Evaluating Employment Agreements
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The first challenge of employed practice is to analyze your contract – before you sign.
Fam Pract Manag. 2012 Jul-Aug;19(4):6-10.
At one time or another in their professional careers, most physicians will be required to sign employment agreements. The type of employer and the complexity of the contract may vary; still, most agreements share basic concepts that physicians must understand before they sign. This article will explain these concepts and help family physicians identify issues that need to be negotiated.
Term and termination
The term of an employment agreement may be one or more years. Many hospitals and health systems use stated terms of at least one year, while physician groups often fix the term at the number of years until the employee may have the opportunity to become an owner of the group, if partnership is an option. It is important not to be fooled by the length of the term, however, as it can be affected by the termination provisions. If either party can terminate the employment agreement without cause by providing a certain number of days of written notice (usually 30 to 90 days), the term of the agreement is really just the length of the notice period. “Without cause” termination provisions are used by many employers, most commonly physician groups. Hospitals and health systems tend to forgo these provisions and are more likely to specify a fixed term of employment, especially if the physician’s practice has been acquired by the hospital or health system, although in recent years I have seen an increasing use of without-cause termination provisions from these types of employers as well. In such cases, the length of the notice period may be longer (e.g., 180 days).
In addition, employment agreements almost always contain provisions that enable the employer to terminate for cause. These provisions also may require that the employee receive written notice of the cause for termination and an opportunity to cure the alleged default. It is to the employee’s advantage to ensure that the agreement allows for this. For example, a physician who fails to follow an employer’s policies may be able to cure such a breach if he or she is advised of this failure and works to correct the deficiency in question. The length of period during which a physician can attempt to cure an alleged default typically runs from five to 30 days.
Because the scope of family medicine is broad, the explanation of the duties of a family physician are often not specifically defined in the employment agreement. The key duties that should be defined relate to the physician’s schedule and obligations for call and coverage responsibilities. It is particularly important for part-time employees to define the schedule, especially if they are paid a fixed salary or other flat per diem rate and their lifestyle requires a fixed schedule or flexibility. Employees will often try to document in the agreement any promises the employer has made with regard to schedule (e.g., working no more than one evening per week and no more than one Saturday per month), although employers often refuse to include these promises in the agreement to maintain maximum flexibility.
Employees also will want call and coverage responsibilities to be spelled out in the agreement. The employer may not be willing to promise a specific call and coverage ratio (e.g., one in four weeknights and one in four weekends), but may add that the practice’s physicians will share call and coverage on a substantially equal basis. This issue needs to be addressed with hospital and health system employers as well, especially when the employee is not aware of all the other physicians who will take part in the coverage arrangement.
Moonlighting and other outside opportunities
Agreements often require the employee to provide services exclusively for the employer. If an employee wants to moonlight, specific language may have to be added to the employment agreement, either to permit services that are known in advance or to specify that the consent of the employer must be sought for future moonlighting opportunities before the physician accepts them. It may also need to be made clear that nonclinical services such as outside speaking and writing, expert witness work, and chart reviews that are done on the employee’s own time are acceptable, and that compensation for them goes to the employee.
With hospital and health system employers, it is particularly important to understand policies related to any intellectual property the physician may develop outside of his or her employment. The policies of the employer, which the employment agreement generally requires the employee to follow, may provide that all inventions or intellectual property developed by the physician during his or her employment belong to the employer.
Most physicians turn first to the compensation section of the employment agreement. Many employees, especially those belonging to physician groups, still receive a base salary with incentive compensation based on formulas developed by the employer. The federal Stark law and regulations and the federal Anti-Kickback Statute, as well as similar self-referral and fraud and abuse laws enacted by states, have an impact on the manner in which an employer is permitted to compensate a physician employee (the specifics are beyond the scope of this article). To aid compliance with these restrictions, incentive compensation formulas should focus on services personally provided by the physician.
Over the past few years, incentive compensation formulas used by hospitals and health systems have moved away from traditional collections-based formulas toward formulas that focus on a physician’s work effort using measures such as work RVUs (relative value units), citizenship metrics, and quality measures. These changes are being made with an eye towards the development of accountable care organizations (ACOs) and the focus on providing quality care in a cost-efficient manner.
Many physician groups still pay bonuses based on a physician’s collections in excess of a gross collections threshold or work RVUs in excess of a gross RVU threshold. Some hospitals and health systems still pay incentive compensation based on physicians’ individual net profit, in which the collections for the services they perform are reduced by various overhead expenses allocated to them. Unfortunately, overhead expenses are often out of the physician’s control. It is often difficult to negotiate an incentive compensation formula with hospitals and health systems, as they have generally developed these formulas for use with all of their physician employees and are not likely to revise them for any one physician in particular.
Closely following compensation in importance to many physicians are the fringe benefits and reimbursable business expenses specified under the employment agreement. Regardless of whether the employer is a health system, a physician with sole ownership of the practice, or a physician group, most employers will pay for a physician’s state medical license fees, hospital staff dues, and federal and state drug registration expenses. As the economy has tightened and Medicare and third-party payment has declined, employers’ willingness to pay for physicians’ business expenses has declined. Employers will often provide an allowance to employees for continuing medical education, dues, journals, and professional society memberships, but they usually will not pay the full expenses. Hospital and health system employers tend to be more generous than physician groups in this regard. In addition, if a physician is moving to take a new employed position, full payment or an allowance for moving expenses is often provided.
Malpractice insurance is another business expense that most employers pay directly. However, the key issue is often not the payment for malpractice insurance but rather the type of malpractice insurance provided. If the employer is providing “occurrence-based” malpractice insurance coverage, then no reporting endorsement (“tail coverage”) is required upon termination and the employee does not have to worry about the continuation of his or her coverage after leaving the employer. If the malpractice insurance is “claims-made” coverage, then a reporting endorsement may be required upon termination of employment. This would cover the employee for claims rendered after termination for services rendered prior to termination, which is necessary unless the employee is permitted to take the claims-made policy to his or her next job. A physician’s future employer often does not want an employee to bring his or her claims-made based insurance policy from the previous job because the new employer would then be paying premiums that relate to coverage for services rendered with the prior employer.
The responsibility of who pays for tail coverage upon termination of employment is a key issue that should be set forth in the employment agreement. It is more common for hospital and health system employers to offer to pay for tail coverage in all instances than it is for physician groups to do so. The payment of tail coverage upon termination can be handled in many ways: employer pays tail coverage; employee pays tail coverage; employer and employee split the cost of tail coverage equally; or tail coverage payment depends on the method of termination. In the last option, the employer often will pay for tail coverage if the employer terminates the agreement without cause or the employee terminates the agreement for cause. The employee would pay for tail coverage if the employee terminates the agreement without cause or the employer terminates the agreement for cause.
Fringe benefits for physician employees have also been cut back over recent years. More physician employees are required to contribute to their health insurance expenses than ever before, and many employers now pay only for individual coverage, not family coverage. Additional benefits such as life and disability insurance are sometimes provided by private physician groups but not as often as hospitals and health systems. Most employers do offer a retirement plan, with hospitals and health systems generally providing more options.
A key issue to examine is paid vacation and continuing medical education absences. Some employers will try to avoid specifically referring to these entitlements in the agreement itself, instead referring to policies on these benefits. However, unless specific entitlements are set forth in the employment agreement, the employer’s policy could change and vacation and CME time could be reduced without the physician’s consent. Fewer employers are providing for paid sick time than ever before, and many employers are combining vacation, CME, and sick time into “paid time off” that incorporates all three concepts into one pool of time.
Depending on the state where you live, restrictive covenants may be an issue in your employment agreement. Some states do not permit the enforcement of restrictive covenants, some limit the ability of employers to enforce restrictive covenants, and some enforce restrictive covenants that are reasonable in scope and duration and are reasonably necessary to protect the employer’s business interests. A restrictive covenant should be limited in duration (often one to two years following the termination of employment) and mileage (which varies depending on the location of the employer) to reasonably protect the employer’s interest against competition by the employee. A reasonable geographic radius restriction might be 30 miles in Boise, Idaho, but 1 mile in downtown Manhattan. Employers may sometimes be willing to agree that the restrictive covenant will not be enforced in certain instances, such as the employee terminating the agreement for cause.
Some employment agreements include liquidated damages in the restrictive covenant, and some states require this. This means the parties agree in advance on the amount of damages the employer would be entitled to in the event that the physician employee breached the restrictive covenant. In some instances, these liquidated damages serve to “buy out” the restrictive covenant (i.e., if the amount is paid, then the physician employee can practice without violating the restrictive covenant), and in other instances these liquidated damages are in addition to the employer’s right to seek injunctive relief.
In addition to including restrictive covenant provisions, many employment agreements include non-solicitation provisions. These provisions are often allowed in states that will not enforce restrictive covenants and apply regardless of whether the physician employee practices outside of the restrictive covenant area following termination. Most non-solicitation provisions focus on preventing employees from soliciting former patients, employees, and referral sources.
Many employers also include confidentiality provisions in their employment agreements. These prevent an employee from using or disclosing confidential information of the employer, including the employer’s patient lists and trade secrets. Employers are often willing to limit the definition of confidential information to information that is not known by or generally available to the public.
Assignment of rights
Most employment agreements do not permit the employee to assign his or her rights, duties, and obligations under the agreement to any other individual. However, most employers will provide that they can freely assign the agreement or can assign the agreement without the physician’s consent in certain circumstances, such as a sale of the practice. If it is important to a physician employee that the employer be the same person(s) that he or she was negotiating with when entering into the contract, this provision should be negotiated prior to entering into the employment agreement.
Physicians who become employees of private physician groups will want an indication of whether or not they will have an opportunity to become a co-owner in the future. These provisions are almost always statements of “intent” and not promises from one party to the other that the employee will become an owner at a specific date in the future. However, an employer may be willing to document the buy-in process and whether a purchase price is expected to be paid for any such buy-in. The more that the employer is willing to specify about future partnership, the better it is for the employee, since it may help to limit or avoid surprises when co-ownership discussions begin.
Finally, there are certain boilerplate provisions to which every physician employee should pay attention. The “entire agreement” clause provides that the agreement supersedes all oral or written discussions, correspondence, or negotiations between the parties prior to the agreement. I always explain to my physician employee clients that “if it is not in the agreement, the employer did not specifically agree to it.”
The notice provision is also important. It defines how formal written notices are to be given, which is important for employees when receiving notice of termination without cause, receiving notice and opportunity to cure a potential default, or providing notice that they intend to leave the employer for cause or without cause.
The foregoing sets forth an analysis of the key components included in many physician employment agreements. The physician who is unsure about an employment agreement and whether it accurately reflects his or her discussions with a proposed employer may find it useful to engage a health care transactional attorney to assist with the review of the agreement.
About the Author
Michael R. Burke, JD, is an attorney and shareholder of the health care law firm of Kalogredis, Sansweet, Dearden, and Burke, Ltd. in Wayne, Pa. Author disclosure: no relevant financial affiliations disclosed.
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