38th Annual Advanced Business Law Seminar

While many employment contract issues are universal, the practice of medicine, as with all professional practices, is full of considerations which are unique to that profession. Also like other professionals, physicians have tremendous demands on their time and attention and often pay insufficient attention to business matters. A well thought out and detailed employment agreement can assist with that and can save discord, both during the relationship and at the time of termination of that relationship. The clearer the expectations on both sides, the more smoothly the relationship goes.

The following are topics for inclusion in a physician employment agreement (those italicized will be the subjects of focus):

• Term
  
  
  • Initial
  • Renewal

• Future Ownership - if anticipated
  
  
  • The agreement should address the time or milestones after which ownership in the Company may be considered. There is often a dilemma as to whether or not to build into the original agreement an opportunity for equity ownership. The decision is a practical one and usually hinges on whether one is in an employer’s market or an employee’s market. If an opportunity for equity is to be provided for, options include:
    
    
    • Valuation based on Company historic revenues over a period of time
    • Valuation based on assets where they are significant
    • Valuation based on a combination of revenues and assets
    • Outright Purchase - where the employee obtains his/her own financing
    • Purchase financed by the Employer
    • Earn-in: where a portion of the new partner’s earnings are applied to the purchase price over time
    • No earn in or set purchase price, but percentage interest is phased in over time

• Description of Services
  
  
  • Specialist/General Practitioner: Occasionally, but rarely, there are situations in which, in a practice where specialties or sub-specialties are combined, there can be disagreements over whether the employee may be assigned to tasks outside his/her area of specialization. If there is any chance of this, it should be addressed in the agreement.
  • Chain of Command: It is important to make clear who has the ultimate authority for decision making and who is out of the loop. When dealing with employment contracts for equity owners, the individual needs to be subject to the ultimate decision of the majority. The opportunity for one to become a prima donna should be limited as much as possible.
  • Fair Division of Work Load: This perhaps causes more disputes than anything, other than money, in professional employment agreements. The contract should clearly spell out what the expectations are in terms of:
    • Hours and Days of Practice
    • Call Duty
    • Less Desirable Services
    • Administrative Duties
    • This also becomes especially important in employment contracts for equity owners.
  • Performance Evaluations: This is an important component for assuring optimum performance and to prevent misunderstandings. There should be at least annual evaluations (more in the first year) and the process should be religiously adhered to. Query: For malpractice reasons, is it advisable to consider making certain details of the evaluation oral rather than written, or is it better to have a detailed record which reflects serious supervision?

• Allowed Outside Activities
  • Speaking Engagements
  • Publications
  • Research: In-house or outside?
    • Amount of time which may be devoted to research
    • Ownership of work product: employer, employee, or shared
  • Consulting
  • Treatment of honoraria, medical-legal consulting fees, speaking fees, royalties and other similar professionally related income

• Compensation
  • Base Salary
    • Set Amount
      • Overtime Component
    • Based on productivity
    • Combination
  • Bonuses
    • Discretionary on the part of the employer
    • Non-Discretionary
      • Use of Clear Formulae based on :
        • Net productivity of the physician (Preferred), or
        • Company profitability
    • There are possible structures that would violate statutory provisions, such as those contained in the Stark Law. For a detailed discussion of this law, see Virginia CLE’s publication “Representing Physicians and Medical Practices” (1999)
    • Signing bonuses: Often a strong incentive for a highly sought after physician
    • Moving and relocation expenses
  • Taxes and Other Withholding

• Benefits
  • Insurance:
    • Medical and Dental
    • Life
    • Disability
      • For equity owners, this needs to be tied into the formula for purchase of interest in a shareholders’ buy/sell agreement
  • Professional Liability Insurance: Always address who will be responsible for tail coverage. This can be a significant benefit to the employee.
  • Vacation ]
  • Holidays ] Timing and Coordination
  • Sick Leave ]
  • Unused Leave
    • Prevent over accumulation of leave by limiting carryforward
    • If carryforward not limited, consider including a provision that leave is not compensable upon termination beyond a stated amount
  • CME
  • Licenses/Membership fees
  • Cell Phone/Pager
  • Computer equipment and software. This can be a significant cost factor, especially where the physician is involved in research.
  • Professional Activities
  • Expense Reimbursement
  • Advertising: Maintain control over how the Company’s name is used for promotional purposes. Permission of the Company in advance of advertisement should always be required.
• Facilities
• Support Staff
• Duty of Loyalty and Protection of the Company
  • Confidential and Proprietary Information: The case law seems to accept a broad definition based on one’s right to make contractual determinations, but there may be a limited ability to enforce this with respect to that portion of patient lists which represents patients treated by that physician.
  • Independent Covenant Not to Disclose Company's Trade Secrets
  • Covenant Not To Compete: Virginia law holds such agreements to be in restraint of trade and holds that they: must not be any broader than is reasonably necessary to protect the legitimate interests of the employer, must not unduly harsh or oppressive in curtailing the legitimate needs of the employee to earn a livelihood, and must not violate public policy. See e.g., Meissel v. Finley, 198 Va. 577, 95 S.E.2d 186 (1956). If the agreement is found to be overbroad in any material way, the entire agreement becomes unenforceable. It is generally accepted that Virginia courts will not rewrite the agreement to an acceptable level of prohibition. See e.g., Roto-Die Co. v. Lesser, 899 F. Sup. 1515 (W.D.Va. 1995). The agreement may not be overly broad with respect to:
    • Duration: While prohibitions ranging from two to five years have been upheld in Virginia, the acceptability of the duration is analyzed on a fact specific basis and even a three year prohibition has been found to be unreasonable when combined with other factors that extended the prohibition beyond what was deemed necessary to protect the legitimate interests of the employer. Simmons v. Miller, 261 Va. 561, 544 S.E.2d 666 (2001).
    • Scope of Prohibition: Virginia has clearly and repeatedly stricken down agreements which fail to carefully tailor the restricted activity of former employees. See e.g., Modern Environments, Inc. v. Stinnet, 263 Va. 491, 561 S.E.2d 694 (2002). Motion Control Systems, Inc. v. East, 262 Va. 33, 546 S.E.2d 424 (2001).
    • Territory: The Supreme Court of Virginia has frowned on attempts to extend the prohibition beyond the territory in which the employer actually operates. See e.g., Simmons v. Miller, 261 Va. 561, 544 S.E.2d 666 (2001); Alston Studios, Inc. v. Lloyd V. Gress & Assoc., 492 F.2d 279 (4th Cir. 1974).
    • [For a more thorough discussion of covenants not to compete, see Virginia CLE’s handbook publication “Virginia Business Torts” (2006)]
    • The ticking time bomb of public policy: While this is a rarely implemented leg of the test, consider the possibilities for a situation in which the medical practice is located in an under serviced locale and the loss of a physician to the community would work a hardship on the citizenry.
  • Non-Solicitation of the Company's Patients
    • How are you really going to tell?
  • Non-Solicitation of the Company's Employees
  • Fiduciary Duty
• Termination
  • For Cause:
    • Clear definition
    • Should also be addressed in terms of impact on compensation and severance benefits
  • Not For Cause - by the Company
  • Voluntary Termination by Physician
    • To Continue Practice Elsewhere: Impact on compensation and severance benefits
    • To Retire
    • Notice
      • Use of Annual Leave and CME Allowance During Notice Period
    • During First Year: More restricted severance benefits
    • After First Year: More generous severance benefits
    • Permanent Disability
    • Death
  • Events After Termination
    • Ownership of Patient Files: While virtually all agreements provide that the Company owns the files, and governmental and insurance regulations require the retention of files, ethical considerations dictate that the patient has a right to his/her file and can require that it be transferred to whomever the patient desires.
    • Delivery of Patient Files: Best and safest practice is to follow the patient’s instructions and keep copies for the Company’s records. Where there is an instruction to transfer the file to the departing employee, the agreement can require the employee to pay the cost of copying and delivery.
    • Return of Company Property
    • Notice to Patients: Where the departing employee will be competing, there needs to be a procedure for providing notice to patients that is civil and keeps the patients out of the middle:
      • Written notice in advance of departure
      • Procedures for notifying walk-in patients of each other’s location
    • Communications With Patients
  • Remedies
    • Liquidated Damages: Determining damages from breaches of covenants not to compete, confidentiality agreements and non-solicitation agreements can be difficult, if not impossible, to calculate. Even where they could be calculated over time, the process may be irksome. A liquidated damage provision may be a desirable substitute. It could include:
      • A set amount per patient
      • Disgorgement of severance benefits or, in the case of departing equity owners, disgorgement of buy-out payment
      • An amount en grosse
      • Be careful to avoid the provision being seen as constituting a penalty
        • Provide in the agreement an acknowledgment that damages are difficult to determine, that the provision is a reasonable estimate of the contemplated damage and that the provision does not constitute a penalty.
    • Injunctive Relief
  • To Arbitrate Or Not: The following factors should be taken into consideration in deciding whether or not to use a binding arbitration provision:
    • Geographic Factors
    • Confidentiality (not hanging the family laundry out to dry)
    • Speed
  • Mandatory Mediation
  • Survival of Covenants
  • Assignment
  • Notices
  • Binding Effect
  • Prior Agreements
  • Attorneys’ Fees
  • Waiver
  • Modification
  • Applicable Law
  • Severability

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