LETTER OF THE LAW
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That employment contract you're about to sign can pave the way to a successful career or send you down a dead-end road. Here's what to watch for.
By Joseph W. Gallagher, Esq., LL.M., and Mark E. Kropiewnicki, Esq., LL.M.

Your initial employment agreement with a practice can be the basis for a long, productive and fulfilling relationship. That's why it's important to cover all reasonable contingencies from your first day of employment to the time you might be offered a partnership.

Employment agreements traditionally include basics, such as employment term, salary and fringe benefits. But today, they should cover much more, including the terms of any restrictive covenant; the details of a non-solicitation agreement; a statement of who covers the "tail" portion of your professional liability (malpractice) insurance; and an outline of the expected buy-in terms, should you be invited to become a co-owner.

All terms and provisions of your employment contract should be spelled out in a written agreement. The trust implied in a handshake is admirable, but not advisable when your career is at stake. What's more, employment arrangements are so detailed and complex that even well-intentioned people will forget some of the exact terms that may have been verbally agreed upon. Moreover, time and experiences often distort perceptions of past discussions and agreements.

Contract negotiations can be viewed as the final step in your interview process with a practice. Ideally, the practice will have given you an outline of the basic terms of the proposed employment agreement during your interview. You should take this opportunity to carefully consider whether the proposed arrangements truly make sense for you.

Once you're offered a formal written employment agreement, have it reviewed by an attorney experienced in this area. An attorney will be able to give you important legal and business advice from an objective perspective. Be aware that employment agreements need not be comprised of incomprehensible legal gobbledygook; they can and should be presented in plain English that's easy to read and free of ambiguity. In fact, we recommend that practices set out the employment terms in an easily understood letter of agreement. Such letters are legally binding and usually more comprehensible than the typical formal contracts we often see.

In this article, we'll provide an overview of the key elements of most employment agreements for new ophthalmologists. This is not a comprehensive review, but it should provide you with a good idea of the broad contractual issues that will be involved in your employment agreement.

Employment Term

Your employment agreement should clearly show the length of time you will be employed by the practice, typically 1 to 3 years. Employment may be contingent upon certain requirements, such as:

■ Gaining staff privileges at the practice's hospitals and ASCs

■ Being accepted into the practice's major payor programs

■ Obtaining appropriate state and DEA licenses

■ Qualifying for malpractice liability insurance coverage.

The agreement may explain that your employment is "at will," which means either party may end the employment whenever it wishes, with a notice period specifically set. Notice periods typically run from 30 to 90 days — the longer the better for you.

Most employment agreements also will allow the practice to fire you immediately under certain "for cause" circumstances, which supersedes the "at will" notice provision. These are usually egregious specific situations, such as loss of license or hospital/ASC privileges; suspension, exclusion or other sanction from or under Medicare/Medicaid or similar programs; ineligibility for standard premium professional malpractice insurance coverage; conviction of a felony or other crime; or divulging confidential patient information.

However, the agreement also may include less specific (and, for you, less desirable) "for cause" situations such as dishonesty; refusal to follow direction; and a general termination "for (any other) cause." Be sure these "for cause" situations are specifically and unambiguously enumerated so they don't become the basis for your arbitrary firing. Finally, it's not unusual for the agreement to automatically terminate in the event of your death or disability (usually after a period of 90 to 180 days).

Some agreements will specify an evaluation period. It would be in your best interest to have your performance compared with specific criteria and objectives stated in the agreement, particularly if the evaluation will relate directly to an eventual offer of co-ownership. Typical criteria include: commitment of time and energy to the practice; level of productivity, efficiency and overall contribution to the practice; and interest in the practice from an entrepreneurial standpoint. Interpersonal factors also could come into play, including your relationships with other practice doctors and staff, as well as your ability to earn the confidence of patients and referrers.

Compensation

The employment agreement should plainly spell out the total compensation you'll be paid annually for the entire term of your employment, including base salary and any incentive or other bonus arrangements the practice has offered. A $10,000 to $15,000 annual increase in base salary is typical for each subsequent year of employment.

Incentive compensation provisions are typical and can be an important part of your total compensation arrangements. An often-used incentive is to pay you a percentage of the gross income the practice collects for the professional services you generate in excess of two to three times the practice's cost to employ you. For example, if your base salary is $140,000, you might be entitled to an incentive compensation bonus of 25% of actual collections for your services in excess of $350,000 ($140,000 times 2.5). (For more on incentive compensation, see "Career Coach" in this issue.)

The practice also may pay you a discretionary bonus based on a subjective assessment of your overall contribution to the practice's success. Such bonuses give you the least control over your incentive bonus.

Some practices may not offer any incentive pay or regular bonuses, but this doesn't automatically make them poor opportunities. If the practice is an appealing long-term opportunity for you, then an appropriate salary can be a sufficient inducement to join that practice. Once employed, your goal of building the practice in order to be promoted to co-ownership could be sufficient motivation.

Business Expenses

The practice generally will pay most of your employment-related general business expenses. You simply need to make sure there's a clear understanding of what the practice will pay for and what it won't pay for. These should include your professional liability (malpractice) insurance premiums; professional society dues; professional journals, books and subscriptions; hospital staff fees; professional travel and educational costs; and sometimes, work-related automobile expenses. Regarding the other business expenses, the practice may cap these expenses (we recommend $1,500 to $2,500 per year) or require advance approval.

Most practices will pay the entire cost of your malpractice insurance. If the practice's malpractice policy is maintained on a "claims-made" basis, however, one of the most important issues specifically and clearly to agree upon is whether the practice will pay for your "tail" coverage.

The tail covers any claims brought after the period covered by the claims-made insurance. Typically, the tail becomes due if you leave the state or the area or if you change professional liability carriers. Who pays the tail is important because it can be quite expensive. Many practices try to make the new ophthalmologist responsible for at least one-half of the tail cost. From your perspective, it's best to have the practice pay much (at least one-half) or all of the cost for the malpractice tail coverage.

Fringe Benefits

Regarding fringe benefits, once again, you need to ensure there is a clear understanding of what the practice will pay for and what it won't pay for. Your fringe benefits should be listed within your employment agreement, as they often will have been trade-offs for the salary on which you and the practice agreed.

Most group practices offer a range of fringe benefits to its employee-doctors, including: basic health insurance for you (and usually for your family); group term life insurance; coverage under the practice's retirement plan(s); and perhaps disability insurance.

If the practice has a retirement plan, the employment agreement should briefly acknowledge when you'll become eligible to participate and perhaps even explain how contributions to the plan are made. Depending upon the retirement plan's eligibility provisions, any contributions the practice makes to the plan may be in addition to any salary increase you receive after your first or second year of employment.

Paid Time Off

During your first year of employment, 2 to 4 weeks of paid vacation time is a typical range. One additional week of paid time off is generally provided for professional education, professional society meetings or to take board examinations. These weeks may be combined into total paid time off. The amount of paid vacation and professional time off usually increases with the length of employment; however, these periods are almost always less than what an owner is entitled to.

The employment agreement also should explain in detail how much sick pay you will receive during each year of employment. Five to 30 days of paid absence for illness or disability is a typical range. At a minimum, pregnancy-related leave must be treated as any other disability under the practice's sick and disability leave policy, although state and local laws may provide for even more leave. 

Non-Solicitation Covenant

Regardless of whether or not the employment agreement you sign contains a restrictive covenant (for more on this topic, see "Understanding Restrictive Covenants," March 2006 new Ophthalmologist), your employment agreement likely will include a separate non-solicitation covenant. The purpose of a non-solicitation covenant is to prevent you from soliciting the practice's patients, referral sources or contractual arrangements before or immediately after your employment with the practice ends. A non-solicitation covenant is usually in addition to, not instead of, a restrictive covenant. It's meant to prevent you from soliciting the patients you've seen in practice even if you've moved beyond the geographical limits contained in the practice's restrictive covenant.

If you violate the non-solicitation covenant, the practice may try to obtain an injunction against your continued solicitation of its patients, and it will likely also seek liquidated (or actual) damages for the harm your solicitation already may have done. The practice should specify its chosen remedy within the employment agreement.

Future Co-ownership

We recommend that your employment agreement include an outline of the buy-in, income division and future co-ownership arrangements. Look for at least a broad outline of the process and factors the practice will use to evaluate your potential for co-ownership. Such a future co-ownership provision may even refer to the evaluation criteria discussed under "Employment Term" in this article. It also should include a specific date by which the practice will initiate co-ownership discussions, and another date by which the practice's current owners will make a firm decision about offering you co-ownership.

General co-ownership terms should include:

■ An explanation of how the price of an equity interest in the practice will be determined

■ The formula to be used to set the equity interest dollar value.

■ How much of an equity interest you are to purchase.

In addition, if part of the buy-in is to be accomplished on a pre-tax basis, the future co-ownership provision should specify the rough details of how your share of practice income will be discounted during the initial period of co-ownership.

Strike a Balance

Your written employment agreement should clearly and unambiguously deal with all the pertinent details of your employment relationship with the practice. After all, it will be the underlying basis for a long-term, productive and successful work ar-rangement that could lead to co-ownership. Your employment agreement should properly recognize and balance your legitimate needs and interests as the employee-doctor, while also protecting the practice's legitimate needs, interests and investment in you.

The authors are principal consultants with The Health Care Group Inc. and principal attorneys with Health Care Law Associates, P.C., both based in Plymouth Meeting, Pa. You can reach them at (610) 828-3888 or jgallagher@healthcaregroup.com; mkrop@healthcaregroup.com