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

Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)

Download Free 646 Page E-book: The Biggest Legal Mistakes Physicians Make and How to Avoid Them

Executive Summary

Physicians often make mistakes when hiring employees. The 10 biggest mistakes in this regard follow.

Mistake 1        Failing to Clearly Explain the Parameters and Expectations of the Job

People working as medical assistants or receptionists in physician offices may have never worked in a medical setting before and may not be aware of the importance of certain skills that are not always necessary in other businesses, including having the flexibility to perform multiple job functions; as the “face” of the office, having that face be a friendly, smiling, and helpful one; being able to assist with exams or procedures that may involve blood or body fluids, and being able to keep patient information private. One requirement of the patient privacy regulations of the Health Insurance Portability and Accountability Act (HIPAA) is that all physician office staff receive training on the confidentiality and other requirements of HIPAA. Staff should be aware that they may not mention patient names or identifying information to anyone outside of the office, even if their neighbor showed up with an interesting condition. HIPAA is being enforced by the federal Office of Civil Rights, which has received thousands of complaints, ranging from breach of confidentiality to refusal to release medical records.

Action Step     Physicians should maintain a checklist of expectations for office staff, which should include the importance of being friendly and helpful to patients at all times, a description of the staff member’s job, the need for flexibility, and the requirement that patient information will be kept confidential at all times.

Mistake 2        Having Documents That Create Other Than At-Will Employment Status

Generally, an employee without an employment contract is an employee at will, whose employment can be terminated by either the employer or the employee at any time with or without cause. However, courts in some states have construed certain documents in the workplace as creating an “implied” contract between an employer and an employee. These documents are usually policies or procedures in the workplace, or employment manuals, that can be read to “promise” that employees will be given certain protections in their jobs. For example, a policy may state that before an employee will be terminated, that employee must be given a written warning. If a physician has terminated an employee without giving the employee a written warning, the employee could claim that this policy created an implied contract between the physician and the employee, that the employee relied on the promise of a written warning, and that the physician’s failure to give a written warning violated this implied contract. Likewise, some policies state that employees may be terminated only for certain reasons, and then list those reasons. If a physician terminates an employee for a reason that was not listed, the employee could claim that the termination was a breach of the implied contract between the physician and the employee that termination would be only for certain stated reasons. In addition to reading through carefully all policies to ensure that the physician, as the employer, has sufficient flexibility to take actions needed, many employers include a cover page in employee manuals or policy books that states: “This manual and these policies shall not be construed to create a contract of any type between the employer and the employee, may be changed by the employer at any time, and do not take away from the fact that employment at [name of employer] is at will.”

Action Step     Physicians should ensure that they do not have policies or employee manuals “promising” that an employee will receive certain rights before termination or will be terminated only for certain reasons.

Mistake 3        Classifying an Employee As an Independent Contractor

When bringing a new staff member on board, particularly a new physician, it is sometimes tempting to treat that new staff member as an independent contractor, rather than an employee, and save on payroll taxes, FICA, withholding, and even the cost of having someone figure out the appropriate amount to withhold from every paycheck. However, the Internal Revenue Service considers workers who perform tasks in the same environment over repeated intervals of time to be employees, unless an examination of the relationship truly demonstrates that the worker is not subject to the direction and control of the employer. The IRS has 20 factors that must be reviewed before considering a worker to be an independent contractor, including whether the worker must comply with instructions about the work, whether services are integrated into the business, whether services must be rendered personally, whether the working relationship is continuing in nature, whether set hours of work must be followed, whether the worker works full-time for this employer, whether work must occur on the employer’s premises, whether payments of regular amounts are received at set intervals, whether the employer furnishes tools and materials, whether the worker offers services to the general public, and more. The fact that the worker is a professional such as a physician is not sufficient to classify that person as an independent contractor. If the IRS determines a worker to have been misclassified as an independent contractor, it can seek to have the employer be responsible for any withholding taxes (Social Security and personal income taxes) that were not taken from the employee’s paycheck. This can be an expensive mistake.

Action Step     Physicians should ensure that new workers are properly classified as employees versus independent contractors and be aware that the IRS considers most workers to be employees with the requirement that taxes be withheld from their paychecks.

Mistake 4        Not Considering Whether to Have a Contract for a Physician-Employee

When hiring a physician, whether or not to have a contract with that person is always a consideration. Without a contract, employment is generally considered to be “at will:” at the will of either the employer or the employee. It is often to an employer’s benefit to have an at-will employment arrangement. However, a physician’s employer should have at least two things in writing. The first is an agreement by the physician to reassign to the employer his or her right to collect payment (sometimes simply in a billing form rather than in a contract). The second is a restrictive covenant, if both parties have agreed to such. A restrictive covenant often prohibits an employed physician from leaving and taking confidential information (such as lists of patients); from hiring away the employer’s employees; and from practicing within a certain radius of the employer’s office for a certain defined period of time (often one or two years) after leaving the employer. The trade-off of obtaining these protections is the need to enter into an employment contract to do so, and therefore no longer having an at-will relationship with the employee, in which the employment may be terminated at any time upon the will of either the employer or the employee. However, the parties may agree to include in an employment contract whatever termination provisions they both feel are appropriate, although the employer will generally desire the ability to terminate the contract without cause upon fairly short notice and the employee will want the security of knowing that the contract cannot be easily terminated.

Action Step     Physicians should consider whether they want to trade the flexibility of not having an employment contract with employees for the protection of having a noncompete provision in an employment contract. 

Mistake 5        Not Considering Stark Regulations to Ensure That a New Physician Hire Fits into a Safe Harbor

When bringing in new physicians, the Stark regulations should be considered as to the compensation arrangements with those physicians and whether the physicians will be considered members of the group practice so as to cover any of their referrals for in-office ancillary services. Stark defines a “member of the group” to include a physician owner of a group practice, a physician employee of the group practice, a locum tenens physician, or an on-call physician while the physician is providing on-call services for members of the group practice. However, an independent contractor is not a member of the group under Stark regulations, and a leased employee is a member of the group only if that person meets the definition of employee under both Stark and IRS requirements (which look largely at whether the group controls such person). The location of the new physician is also a consideration under Stark. Under the in-office ancillary services exception (allowing physicians in a group practice to refer for ancillary services performed by the group), services covered under Stark must be furnished to patients in the same building where the referring physicians provide their regular medical services, or in the case of a group practice, in a central building. Under the March 2004 tests for “same building,” referring physicians or group practices must have offices in the building that are normally open to their patients a requisite number of hours per week. Finally, compensation arrangements with physicians must meet Stark requirements. For example, physicians may be paid productivity bonuses based on personally performed services, but productivity bonuses based on supervising services covered under Stark are more limited.

Action Step     Physicians should review the requirements of the Stark regulations when structuring a new physician relationship or a compensation arrangement.

Mistake 6        Giving an Open-Ended Letter Referring to an Annual Salary or Multiple Years

Without an employment contract, employment is usually considered to be “at will.” Either the employer or the employee can terminate the employment at any time for any reason or no reason at all. However, certain writings (even if not a formal “employment contract”) can sometimes be considered equivalent to a contract for certain purposes, restricting the ability of the employer to terminate the employment relationship at will. One writing that courts have found to contain promises that restrict an employer’s right to terminate employment is an “offer letter.” When an offer letter contains language that seems to promise employment indefinitely, or for a long period of time, courts have at times held such a letter to be an employment contract for some period of time. Because an offer letter that discusses an annual salary can sometimes be construed as a contract for a year, it is advisable to offer salary in terms of what the employee will make per week or per month, rather than per year. 

Action Step     Physicians should write offer letters to employees without open-ended language that could be construed as promoting employment, and reference salary in terms of weekly or monthly, rather than an annual rate.

Mistake 7        Misclassifying an Employee as Exempt for Purposes of Overtime

Unless specifically exempted from coverage under the Fair Labor Standards Act (FLSA), most employees must receive overtime pay for hours worked in excess of 40 in a workweek, at a rate not less than time and a half their regular rate of pay. A workweek is seven consecutive 24-hour periods that may begin on any day. The overtime requirement may not be waived by agreement between the employer and the employee.

New rules were issued by the U.S. Department of Labor on April 20, 2004, that modernize the standards to determine whether executive, administrative, professional, sales, and computer employees are “white collar” employees exempt from FLSA’s overtime requirements. If such employees do not earn at least $455 per week, they are entitled to overtime pay when working more than 40 hours in a workweek. In addition, the employee must regularly receive a predetermined amount of compensation each pay period, the compensation may not be reduced because of variations in the work performed; and the employee must be paid the full salary for any week in which work was performed. Some deductions are permitted, namely for absence from work for one or more full days for personal reasons (not sickness or disability); absence from work for one or more full days of sickness or disability if the deductions are made under a bona fide plan for such; to offset jury, witness, or military pay; penalties for violating major safety rules; unpaid disciplinary suspension of one or more full days; or unpaid leave taken pursuant to the Family and Medical Leave Act.

Action Step     Physicians should ensure that employees who work more than 40 hours in a workweek receive overtime pay unless they are clearly classified as being exempt.

Mistake 8        Speaking or Acting in a Way That Could Be Considered Discrimination in Employment

An employee who files a claim or lawsuit against his or her employer for discrimination often brings up statements made in the workplace as evidence of discrimination. For example, courts have looked askance at statements such as, “I want someone with more energy,” or “I want some fresh blood in here,” or “So-and-so has gotten tired,” as possible indications of age discrimination. Similarly, negative comments about pregnant workers can come back to haunt a physician employer if a staff member becomes pregnant. In addition, a statement suggesting that someone with a disability needs time off can be considered a preference against employing someone with a disability, in contravention of the Americans With Disabilities Act. The best reason to discipline an employee, or terminate someone’s employment, is always performance that relates to patient care. Therefore, physicians should document any performance problems, and ensure that this documentation is retained in the employee’s file.

Action Step     Physicians should document reasons that employees are disciplined or terminated, and those reasons should always be related to performance (preferably performance that relates to patient care).

Mistake 9        Not Having Written Policies in the Office for Employees to Follow

Physician offices, like any other employer, should have written guidelines for employees (both physician and nonphysician employees) to follow. A large medical office may have an employee manual, but a small office should at least have a policy handbook that provides employee guidance. In June 2000, the Office of Inspector General (OIG) of the Department of Health and Human Services published Draft Compliance Program Guidance for Individual and Small Group Physician Practices, which sets forth guidelines that may be used both for compliance purposes and for employee purposes. If a physician ever receives a knock on the door from the OIG (or worse, from the U.S. Attorney, acting on behalf of the OIG) with a question about the practice, whether about a billing issue or otherwise, it can be helpful to have a compliance/personnel manual in the office that establishes the office’s corporate compliance program and sets out guidelines for the staff. The OIG guidelines suggest that each physician practice take reasonable steps to respond to each of the seven elements of the compliance guidance, depending on the size and resources of that practice. These include developing a code of conduct and written policies and procedures; assigning compliance responsibility to a designated person; conducting training on practice ethics and policies and procedures; looking periodically at high-risk billing and coding issues; developing lines of communication with staff to allow problems to be reported; enforcing disciplinary standards; and responding to detected compliance violations. Although the compliance guidance is written around the concept of a compliance program, the elements are consistent with a good personnel structure as well.

Action Step     Physicians should have a written compliance/personnel manual for office and billing staff that follows the OIG’s Draft Compliance Program Guidance for Individual and Small Group Physician Practices.

Mistake 10      Thinking That Having a Probationary Period Prevents Being Sued by an Employee

Many employers describe the first three months of employment as probation, during which an employee can be terminated more easily. Although the concept of probation may be helpful because employees’ expectation of continued employment is less, probationary employees can bring many of the same claims and lawsuits that they can bring if terminated at any other time during employment. The federal and state laws that protect employees from discrimination, from being fired for whistleblowing, and the like, apply to all employees, with no distinction for probation. The benefit of probation is sometimes the strength of employer policy language that makes clear that termination is at will during the first few months of employment. A dangerous component of probation is the not uncommon thought of employers that they do not need to document the reason for termination during probation. The best way to defend a claim that a physician unlawfully discharged an employee is to show that the employee was discharged for a legitimate reason, and the best reason is always documented poor performance.

Action Step     Physicians should document why a staff member’s employment was terminated and realize that such documentation should evidence poor performance, even if the employee was in a probationary period when terminated.


Physicians should be careful to avoid these mistakes when hiring employees.

Written by:

Margaret J. Davino, Esq.

Peer reviewed by:

Joan Gilbride, Esq.

Download Free 646 Page E-book: The Biggest Legal Mistakes Physicians Make and How to Avoid Them