The 10 Biggest Legal Mistakes Physicians Make in Negotiating Contracts with Their Employers

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.)

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Executive Summary

Each year, tens of thousands of physicians, some just leaving residency and some with more experience, sign employment contracts. The key to the rights of both the employer and the employee are the terms of the written employment contract. Physicians need to be exceptionally careful about what terms the employment contract contains. Many physicians make serious mistakes when negotiating employment contracts, and such mistakes are likely to adversely affect them and their families for years.

Mistake 1      Consulting Counsel Too Late

Physicians often agree to the terms of an employment contract offered after only brief negotiations. Some may consult with counsel late in the process or not until after the contract has been signed. By consulting counsel too late in the process, physicians forfeit the ability of counsel to provide them with guidance, checklists, demands, proposals, counterproposals, strategies, and tactics to achieve better terms, compensation, and working conditions. When physicians consult with counsel early in the process, counsel can negotiate the contract with the employer’s lawyer, which will likely result in better terms and free the physicians from the uncomfortable task of negotiating with a future employer.

Action Step     Prospective physician employees should consult with experienced counsel before starting to negotiate any employment contract.

Mistake 2     Failing to Conduct Adequate Research on the Prospective Employer

It is not uncommon for physicians to concentrate so much on the salary and other proposed provisions of the employment contract that they often neglect to do “due diligence” on the employer. While the promises (written and oral) of the prospective employer are important, of equal importance are the employer’s past actions. Before beginning contract negotiations, physicians should research the turnover, percentages of physicians engaged by the employer who make partner, the employer’s profit or loss history, past payouts, malpractice claims, pending litigation, and the reputation of the partners and of the employer. What the employer has actually done in the past may be more important than what the hiring physicians promise to do in the future.

Action Step     Prospective physician employees should perform “due diligence” on the employer before commencing employment contract negotiations. 

Mistake 3      Overlooking the Vague Term of Contract

Physicians often overlook the number of years the contract is to run (the term of the contract), whether the contract is renewable, by whom it is renewable, and on what terms. It is not uncommon for new physicians to sign lengthy contracts with inadequate consideration of cost-of-living raises and escape clauses for the physician employee. Some proposed contracts are self-renewing, renewable by mutual agreement, or renewable by the employer at its option. Many proposed contracts do not even mention renewal. It is difficult, if not impossible, to evaluate a proposed employment contract properly if the term of the contract is not clearly spelled out and if the physician does not fully understand the term.

Ambiguities in a contract are a frequent cause of litigation. If litigation occurs, ambiguous terms will be a subject of dispute, so they should be avoided. For example, a clause stating that the physician must “reside locally as per the current and past policies of the practice” is ambiguous. What precisely does “reside locally” mean? What are the “current and past policies of the practice?” It is much better to state clearly where the physician must reside.

Also, physicians being considered for employment may be induced to sign an employment contract with vague or unclear call duty responsibilities (e.g., “new physician will share work and call duties with the employees of the company”). By agreeing to this type of open-ended call duties, physicians are essentially relying on the employer to be fair and reasonable. Physicians should determine the precise nature of call duty and what happens if one or more physicians get sick, leave the practice, or otherwise cannot fulfill the call duty at a particular time. Physicians would be better protected by obtaining specific language (e.g.,“the physician will be on call one day per week”) that does not depend on factors outside of their control.

Action Step     Before signing, prospective physician employees should insist that the term of and language in the contract be clear and fair to both sides.

Mistake 4      Failing to Understand the Legal Significance of Defined Terms

Employment and other contracts often have defined terms. Such terms are usually recognized in a contract because they are in quotes, italics, or boldface, underlined, or made to stand out in another way. When a defined term is used in a contract, a court is likely to interpret the term according to its definition in the contract, not its common dictionary definition. In other words, what the contract says the term means is what counts, not what an average person thinks the term means. For example, a contract may state that the physician “may be terminated immediately for professional misconduct.” Since professional misconduct is in italics, it is a defined term. What will govern precisely why a physician can be terminated is the definition of this term in the “Definitions” section of the contract. 

Action Step     Prospective physician employees must recognize defined terms in the contract, as well as read and understand the contract’s definitions of any and all defined terms.

Mistake 5      Not Paying Enough Attention to Fringe Benefits

While the salary physicians will be paid is of primary importance, it is not uncommon for prospective physician employees to overlook the breadth of potential fringe benefits to be negotiated. Common benefits include:

  • Tuition and CME reimbursement
  • Health insurance
  • Malpractice coverage
  • Car allowance
  • Vacation leave
  • Sick leave
  • Maternity leave
  • Life insurance
  • Professional dues
  • Paid holidays
  • Journal subscriptions
  • Relocation expenses
  • Dental insurance
  • Profit sharing
  • Disability insurance
  • 401(k) and other retirement plans
  • Parking
  • Flex time
  • Loans

Action Step     Prospective physician employees, with the help of counsel, should create a checklist of fringe benefits that are available and open to negotiation. These potential benefits should be listed in order of priority and include a “must-have” section.

Mistake 6      Not Specifying the Conditions of Employment

Often, physicians overlook whether the employment contract deals specifically with the actual job description. What physicians will be required to do, where, and how they will be expected to perform these duties are crucial aspects of any physician employment agreement. These aspects of employment should be negotiated prior to negotiating the compensation.

A detailed list of the specific proposed duties for the physician should be negotiated and clearly spelled out in the employment contract. These duties include:

  • Patient appointment hours
  • Hospital rounds
  • Emergency room call
  • Office duties
  • Review of blood work and lab results
  • Telephone calls
  • Medical record documentation
  • Preoperative consultations
  • Availability of nurses and support staff

Action Step     With the assistance of experienced counsel, prospective physician employees should prepare a checklist of proposed duties and responsibilities to be used during the employment negotiation. Only when both parties agree to these duties should physicians negotiate compensation issues.

Mistake 7     Not Having Adequate Information on Bonus Terms

It is not unusual for physicians to sign an employment contract without having adequate information on the additional compensation (bonus) that they can expect to receive under the contract.

In many employment contracts, physician incentive or bonus plans are written to protect the employer and not the physician employee. Some clauses a physician employee should be particularly careful about include:

  • The ability of the compensation committee to cancel or prospectively revise the incentive plan
  • The need for a site to “break even” before the plan takes effect
  •  The precise calculation of the physician incentive
  • The definition of key terms (e.g., positive net income, negative variance, percentage, gross revenue).

Action Step     With the assistance of counsel, prospective physician employees should review the proposed incentive plan until they fully understand the plan. The plan should have objective triggers that an unscrupulous employer cannot manipulate against the interest of the physicians. For example, it is preferable for the physician’s bonus to be based on gross income rather than on net income because net income is usually much more subjective and easier for business owners to manipulate. If, for example, the owners have an employee who gets a percentage of net income as a bonus, the owners might have an incentive to pay themselves a higher salary and thus drive down the practice’s net income. 

Mistake 8      Failing to Consider Unduly Restrictive Covenants Not to Compete

Often, prospective physician employees go into a negotiation with little or no concern about the “covenant not to compete clause” in the proposed employment contract. Operating in good faith, they have the hope and expectation of long-term employment. Many proposed physician employment contracts provide a noncompetition section.

Prospective physician employees should be concerned with the following noncompetition sections:

  • Length of term (in years or months)
  • Geographic limitation (e.g., a certain radius in miles or states)
  • Provisions for exception (e.g., teaching, working for an insurance company, or working as a medical director of a noncompeting company).

The law generally provides that unreasonable covenants not to compete will not be enforced. However, proving that a covenant not to compete is “unreasonable” requires litigation, time, and substantial legal expense. It is much better to negotiate, in advance, a reasonable covenant. Attorneys can help in this regard by researching precisely what has been found to be reasonable and unreasonable in the jurisdiction in question.

Action Step     Prospective physician employees should carefully consider all of the implications of signing a noncompetition clause and negotiate the clause cautiously. They do not want to spend time and money litigating this issue when leaving the current employment.

Mistake 9      Failing to Recognize One-sided Termination Provisions

Physicians who are negotiating and signing employment contracts should be acutely aware of the full implications of the termination provisions of the proposed contract. What appears to be a generous two- or three-year employment contract with cost-of-living increases, etc., can, in reality, be terminated almost at will. Such contracts can be a serious problem for all physicians but especially for those who have just moved their families to accept new employment in a different location.

Every physician should pay particular attention to the events listed in the contract that can trigger a termination, including:

  • 90-day notice by the employer or by either party
  • Any event the employer deems to be detrimental to the employer
  • Suspension of privileges, including license suspension
  • “Material” breach of contract
  • Illness
  • Disability. 

Action Step     Prospective physician employees and their counsel should look carefully at the termination provisions of the proposed contract to determine if the provisions are fair and reasonable. Provisions that are too one-sided may portend difficulties with the employer. Vague provisions should be clarified.

Mistake 10    Not Protecting “Additional Income”

Physicians negotiating an employment contract often overlook the importance of protecting “outside or additional income.” This outside income, which can become substantial, can include:

  • Honoraria for lecturing
  • Royalties for writing treatises and articles
  • Consulting work
  • Testifying as an expert witness
  • Inventions
  • Patents
  • Copyrightable works
  • Discoveries
  • Other intellectual property

Action Step     Prospective employee physicians should be cautious about signing away rights to outside income, especially when this income is generated outside of regular employment (such as at night, on weekends, or during vacations). Employment contracts should contain specific language stating that the physician retains all outside or additional income. Not addressing this issue in the contract can lead to misunderstandings and bad feelings at best, and litigation and termination at worst.

Conclusion

Any physicians entering into an employment negotiation should be mindful of these mistakes and take steps to avoid them so as to be in the best position to achieve a fair, reasonable, and secure employment contract.

Additional Resources

  • S.Babitsky & J. Mangraviti, The Successful Physician Negotiator: How to Get What You Deserve (SEAK Inc. 1998)
  • B. Hirsh & D. Wilcox, How to Negotiate a Physician’s Employment Contract (American Medical Association 1995)
  • R. Payne & M. Rosenbaum, Physician Employment Contracts: Understanding Your Employment Contract: A Model for Physicians (American Medical Association, Nov. 15, 2000) (transcript from the AMA Group and Faculty Practice Educational Series)
  • The Physician’s Guide to Employment Contracts and Job Search (Google Web search Oct. 26, 2003)

Written by:

Steve Babitsky, Esq. and James J. Mangraviti, Jr., Esq.

Peer reviewed by:

Jeffrey W. Oppenheim, Esq.

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