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

In addition to the heavy demands of running a medical practice, physician owners are often called on to make the difficult decision of terminating an employee. The group practice is unusual in that it employs medical professionals, such as doctors, nurses, and physician assistants, as well as clerical personnel. The terms and conditions for each type of employee may vary. In general, however, physicians need to be extraordinarily careful in monitoring any employee’s employment from the inception of employment. Failure to take the appropriate steps when terminating an employee may lead to a costly lawsuit, even if the physician successfully defends the case. Adhering to the following action steps will ensure that the physician will preserve employee morale, avoid claims, and, when an employment claim is filed, minimize legal fees and potential judgments.

Mistake 1        Failing to Obtain Employer’s Liability Insurance

One of the biggest mistakes physicians can make even before they hire an employee is not obtaining employer’s liability insurance. While almost no physician would practice “naked” (without malpractice insurance), most physician employers do not even consider procuring employer’s liability insurance. In terminating an employee, physicians may face a claim for breach of contract under state law or for discrimination under municipal, state, or federal laws. An employer’s liability insurance policy may cover judgments for such claims as sexual harassment or age discrimination, in addition to paying for legal fees. Even if the physician successfully defends the claim, it may cost tens or hundreds of thousands of dollars in legal fees to do so. Worse yet, a judge or jury may find against the physician. While under federal law, most awards of compensatory and punitive damages are capped at a level determined by the number of employees the physician employs, the award could nonetheless be devastating.

Action Step     Physicians should obtain employer’s liability insurance covering the group practice and check with their insurance agent on an appropriate policy. 

Mistake 2        Failing to Document the Employee’s Deficiencies

When confronted with the problem employee, physicians and most small employers fail to document the employee’s misconduct. This mistake can be fatal. It is important to establish a timeline with respect to the employee’s record. If the physician documents the problems, it is more likely that a judge or jury will believe that the employee’s conduct was deficient. Further, certain state laws govern the production of personnel files. In Illinois, for example, if the employer fails to timely produce personnel documents upon a written request, those documents will be inadmissible in a subsequent legal proceeding. In other words, the physician will not be able to later “recreate” these nonexistent documents.

Action Step     Physicians should document any employee misconduct or performance deficiencies, and at a minimum, do so during an annual review.

Mistake 3        Failing to Afford the Employee Progressive Discipline

In conjunction with Mistake 2, a mistake physicians often make is failing to afford progressive discipline to an employee. While there is no federal or state law requiring physicians to afford the employee progressive discipline, the physician’s own employee handbook may require it. Even if the handbook explicitly disclaims any requirement that the physician afford the employee such corrective action, the physician employer should nonetheless attempt to follow such a policy. Again, while not legally required, there is an element of fairness to the procedure. If the physician employer first verbally counseled the employee, then provided the employee with a written warning, then probation, followed by termination, it is less likely that the jury would find against the physician in an employment claim. In addition, when the physician appears to be acting fairly, the employee may be sufficiently deterred in even bringing such a claim.

Action Step     Physicians should afford progressive discipline to their employees where appropriate.

Mistake 4        Failing to Follow the Employee Handbook

Many physician employers have an employee handbook, which may serve a number of purposes. It may provide employees with guidelines regarding their terms and conditions of employment, and it may also serve as a public relations document for physicians. The handbook may, however, also be used as a sword by employees in employment litigation if physicians do not follow their own policies. For instance, the physician’s failure to follow certain steps in a corrective action setting when the handbook requires that the physician do so may give rise to a breach of contract claim or appear to be discriminatory. Another fertile area for mistakes is the promise of annual reviews to be conducted if none are held.

Action Step     Physicians should carefully draft their employee handbooks and diligently follow their policies. They should be careful not to include language that binds them to certain obligations.

Mistake 5        Failing to Consult with Counsel

Many potential employment claims can be avoided or diffused if the physician consults with counsel before terminating the employee. Counsel may provide critical legal advice as to whether the potential termination may violate state or federal law and a recommended course of conduct, which, if adhered to, may avoid such a costly claim. Counsel may also be instructive in providing the appropriate progressive discipline, as well as in drafting a proper severance agreement, general release, or postemployment notices (e.g., COBRA notification). Further, in some employment claims, it is proper for the jury to consider the physician’s failure to consult with counsel in determining whether to award punitive damages.

Action Step     Physicians should always consult with counsel before terminating an employee.

Mistake 6        Failing to Incorporate an Arbitration Provision in the Hiring Documents

One point that cannot be stressed enough is that employment litigation is expensive. One way to save many thousands of dollars in legal fees is to require employees to agree to binding arbitration at the outset of employment. Binding arbitration will avoid jury trials, which generally favor employees, and streamline the litigation process, thus reducing fees. Depending on the employee, the arbitration agreement can be included in an employment application or employment agreement. While the law is continually evolving in this area, the agreement must generally be fairly drafted and not onerous (i.e., requiring the employee to pay all costs of arbitration). To avoid a successful challenge to the arbitration agreement, the physician may wish to assume all costs of the proceeding.

Action Step     Physicians should incorporate arbitration provisions into their hiring documents.

Mistake 7        Failing to Incorporate Noncompete Agreements into the Employment Agreement

Another mistake a physician may make even before terminating an employee is failing to incorporate a legally enforceable noncompete or nonsolicitation agreement into the employment agreement. If the physician employer has not secured that protection, the departing employee may seek to raid his or her former employer’s patient base or lure away key employees. To provide the maximum protection under applicable state law, the physician should retain counsel to determine what restrictions are permitted under the local jurisdiction. Generally, the restrictions must be reasonable in time and geographic scope. For instance, a two-year time limitation with a 15-mile radius of any of the physician’s offices may be deemed reasonable to enforce. 

Action Step     Physicians should incorporate noncompete, nonsolicitation agreements, or both, into their employment agreements. Reasonable limits must be placed regarding time and geographic scope.

Mistake 8        Failing to Pay the Employee All Compensation

A frequent mistake physicians make is not paying terminated employees all the compensation to which they are entitled. These sums may include regular wages, overtime pay, bonuses, unused vacation time, unused personal days, and retirement benefits. Physicians should check with their office or human resources manager retirement plan trustee to ensure that all such sums are paid timely. Physicians who fail to do so may be subjected to various claims under state and federal laws, as well as an inquiry from the U.S. Department of Labor.

Action Step     Physicians should create a checklist of all compensation and benefits due, and ensure that the employee is timely paid all compensation upon departing the practice group.

Mistake 9        Failing to Be Honest with an Employee During Termination

Often, and for various reasons, the employer may not be truthful when terminating the employee. While not being truthful may not in and of itself give rise to a legal claim, it may provide fuel for the fire in the event that there is a colorable case. For instance, in an employment discrimination claim, the physician employer’s untruthful reason for termination may constitute sufficient pretext to contradict any legitimate reason that the physician had in terminating the employee. Further, if the physician is not consistent in his or her reason for terminating the employee, the physician may not appear credible to a jury. Inconsistencies may arise between what the physician told the employee, the Department of Labor, the local human rights agency, and the Equal Employment Opportunity Commission. If the employer appears truthful, however, the employee may be sufficiently deterred in bringing the claim in the first place.

Action Step     Physicians need not provide a detailed explanation for termination, but where one is given, they should provide the employee a truthful reason.

Mistake 10      Failing to Negotiate a Severance Agreement with an Employee

After deciding to terminate an employee, one of the biggest mistakes physicians make is not negotiating a severance agreement and general release with the terminated employee. While physicians may be reluctant to pay the terminated employee any additional compensation, in the long run, doing so will insulate the practice group from expensive employment-related claims. To make the agreement legally enforceable, physicians must provide the employee legal consideration to support the agreement; in other words, compensation to which the employee would not ordinarily be entitled. Physicians may be able to obtain many favorable concessions from the employee in such an agreement. Key terms may include:

  • Release of all employment claims under federal, state, and municipal laws
  • Acknowledgement that all compensation has been paid in full
  • Agreement not to compete for a certain period of time, in an appropriate geographic radius, or both
  • Agreement not to solicit employees for a certain period of time
  • Agreement not to initiate litigation
  • Agreement not to encourage others to initiate litigation
  • Agreement to return all company property
  • Agreement not to disparage the physician
  • Agreement to arbitrate any provision of a breach of the agreement
  • Selection of a forum for litigation/arbitration
  • Agreement to cooperate regarding a malpractice claim
  • In the event of a breach of the agreement, a provision for the award of attorney’s fees and costs 

Action Step     Physicians should be willing to pay a terminated employee a modest sum to obtain a severance agreement and general release.


Physicians may make many costly mistakes when terminating an employee. Many of these mistakes can be avoided by consulting with counsel and drafting appropriate hiring and termination documents. Even if all claims cannot be avoided, costs can be contained by obtaining employer’s liability insurance.

Additional Resources

  • E. Hollander, Employment Evidence (James Publishing Co., 2003)

Written by:

Eugene K. Hollander, Esq.

Peer reviewed by:

Mary M. Madden, Esq.

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