What You Need to Know Before Signing a Physician Employment Agreement.

Take Care Before Signing an Physician Employment Agreement

(June 9, 2011): After 20 years of practicing law I can say that most phone calls I receive from a potential client are after a contract has been signed. Unfortunately, today’s physician employment agreements are multiple pages long with small print and certainly not written for easy reading or common sense applicability. Contracts are certainly a pain to read. However, one or two hours of legal advice before signing a contract can often save a doctor significant money, time and stress. This is also true if an employer has violated its promises.

Many issues in employment litigation can be avoided by reviewing provisions that are common in most employment agreements for most professions. There are also concerns and rules applicable only to doctors and that is why consultation with an attorney is always advised to protect your assets, income and career.

The purpose of this article is to address the primary “contractual” issues to consider prior to entering into a physician employment agreement. To be clear, this article is not meant to cover possible Stark and / or Anti-Kickback considerations, both of which may require a separate analysis, depending on the facts presented. The following seven issues are discussed in this article:

  • What are the length and terms of the employment?
  • What reasons are listed in the employment agreement for termination?
  • Is there any language that addresses compensation, bonuses or liquidated damages?
  • Review the Employment Agreement for non-compete and confidentiality clauses.
  • What are the choice of law and location of enforcement of the agreement?
  • What are the provisions as to mandatory mediation or arbitration?
  • Always consult with an attorney before you decide to terminate your employment.

I. What are the Length and Terms of the Employment?

In many states employees are considered at-will which means the employer can fire you for a good reason, bad reason or no reason at all. There are exceptions but at-will employment definitely favors the employer. Consequently, the contract should be examined to see whether or not the agreement states you are hired for a specific length of time or if it is silent as to length of term.

Even if the agreement states you are to be employed for three years it may also state that you agree that you may be terminated at-will. An attorney can help you determine if a court will enforce the at-will provision. Arguments can be made, depending on the agreement language, whether or not the at-will provision is enforceable. This is a critical determination because if the at-will provision is enforced this may eliminate your right to any compensation that you have not been paid.

II. What Reasons are Listed in the Physician Employment Agreement for Termination?

If the agreement is for a specific term, such as five years, and is not at-will, then it needs to be determined if there are any provisions that outline how the employment may be terminated before the five-year term expires.

Most employment agreements will have a termination for cause paragraph. Causes for termination range from failure to follow employer polices to the commission of crimes involving moral turpitude (theft) or any felonies. If you are terminated for cause and the employer can prove the cause, then normally your compensation is limited to what salary you have earned through date of termination and any bonus or incentive pay usually will not be paid. If you are terminated without cause, then most state laws and courts will require that you be paid any compensation that has been earned including bonus or incentive pay.

It would be prudent to have an attorney review the employment agreement as many times courts or statutory law may have interpreted the language in the agreement regarding causes for termination. This is important to you in your decision whether to sign the contract or to try to negotiate the language regarding reasons for termination. Many times you can convince an employer to add additional provisions to protect you from termination for cause or without cause. For example, you may have a provision added that if the employer terminates you without cause then you are entitled to a severance package tied to length of time employed. Additionally you may have language added that you receive written notice from the employer regarding violations and you be allowed a reasonable time to cure any violations before you are terminated for cause.

III. Is There Any Language that Addresses Compensation, Bonuses or Liquidated Damages?

The employment agreement should be reviewed regarding compensation, billing practices, bonuses, and operating expenses. Are there performance incentives? Are you allowed to earn income for services you provide outside the Hospital facilities? What type of insurance does the employer provide, whether liability or other? Is there mention of deferred compensation, stock options, or severance packages?

While the general rule for contract enforcement is that the court will look to the language in the contract to determine rights, there are many exceptions and courts will not always uphold compensation plans that give an employer the power to modify or eliminate compensation.

Review the compensation provision for tax consequences. A severance package may be subject to special taxes if the severance payments constitute a “golden parachute” payment. Additionally the IRS has and will make changes or restrictions on certain deferred compensation plans. It is advisable to consult with a tax professional before signing to determine what tax consequences may be triggered by the compensation plan and if tax consequences can be avoided by redrafting the applicable contract language.

Additionally, beware of any liquidated damage clauses. Many times, if you receive a bonus and agree to work for a certain number of years, an employer will put in a liquidated damages clause stating that if you quit without notice and/or without what the employer considers a valid reason you will owe the employer money. This ostensibly is a set monetary number for payment of damages to the employer for your action of quitting. The clause will state that you agree it is impracticable and difficult to determine the damages the employer will suffer if you quit and then provide factors to determine the damages. Factors may include expenses relating to securing a replacement or temporary physician for coverage, credentialing and recruiting expenses and potential loss of scheduled services. If the figure is too large, then many times courts will state the liquidated damage clause is a penalty provision and therefore unenforceable. Many times you may be able to negotiate the figure down or eliminate the provision through negotiation before signing the employment agreement.

Also beware of any requirement of repayment of a bonus. For example if you receive a $100,000 signing bonus and sign an employment agreement for 5 years, the employer may require that you pay the unamortized portion of the bonus if you terminate the agreement without cause. Conversely, you may want to check for language that you keep the entire bonus if the employer terminates you without cause.

IV. Review the Physician Employment Agreement for Non-Compete and Confidentiality Clauses.

A non-competition clause should be reasonable in time and scope and most states and courts have determined what is reasonable. Important factors are the length of time restraining competition, the activity restrained, and the geographic area in which competition is restrained. Many times this can be negotiated.

Confidentiality clauses should be reviewed as to enforceability and content. Certainly there is information that is beneficial to the employer that is not known to competitors or easily ascertained by competitors and this is reasonably protected. However, many times these clauses may be overreaching and can be renegotiated or clarified.

Additionally, many courts will enforce a common law duty of confidentiality against an employee. This means some information is confidential by law, whether or not there is a confidentiality provision in the employment agreement. It is prudent to have a general understanding of what information you can or cannot take or disseminate or use. This is important to reduce the possibility of your former employer from filing a lawsuit to prohibit you from using certain information and to seek damages from you.

V. What are the Choice of Law and Location of Enforcement of the Physician Employment Agreement?

Most contracts will have a provision stating that the law of a particular state will govern the interpretation and enforcement of a contract. There normally are provisions that provide that the venue (location) of a lawsuit is to be in a certain county, and in state or federal court. This is important if you move from your former place of employment in California to Maine. If there is litigation you may be forced to hire an attorney in California and litigate on your employer’s home turf. Alternatively, if you remain in California, but the employer is national, the contract may state New York law governs and any litigation will be in New York. Many times choice of law and venue clause can be negotiated and this can be important in terms of litigation expenses.

VI. What are the Provisions as to Mandatory Mediation or Arbitration?

Mediation is normally a non-binding settlement conference whereby the employer and employee present their side of the case to an impartial trained mediator when are all present. Thereafter the parties are separated and the mediator goes between the parties to attempt to reach a settlement. If a settlement is reached normally an agreement is signed and the signed agreement is enforceable in court. If the parties do not reach a settlement they have the option to go to court or to arbitration.

Arbitration is a more formal process and incorporates many of the rules of formal litigation. Arbitration is usually binding, meaning that the arbitrator, after hearing formal presentations of evidence by both sides will make a written decision which is final absent some fraud or a significant erroneous application of law. Basically, it is very hard to appeal or overturn an arbitration decision and the law favors finality of these arbitration decisions. Arbitration should be less costly than litigation in a court and should be completed sooner than a court case. Arbitration clauses or agreements may preempt an employee filing a discrimination case or wrongful termination case in court. These clauses should be reviewed and pro’s and con’s weighed. Many times these terms are negotiable.

VII. Always Consult with an Attorney Before You Decide to Quit Your Employment.

The old saying is an ounce of prevention is worth a pound of cure. As a doctor or health care professional you diagnose a patient’s symptoms or review test results, and then prescribe a plan of treatment and/or preventive measures. The same reasoning applies to having an attorney review an employment agreement before you sign it. The same reasoning also applies if you want to terminate an employment agreement. It is true that knowledge is power and without careful consideration, your plans or actions may cause legal headaches. There are many fair strategies you may take to protect your compensation and resources when you consider terminating your employment.

Just as important is to realize that this article is not intended to be specific legal advice or to be acted upon as legal advice. This article is an overview of general areas of contract law and issues faced by employees. If you have any legal question(s), please contact an attorney.

Healthcare Attorney

Mr. Schneider is a partner in Liles Parker and primarily works out of the Firm's Houston, Texas office. Jennifer Papapanagiotou assisted in this article and is of Counsel and also at the Houston office. The firm focuses on health care, health care audits, business contracts and acquisitions, and other general corporate and business litigation matters. Should you need assistance with an employment contract, give us a call for a free consultation. Mr. Schneider and Ms. Papapanagiotou can be reached at: 1 (800) 475-1906.