Practitioner Employment Contracts Pay Attention to This Key Provision to Ensure Success

Every medical and dental practice should have an employment agreement in place for each of its doctors, as well as its non-physician providers (NPPs). A well-written employment agreement serves both the individual doctor and the group practice interests by reducing practice risks and addressing critical issues up front.
This is a written document of mutual expectations and responsibilities. Since members of partnerships and limited liability companies (LLCs) are self-employed, similar provisions would be included in the partnership or operating agreement. Most of the content of employment agreements is financial and operational in nature, and it is that which we will discuss in this article. Regardless, it is strongly recommended that the final agreement be drafted by legal counsel to be sure it is in compliance with state and federal laws and is enforceable.

Scope of Employment and Compensation. The agreement should specify the nature of services and responsibilities the practitioner is employed and paid to perform. This naturally includes providing health care services to patients, but should also include administrative, operational, and supervisory services.

This is particularly important because declining payments for direct patient care services are forcing practices to derive a significant amount of revenue from the services of non-owner doctors, NPPs, ancillary services, and the dispensing of drugs and durable health items.

In light of tax court rulings, the IRS position on unreasonable compensation, and federal self-referral laws and regulations, employment agreements should contain language specifying that doctors are being compensated not only for direct patient care services but also for a broader range of services and responsibilities, such as administrative, financial, and operational management, and supervision of employed non-shareholder doctors, non-physician providers, ancillary services, and related support personnel.

The employment agreement should clearly specify how the doctor is being compensated either in the main body of the document or in an attached appendix. The compensation plan should provide for a reasonable and supportable allocation of direct and indirect expenses, including management services provided by other shareholders.

Fringe Benefits. The agreement should define all the fringe benefits the practice will provide and how much the practice will pay on behalf of the doctor. These usually include health, dental, group term life, malpractice, and disability insurance, as well as continuing medical education allowance, retirement plan, vacation and sick leave, professional dues and licenses, cell phone and pager, travel, meals, and entertainment allowances.

If the practice pays for the doctor’s malpractice insurance, and it is a ‘claims made’ policy, it is very important to specify who will be responsible for the ‘tail’ policy premium. Since this can be a substantial expenditure, this needs to be agreed upon up front. Some agreements provide for an offset against the doctor’s severance pay or deferred compensation to pay for this tail insurance premium.

Outside Income. Since most employment arrangements anticipate that the doctor will work full-time and exclusively for the practice, the agreement should specify this and explain to what extent the doctor can earn income outside of the practice. Agreements usually allow income from lectures, honorariums, and writings, as long as the time devoted to these activities does not detract from the doctor’s duties in the practice.

Deferred Compensation. Owner practitioners usually have a provision in their agreements for an unfunded supplemental retirement payment which is usually tied to accounts receivable or some percentage of average annual compensation. New and proposed Section 409(a) rules and regulations need to be complied with in writing these provisions.

Noncompete and Nonsolicitation Clauses. Most provider employment agreements provide for some provision to restrict competition and solicitation of patients and/or personnel. The enforceability of this clause is subject to state law and court decisions, so it should be carefully drafted, and only by legal counsel.

Disability Provisions. The agreement should clearly define continuing compensation that is payable in the event of short-term and long-term disability, as well as when provisions for termination of continued employment and redemption of ownership interest kick in.

Termination of Employment. The contract should contain a clause specifying when and how the practitioner’s employment may be terminated by either the doctor or the practice. It will usually contain ‘with cause’ and ‘without cause’ provisions, some providing for immediate termination and others allowing for a period of time to ‘cure’ the cause for termination. Termination without cause usually requires a 90-day to 180-day notice by the terminating party. Examples of cause for termination may include loss of hospital privileges, loss of license to practice, conviction on a felony charge, disability leave beyond a specified period of time, loss of malpractice insurability, behavioral issues, and breach of contract.

Mandatory Retirement Age. Most doctors, like most people, ultimately face the reality that they just can’t perform as well as they once did and as well as their partners and colleagues. Hopefully they will make the decision to retire before they become a risk to their patients and the practice.

Unfortunately, this is not always the case. Setting a mandatory retirement age and documenting it in the employment contract relieves the younger, more able members of the practice from the unpleasant task of forcing a senior member into retirement. This is a provision that has to be entered into at the start of employment or upon the unanimous consent of all existing doctors in the practice to avoid age discrimination litigation later.

Partial Retirement. This provision details conditions under which a doctor may elect to cut back on work without having to retire completely. It has many implications, including malpractice insurance and other practice costs, minimum revenue-generating requirements, issues of call coverage, and other issues that many practices choose not to have to deal with and are usually not included in standard employment contracts.

Every practice should periodically review its partnership agreement, LLC operating agreement, or employment agreements, whichever the case may be, to be sure the above key provisions are addressed, as well as other issues that may arise due to changes in the ever-changing health care environment.v

James B. Calnan, CPA, is partner-in-charge of the Health Care Services Division of Meyers Brothers Kalicka, P.C. in Holyoke;             (413) 536-8510      .

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