Receiving an employment contract can be the most nerve-racking event to date for a new physician. Understanding the contract's basic elements allows physicians to better evaluate their job offers.
This week I worked with an attorney to answer a topic I get asked and approached on all the time. This is the first article of a 2-part series. The second part will be up on Wednesday, Aug. 6.
As residency nears an end, physicians are presented with one or more employment contracts. Receiving this contract can be a highly anticipated event that is part of an exciting time. However, it may also be the most nerve-racking event to date for a new physician, because, once signed, the physician is bound by its terms. Understanding the contract’s basic elements allows physicians to better evaluate their job offers.
This article is not to replace the contract review by an attorney, but to enhance it. Having a better understanding of the physician contract prior to contacting an attorney makes the time with the attorney more understandable and efficient.
When a contract is signed, the terms will control most, if not all, aspects of working life. A bad contract and work environment can have work/life spillover. When work goes bad, it can have a very serious impact on the home life.
While I will cover most, if not all, of the important provisions the new physician will find in a contract, I can’t recommend strongly enough to have an attorney review any agreement BEFORE signing.
A good attorney will be able to tell you:
• What the provisions mean
• Whether they should or should not be included
• What provisions are not in the contract that should be
A review of the contract helps prevent the perfect opportunity turning into a bad situation. Paying a small fee now to an attorney can save you tens of thousands of dollars later if the deal goes bad. Not only might the physician be liable for any damages to the employer if the employment does not work out as planned, but also they will have to pay their own attorney fees and possibly the employer’s as well.
Common terms and provisions
In the first employment contract, the following common terms and provisions will most likely be included:
• Term of employment and termination
• Employment status and scope of work
• Restrictive covenants
• Compensation, bonuses and fringe benefits
• Malpractice insurance and “tail coverage”
• Scope of employment and other related issues
1. Term of employment and termination
Most physician employment contracts are for one- or 2-year terms and may state that the contract will automatically renew at the end of each term. In most cases, when a term is listed, both parties are bound for that term and may not terminate the contract without potentially being liable for damages.
With that said, most contracts provide events for the parties to terminate the agreement. Generally, this termination is either with cause or without cause.
"With cause" generally means the contract is terminated due to some act or omission by the physician. This area of the contract is often one-sided, providing no events of cause by the employer.
Generally, these events allow for immediate termination by the employer:
• Loss of license to practice medicine
• Failure to meet initial qualifications for employment as agreed upon in the contract
• Loss of hospital privileges
• Loss of malpractice insurance
• Abuse of drugs or alcohol
• Conviction of a felony, theft, or other act of dishonesty
• Physician’s bankruptcy or permanent disability
The simple notice provision is the most common “without cause” termination provision. This provision enables the employer to terminate the contract for no stated reason by providing written notice in advance. The notice period is usually 30 to 60 days. Reciprocal (fair) agreements will allow the physician to do the same.
The physician will have to balance this termination length with his or her individual situation. Usually, the longer the notice period, the better it is for the physician if the employer is doing the terminating. On the other hand, if it is the physician terminating the agreement, he or she may want to get out as fast as possible.
2. Employment status
This section defines a physician’s status as an employee, independent contractor, or owner. The physician’s tax burden will be directly affected by this classification so it is important to understand what each of these means.
3. Restrictive covenants
A restrictive covenant attempts to limit the physician and his or her activities during the term of the contract and/or after the physician has left the employer’s employment. The 3 most common restrictive covenants are:
• Non-competition provision
Typically, a physician is prevented from practicing within a defined geographic area for a certain period of time after the termination of the doctor's employment, regardless of which party terminated the employment. Generally, the more specialized the physician’s practice, the greater the geographic area that will be enforced.
This is a very important part of the agreement and the validity of it will depend on the laws of the state the physician is working in. Non-competition agreements are void per se in some states, while other states analyze the provision under a reasonableness test as to the geographic limitations and time duration.
Under a reasonableness test, a court, depending on the legal precedent of the state, will take one of 2 actions. In states such as Minnesota, the court applies the "blue pencil" rule to an unreasonable restriction and rewrites the clause to make it acceptable. This represents an attempt to salvage restrictive covenants whenever possible. In other states, such as Wisconsin, a provision that is deemed unreasonable will not be saved by a court. It will be ruled invalid.
If the contract contains a non competition provision, the physician will definitely want an attorney opinion as to the potential ramifications in their particular state.
• Non-solicitation provisions
The agreement may have a non-solicitation provision along with, or instead of, the non-competition clause. In a non-solicitation provision, the employee may not be limited to where he or she can practice, but the physician may be restricted from trying to bring patients and/or staff to his or her new employment practice.
Like the non-competition provision, this may or may not be valid and will depend on state laws. Note that this provision relates to direct solicitation by the physician and not independent free choice by the patients.
• Confidentiality provisions
This type of provision protects the employer’s confidential information and trade secrets. Courts generally agree an employer is entitled to protect its confidential business information and trade secrets. This may even be the case without a specific provision written into the contract, depending on federal and state laws.
In the next part of this series, I will cover 2 of the remaining terms and provisions of an employment contract: malpractice insurance and scope of employment.
The Robert Kaufer Law Firm is not affiliated with North Star Resource Group, North Star Consultants, Inc., CRI Securities, LLC or Securian Financial Services, Inc.
Jon C. Ylinen is a Financial Advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC. and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC. is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource Group is not affiliated with Securian Financial Services, Inc. but is independently owned and operated.
Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax, specific loan repayment for an individual or legal advice. This is not a recommendation of any strategy or product in particular.