at the end of the tunnel - Could a train be coming your way?
REAL EMPLOYMENT CONTRACT
D. Wall, Esq.
Many physicians emerging from
their residencies have completed at least eight years of training beyond
college. Most have federal-sized debt, and have worked more hours per week
than one should be awake. Because of the long hours and short pay,
physicians emerging from their residencies and fellowships are eager to
begin receiving real money for their skills. The proverbial "light at
the end of the tunnel" often takes the form of the first offer of
employment, with the starting salary shining like a beacon through the
murky haze of legalese.
For a weary resident, the first contract is
tangible evidence that loans will be repaid, children will be fed, spouses
will be allotted their own razors, and cars made in this decade will be
obtainable -- those things that the well heeled can afford. In their
eagerness, however, residents often myopically rely on the "starting
salary" as the sole criterion for decision making. However, draconian
provisions in an employment contract can, believe it or not, make the new
physician long for the "good ole days" when he or she was a
resident. Here are some points a resident, and his or her attorney, should
consider before entering into an employment contract.
Although some employment contracts may
appear to provide a new physician with employment for up to three years,
almost all contracts allow the employer to terminate the physician with or
without cause. "Cause" generally means "a good reason"
such as a physician's loss of hospital privileges, loss of ability to
prescribe narcotics, or inability or unwillingness to meet patient
obligations. "Without cause," however, generally means for any
or no reason.
Although it is rare for a contract not to
contain both "cause" and "without cause" termination
clauses, a physician can minimize the adverse impact of these clauses by
requiring the employer provide notice in advance of termination,
especially if termination is "without cause." The notice period
should give a physician adequate time either to change his or her
behavior, or to find a new position.
BEWARE OF THE CONTRACT THAT DOES NOT
MENTION CALL. Too many residents have been seduced by the often
irresistible Siren-like whir of a bottomless ATM spewing cash, only to get
closer and find that the sound was in fact the all-to-familiar chirp of a
beeper. (Sometimes, believe it or not, employer-physicians no longer take
call after hiring a physician fresh from residency). If a physician
emerging from residency is willing to take call every night, that's fine.
However, he or she should find out before signing a contract what call
obligations will be, and get those obligations in writing.
Type of Work
It is sometimes difficult to get an
employer to put in writing exactly what type of work a physician will be
performing. However, for certain procedure-intensive specialists (e.g.
cardiologists, neurologists, ophthalmologists), it is extremely important
to find out the approximate number and type of procedures expected to be
performed. This is especially true if board certification requires a
certain number of procedures annually.
Another trap is that a practice may hire a
physician to be a "table setter." That is, the physician may end
up being the office practitioner while the employer-physician does all of
the procedures. There is nothing inherently wrong with being a
table-setter -- a physician simply needs to know what his or her role will
There are three ways to compensate
physicians -- (i) guaranteed amount, (ii) production ("the more you
work, the more you get"), or (iii) a combination of the two. If a
physician has an entrepreneurial bent, he or she might like the idea of a
production based contract, or one that has a relatively small guaranteed
amount with a big upside for production. Because production is typically
measured by cash collected (as opposed to services billed, hours worked,
or patients treated), a physician should keep in mind that it takes time
to collect cash. This is especially important in a physician's first year.
He or she may be busy for the entire twelve months of the year, but
because of the lag time endemic to collecting for physician's services,
the physician's "production" will be based upon approximately
ten months of collections (i.e., collections for month 1 will not be
realized until month 3, and so on).
Also, with a production based contract, a
physician must beware of being hired to be a "table setter." If
a physician is not assigned to do procedures that enhance production,
there will not be much of a production bonus.
Generally, employers are loathe to include
in the initial contract a commitment to allow an employee to become a
partner. If such a promise is made in the contract, or is even discussed
in the course of negotiating the contract, a physician should be wary of a
long partnership track.
For example, a contract may allow the
physician to become a partner at the end of two years, and require the
physician to buy a prorata portion of the practice's assets from the other
partners at the time partnership is offered. Alternatively, some practices
might tell a resident that if the resident works as an employee for five
(rather than two) years, he or she will become a partner and pay nothing
to buy in. In those cases, employers often refer to the wait as allowing
the new physician to accumulate "sweat equity." A contract that
induces a long wait for partnership by promising a "low or no
buy-in" should be closely scrutinized.
In today's market, many practices are being
purchased by hospitals and other providers, often resulting in one-time
lucrative payouts to the practices' owners. If a physician is in a
"sweat equity" arrangement, and the practice is sold the day
before he or she becomes a partner, then the physician will receive
nothing for his or her sweat equity in the practice.
Most employers try to insert
"non-compete" clauses in contracts they present to residents. A
non-compete clause provides that if the physician leaves the employer, he
or she will not practice within so many miles of the employer (often
referred to in contracts as the "Restricted Area") for a number
of months or years (often referred to as the "Restricted
Period"). Employers like these clauses because they do not want
someone to work for them for several years, leave, and steal all of their
Obviously, non-compete clauses are more
detrimental to some physicians than others. For example, if Opie had
become a physician rather than a Hollywood director, he should never agree
to sign a non-compete that precluded him from working in Mayberry.
However, Joel, the doctor in Northern Exposure, would probably have gladly
signed a non-compete for the entire State of Alaska.
Repayment of Recruiting
Because of the competition for primary care
physicians, many practices are incurring costs associated with placement
(i.e., headhunters), and are advancing signing bonuses to their new
employees. Often, a practice will attempt to recover its headhunters' fee,
and even a signing bonus, if the physician does not complete the entire
term of the contract.
Only in rare circumstances should a
physician agree to repay recruiting costs. These are costs associated with
the practice from which the physician derives no benefit. Second, it is
sometimes acceptable to agree to repay a "signing bonus" (think
of it as a forgivable loan). If the employer requires repayment, the
instances in which repayment must be made should be narrowly defined. For
example, if the practice fires the physician "without cause,"
the physician should not be required to repay the signing bonus.
Additionally, if the physician fulfills twenty-three months of a twenty
four month commitment, then at least 23/24ths of the loan should be
Many employment contracts are silent with
respect to an employee's obligation to purchase insurance after the
employment relationship ends. Because most employers provide "claims
made" medical malpractice coverage for their employee physicians,
employees are only covered for "claims made" during the period
the employee is on the employer's policy. Once an employee leaves the
employer, the employer will delete the employee from the malpractice
policy. Generally, if a claim is made during the term of the employee's
employment, there is coverage. However, if the claim is made after the
employee has left the employer (and has been deleted from the policy),
then the former employee would not be covered.
This gap can be insured by the employee's
purchase of what is known in the insurance industry as a "tail."
The tail is appended to the original claims made policy, and provides
coverage for the physician after the term of his or her employment, for
occurrences prior to his or her termination. The tail could be costly, and
like many other financial arrangements, can be negotiated within the
initial employment agreement. If, for example, the employee physician is
terminated without cause, he or she may want to insist upon an employment
agreement providing that the employer pay for the tail. If, however, the
employee is terminated with cause, it may be okay to agree in advance that
the employee will pay for the tail, or a portion of it.
The key is, however, that a resident must
know the type of coverage offered by his or her employer, and must make
arrangements for tail coverage upon departure. Failure to do so could
prove costly--even successful litigants incur legal fees and other
expenses that could prove life-altering.
Agreements and Revenue Guarantees
Many practice relationships today involve
revenue guarantees rather than salaries. This is most common in rural
areas, where there is a short supply of physicians. However, it is
becoming increasingly common in suburban areas as well.
Generally, a revenue guarantee takes the
form of a per month amount to be paid to the physician by a hospital. For
example, a hospital may guarantee a surgeon that he or she will have gross
revenues of $25,000 per month for twelve months. When the surgeon starts
practicing, and receives no fees in the first month (because of a lag in
collection), then the hospital would pay the surgeon $25,000. If, however,
in the second month, the surgeon collects $7,000 in revenues, then the
hospital would pay only $18,000--the difference between the
"guaranteed amount" and what was actually collected. If, for
example, in the fifth month, the surgeon collects, $26,000, the hospital
would pay nothing to the surgeon.
To induce the physician to remain
practicing near the hospital, the hospital often agrees to forgive the
repayment of all advances if the physician stays in the area for a certain
number of months. This arrangement gives rise to interesting tax
The hospital's advances are generally
deemed loans, which are non-taxable. Thus, in the above example, the
physician would receive up to $25,000 per month tax free for the initial
period (generally 12 months). However, if the physician is required to
stay in the area an additional 24 months to have the loan forgiven, and
1/24th of the "loan" is forgiven as each month passes, he or she
will be taxed upon the forgiveness of the loan, as it is forgiven.
In this example, assume the physician
receives $100,000 from the hospital as a "loan" in the first
twelve months, and that the loan would be forgiven if the physician
practices in the hospital's geographic region for an additional 24 months.
The loan can be repaid either by money (i.e., $100,000) or 24 months of
service in the hospital's community. In this example, the physician would
have no tax liability in months 1 through 12 for receiving the $100,000
loan, but would have tax liability not only on his or her earnings in
months 13 through 36, but also on the amounts advanced in months 1 through
12 but not forgiven until months 13 through 36.
Assuming the surgeon satisfies the service
commitment over a twenty-four month period, he or she would recognize
$50,000 in income in each of the second and third years even though the
$100,000 loan was advanced in the first year. Thus, the surgeon must save
money in months 1 through 12 to meet the tax obligations caused by
receiving "phantom income" (i.e. taxable income for which there
is no corresponding cash) in months 13 through 36.
There are no specific terms that are
considered as standard in physician employment contracts. Often, a
practice will present a contract to a physician and state "this is
what we did for our most recent hire -- it should meet your needs."
However, a physician should think of a standard contract as a suit of
clothes, which rarely looks real good unless tailored. For example, a
non-compete clause may be too binding for one physician yet a perfect fit
Common to all physician contracts, however,
is that physicians should exercise extreme caution prior to signing. An
onerous non-compete clause, a loosely drafted repayment obligation, or
compensation that is heavily dependent upon production could lead to a
This article was contributed by:
D. Wall, Esq.
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