. Likewise, a simple form from a self-help employer manual may not be sensitive to the regulatory context in which most physician employment agreements are currently drafted.

Action Step Employers should consult with experienced counsel to prepare employment agreements suitable to their needs. And while, to the untrained eye, the legalese in contracts may seem impenetrable, this need not be the case. Employers can and should expect their attorneys to prepare an agreement that, while comprehensive, is also readable and understandable.

Mistake 2 Conducting Inadequate Research on Prospective Employees

Prevention is the best medicine not only for physical health, but for legal health as well. There is seemingly no limit to the resources and avenues available for background checks on a candidate, in some cases subject to applicable federal or state privacy laws, such as credit searches, drug testing, judgment and conviction searches, and motor vehicle records. Truly basic measures, though, will prevent most hiring mistakes. At a minimum the resume should be carefully reviewed before inviting the candidate for an interview. Gaps in employment and educational history should be noted, and the candidate should be questioned about them. References should be requested and, with the candidate’s written authorization, each of these checked and educational degrees and licenses confirmed.

At the interview (and in the contract), the employee should be asked to disclose pending or threatened license or drug registration restrictions, disciplinary actions, and investigations in the employer’s state and in any other state in which the candidate holds or has applied for a license. The same is true for any pending or threatened proceeding or investigation by any hospital, insurance company, or professional society. (Leave it to the credentials committees of the hospitals to uncover any National Practitioner Data Bank or licensing board issues.) Employers should also ask about prior convictions, and whether the candidate holds a valid and active driver’s license and has automobile insurance.

A harmonious professional working relationship is the most effective means of resolving misunderstandings before they become disputes and then litigation. All of the owners, if feasible, should meet and size up the prospective employee before an offer is extended. Partners should seek consensus on an offer of employment.

Action Step Employers should perform “due diligence” on the employee before making an offer of employment.

Mistake 3 Not Fully Considering Allocation of Off-Hours and On-Call Duty

The employee will expect on-call responsibilities to be shared “equally.” But equal allocation of on-call duties may defeat the purpose of recruitment. Physicians should consider that the senior or hiring partner may be responsible for producing most of the business in the office. That partner may also be devoting time to managing the office or perhaps be at a stage in life when there is a professional need to be relieved of such burdens. Employers should consider these factors before agreeing to share call on an “equal” basis.

Action Step In allocating on-call duties within the practice, consideration of other practice responsibilities should not be overlooked. The contract can indicate that these responsibilities will be allocated “equitably” (as opposed to “equally”) at the discretion of the employer.

Mistake 4 Making Vague Bonus Compensation Offers

A productivity bonus can be an incentive to an employee while benefiting the practice. A bonus formula that is vague, however (e.g., “Bonuses may be granted at the sole discretion of the Employer”) will make bonuses seem illusory. Essentially, a bonus program is a form of profit sharing, reflecting a “win-win” scenario. A bonus should therefore be based on achieving specific revenue goals, with financial criteria (e.g., net revenue, gross revenue, expenses, and revenue attributable to the employee) clearly defined. A bonus award also implies loyalty and commitment to the practice. Typically, this is expressed as a condition that the employee be employed in the practice through the end of the fiscal year in order to be eligible for a bonus. Distinctions can be made between termination with or without cause in this context.

Action Step Employers should consult their financial adviser for guidance on developing a bonus formula. Their attorney can then draft the precise bonus language.

Mistake 5 Failing to Take into Account Fringe Benefits in Compensation

How often is it heard that a friend or relative took a job “for the benefits alone”? Considering the range of benefits offered by many companies—vacation, paid office holidays, personal leave, sick/disability leave, auto allowance, medical, dental, life, disability insurance, retirement, deferred-income or profit-sharing plans, parking space, uniforms, continuing education, professional journals and book allowance, tuition reimbursement, professional liability, incentive bonus programs, relocation allowance, etc.—benefits are indeed a powerful incentive. At the same time, benefits programs add significantly to overhead. Many have specific eligibility requirements. And some of these (e.g., health insurance, 401(k) plans) are regulated by federal law. Employers should factor in these costs in order to “back in” to the base salary. Alternatively, the contract can set forth the lump-sum salary figure, but then specify that this amount will be subject to deductions for certain benefits (e.g., health insurance, malpractice insurance, professional dues) elected by the employee.

Action Step Employers should view base salary as only one part of the overall compensation package; the other aspects relate to employee benefits. Benefits programs, like health insurance, may be sensitive to economic factors, though, and the contract should therefore make clear that benefits programs may be modified or withdrawn at the sole discretion of the employer.

Mistake 6 Promising Partnership

Not every physician aspires to own or be a partner in a practice, and indeed partnership is not always a desirable goal in every circumstance, but physicians who consider practice ownership a primary career objective want reassurance that partnership is not illusory. Nonetheless, employers should avoid promising or guaranteeing partnership at least until the employee has had an opportunity to prove himself or herself. And only after the employer decides to offer partnership should financial terms be spelled out. Federal and state laws prohibit denial of partnership based on race, religion, sex, age, etc., and employers should base the partnership decision strictly on professional and business considerations.

Action Step In the contract, the employer should be willing to consider in good faith whether to offer partnership and to reach a decision after an agreeable period of time. The employment contract should state specifically that this understanding is not to constitute or be construed as an offer or promise of partnership.

Mistake 7 Creating Overly Aggressive Postemployment Restrictive Covenants

To some extent, creating overly aggressive postemployment restrictive covenants may be the biggest mistake employers make: reasoning that a more severe restrictive covenant is better. In fact something closer to the opposite is true: The more reasonable the restriction, the better. “Restrictive covenants” is a general term that includes agreements not to compete against the employer, not to divert patients from the employer’s practice, and not to interfere in the employer’s relationships with other employees. A somewhat separate category of restrictions relates to nondisclosure of information considered confidential and proprietary to the practice. Understandably, an employer that has invested heavily in building a practice will impulsively try to impose punitive restrictions, thinking these will be more effective in preventing competition. And yet, employers should know that courts dislike restrictive covenants, the American Medical Association dislikes them, and most significantly, patients dislike them. A court will nonetheless enforce a restrictive covenant that it finds reasonable and not unduly harsh or burdensome to the employee in terms of the scope, time, or territorial extent of the restriction. An ideal and enforceable restriction would have the effect of making it inconvenient, but not impossible, for patients to continue to see the departing doctor. It helps to have the employee acknowledge the reasonableness of the restriction and to acknowledge that he or she has had an opportunity to consult counsel regarding the covenants.

Action Step The covenants should restrict only to the extent reasonably necessary to protect the integrity of the practice. In formulating restrictive covenants, attorneys often have in mind that the covenant language will be dissected at some point by lawyers and judges. This subject may well be the most litigated issue in physician employment relationships. A well-crafted restrictive covenant will stand up in court and, more helpfully, deter the employee from violating it in the first place.

Mistake 8 Failing to Include a Broad Array of Termination Provisions in the Contract

Employment ends either when the contract expires as of a certain date or is terminated by either party. Many contracts contain automatic renewal clauses so that an agreement continues in effect after the stated period of employment ends, unless either party indicates otherwise in advance of that date (usually no less than 30 days).

Termination of employment is a different matter. State courts to varying degrees follow the “at will” doctrine of jurisprudence, meaning that the employer can terminate employment at any time for any reason (except for an illegal reason, such as discrimination). Typical at-will terminations tend to be based on general dissatisfaction with performance or layoff for economic reasons. Termination of employment at will is an important management prerogative. To make it more palatable, employers can agree to a notice period before the effective date of termination. Typical notice periods are 30, 60, or 90 days, depending on business volume and staffing considerations. Grounds for termination “for cause” should include, at a minimum, loss of medical license or drug registration; loss of hospital privileges; decredentialing by Medicare, Medicaid, or any insurance company; disciplinary action or sanction by a licensing body or professional society; failure to achieve specialty board certification; conviction of a felony; absenteeism; insubordination; substance abuse; material breach of the employment contract; bankruptcy and, of course, death, and disability.

Action Step The contract should include a broad array of grounds for termination with cause, and should also reserve the employer’s right to terminate employment without cause, the “at-will” termination.

Mistake 9 Failing to Address Outside Activities in the Contract

Full-time employees are generally expected to devote substantially full time and attention during regular business hours or on-call periods to the practice. Certain outside activities, such as charitable pursuits, professional societies, or medical staff leadership, can certainly enhance a practice. On the other hand, outside activities or second, “moonlighting,” jobs, may also impair performance or bring unwanted publicity to the practice.

Action Step The employment contract should specify that the employee must devote full attention to his or her duties for the employer during regular working hours and while on-call (or, as circumstances may dictate, even when not on call), and that outside activities (e.g., investments, community activities, charitable work, certain professional activities) will be permitted, and noncompetitive income retained by the employee, so long as they are not competitive with the practice and do not adversely affect performance of duties or harm the reputation of the practice. The contract should nonetheless also state that the employee takes full responsibility for such activities, and that prior notice to the employer is required before outside engagements are accepted to allow the employer to consider the possible impact on the practice.

Mistake 10 Failing to Address in the Contract the Issue of Trial by Jury

Juries tend to root for the underdog. That’s just an unscientific observation. But if juries were perceived as truly neutral, why is it that plaintiffs’ lawyers routinely demand a jury when suing an employer? Actually, there is, in fact, a great deal of science and psychology behind a plaintiff’s preference, and a defendant’s reluctance, to have a case heard by a jury. Suffice it to say that it is based largely on substantiation of the foregoing perception, that juries are indeed inclined to sympathize with plaintiff employees. Employers can neutralize this “advantage” in the event of a lawsuit by mandating in the contract that lawsuits arising out of the employment relationship be heard by a judge alone and not by a jury.

A brief digression here. Another option for employers (and employees) is to require that all disputes be settled by arbitration. Arbitration (and its less uptight cousin, mediation) is a relatively quick, inexpensive, and private way to resolve disputes. But while arbitration is encouraged and endorsed by the courts, Congress, and the state legislatures, it is not always the last word in resolving disputes, and depending on the nature of the claim (e.g., claims based on discrimination), arbitration agreements may not always be enforceable.

As far as “biggest mistakes” are concerned, though, employers should generally keep employment disputes out of the hands of a jury, where inattentiveness, ignorance, and personal prejudice are rampant. There is no guarantee that a single judge will be any less inattentive or close-minded than any jury member. And there is the view that jury panelists apply collective wisdom and common sense to deciding matters that a judge deciding alone cannot. In litigation, however, juries represent a tactical advantage for a plaintiff employee that an employer can prevent by means of a carefully drafted jury waiver.

Action Step The employment contract should include a specific waiver by the employee of any right to a trial before a jury and an agreement that all disputes resulting in a lawsuit shall be tried before a judge alone (or an arbitrator). The employee should also acknowledge in the contract that he or she was given the opportunity to ask questions and consult with his or her own counsel regarding the waiver.

Conclusion

Employers generally dictate the terms of employment. A carefully drafted employment agreement will help employer physicians avoid mistakes when contracting with employee physicians.

Written by:

Robert A. Blass, Esq.

Peer reviewed by:

Robert F. Simon, Esq.