By Alice G. Gosfield, Esq. and Daniel F. Shay, Esq., November 02, 2015
When it comes to contracts, many physicians do not see eye-to-eye with lawyers. Especially after going through the process of applying for and interviewing for a job, a physician may see his or her employment contract as one last annoying obstacle to getting back to practicing medicine. Alternatively, that physician may simply be grateful to be working again in an environment with likeminded colleagues, and may not want to “poison the well” by bringing lawyers into the process.
If you ask them, however, most lawyers will tell you that your employment contract is meant to establish a “meeting of the minds” — a common understanding — of what each side’s respective duties and obligations are for the duration of the contract. Given that this document will, in essence, control your livelihood for the foreseeable future, most lawyers would advise that you (1) understand what your employment contract says, and (2) ensure that the contract accurately reflects what you have agreed upon during negotiations. By reading the contract yourself and obtaining a legal review of the document, you can save yourself considerable headaches in the future.
This article discusses several common clauses in physician employment contracts. It addresses their legal and practical significance, and offers advice on how to negotiate.
Term and termination
When reviewing a contract, one of the best places to start is the “end” of the contract: specifically, the language controlling the contract’s term and how the contract may be terminated. The term, or length, of a typical physician employment agreement will usually be anywhere from one to five years; for this period of time, the written document will control. At the end of the term, the contract may automatically renew (also known as an “evergreen” provision) unless the parties give notice of their intent to terminate, or it may simply terminate upon reaching a given date (e.g., the third anniversary of signing).
An automatically renewing contract means the parties need do nothing further. The contract will continue for however long the “renewal term” is (which may be an additional year, or longer). The benefit of this type of renewal is reduced hassle; if all parties are satisfied with the arrangement, they can continue as before. By contrast, a contract with a fixed duration, which terminates at the end of the term, will require negotiating to either renew the existing contract, revise it, or adopt a new contract. This approach may be more burdensome, but by forcing the parties to come to the negotiation table, physicians who can exert leverage may be able to gain more favorable terms going forward. In either case, a physician should pay close attention both to the date on which the contract will terminate or automatically renew, and on how much advance notice they must provide of their intent not to renew (if they wish to terminate or renegotiate).
Termination may occur in several other ways. Any contract may be terminated for breach. What constitutes a breach, however, may be contained both within the termination clause itself, and scattered throughout the remainder of the contract. For example, the termination clause may address specific grounds for termination (e.g., loss of licensure or DEA certification, expulsion from Medicare or other federal health care or third-party payer programs, etc.), but the termination section may also reference “material breach,” which means that any significant breach of the employee’s duties could result in termination. Some breaches will offer an opportunity to cure within a set amount of time (often, 30 days), while others will offer no opportunity to cure. Still others may result in “automatic” termination, meaning that the occurrence of the triggering event actually terminates the contract, as opposed to the contract terminating upon notice. These are particularly troublesome, since the employer ought to at least notify the employee of the termination.[pagebreak]
An employment contract may also allow for termination “without cause,” meaning that the contract may be terminated for no reason. Typically “without cause” termination language requires advance written notice, usually of anywhere between 30 and 180 days. These clauses may be mutual, allowing both the physician and the employer to terminate without cause, or unilateral, allowing only the employer to terminate without cause. Ideally, the contract will allow for mutual without cause termination. Mutual without cause termination language offers a physician flexibility, albeit at the potential cost of job security. On the one hand, under such a clause you may terminate without breaching the contract if your spouse is transferred across the country. On the other, your employer may terminate you one day shy of the previously-agreed-to date on which you would have made partner.
After termination, one of the most impactful clauses of a physician employment contract is the restrictive covenants. These sections often contain three types of restrictions that survive after termination of the contract: (1) business confidentiality, (2) anti-solicitation, and (3) non-competition. Business confidentiality language restricts the physician’s ability to disclose business-related information following termination, such as terms of managed care contracts the practice may have negotiated, details of arrangements with vendors and suppliers, and internal business methods, practices, or trade secrets.
Anti-solicitation language prohibits activities such as approaching former employees, patients, referral sources, or other contractors and attempting to lure them away to the physician’s new practice. These types of clauses do not, however, prohibit these entities from seeking out the physician’s new practice on their own; rather, they prohibit the physician from actively soliciting them to change their allegiance.
Non-competition clauses generally prohibit physicians both from investing in and working for competitors, or from establishing their own practices in competition with the former employer. Not every state considers such language enforceable, however. California, for example, has laws that generally prohibit such restrictions in employment contracts. Moreover, even in states that do permit them, to be enforceable, these types of restrictions must usually be limited in geographic scope, duration, and the type of services they prohibit. For example, a geographic scope of 10 miles might be enforceable in a rural setting, but not in an urban setting (where a one to five mile restriction might be more enforceable). Likewise, a 10-year restriction is unlikely to be upheld, whereas most courts will enforce a one to three year restriction, depending on the law of the jurisdiction.
Lastly, consider the difference between a restriction on “the types of services provided by the physician,” “the types of services provided by the practice,” and “the practice of medicine” in terms of restrictions on services. The first, for example, would be more favorable to a physician in a multi-specialty practice; even if the physician is dual-boarded in different specialties, the physician would only be prohibited from performing those duties performed during the contract. By contrast, the second restriction would prohibit that physician from performing any of the services that the practice provides, even beyond what the physician performed during the contract. The third variation is the broadest, restricting any practice of medicine within the applicable geographic territory. [pagebreak]
Other post-termination obligations
In addition to the restrictive covenants, physicians should pay close attention to other clauses that survive termination. Three of the most important are: (1) malpractice insurance, (2) post-termination records access, and (3) indemnification.
Most employers provide malpractice insurance to their employed physicians. It is, after all, in the employer’s interest to ensure that the physician has malpractice insurance. However, many employers do not provide occurrence-based coverage, given how expensive it can be. Instead, they usually provide claims-made coverage, which raises the question: who is responsible for tail insurance when the contract terminates? In many cases, the employer will provide this as well. However, in some instances, the employer will not provide tail insurance if the employee was fired for cause, and in some cases if the employee terminates without cause. Considering the expense of purchasing tail coverage for oneself, physicians should be wary of such clauses.
Related to malpractice coverage, in the event that a physician must defend themselves in a malpractice lawsuit, or respond to a payer audit, that physician will need access to records of the care they provided and services billed in their names. Accordingly, the contract should include language that grants the physician access to such information, including the ability to make copies (usually at the physician’s own expense). Most likely, this language will include a requirement that the physician obtain the records during regular business hours, and upon reasonable notice.
Indemnification generally means that the indemnifying party agrees to pay for the damages imposed on the other, indemnified party, in the event that the indemnifying party is to blame. Indemnification does not mean that the indemnified party is protected from being sued in the first place. Legally, the indemnified party is still liable for the damages, but the indemnifying party promises to pay for those damages that it caused. Many physician employment agreements have the physician indemnify the practice for his or her errors, omissions, gross negligence, and/or willful misconduct. Some agreements make this language mutual, meaning that the practice also agrees to pay for the physician’s damages if the physician is sued for the practice’s errors, omissions, etc. In most employment contexts, the practice will submit claims for services on behalf of the physician. The physician will not personally perform the coding for his or her services. In such circumstances, the practice should indemnify the physician specifically for the practice’s errors in any coding or submission of claims for services. [pagebreak]
In addition to addressing what happens after a contract terminates, and how that termination can occur, the contract should clearly state what each party’s respective duties are. This may happen with varying degrees of specificity. If a contract is extremely specific and precise in its requirements, then it may not be flexible enough to permit deviation from those requirements. If the contract is too vague, then the parties may not have a mutual understanding of what is expected.
To put this into context, consider the following language:
“Physician shall be required to work a minimum of forty (40) hours per week, in the performance of Physician’s clinical duties. Physician shall also be expected to participate in such administrative activities as Employer directs from time to time.”
At first glance, this language may appear to be perfectly reasonable. But closer inspection reveals several problems. Assuming for the moment that the physician’s clinical duties are clearly defined elsewhere in the document, this language does not state: (1) whether the employer expects the physician to perform the 40 hours according to a specific schedule, or if the physician may set his or her own schedule; (2) how many hours the physician will be expected to spend performing administrative tasks; nor (3) what types of administrative tasks the physician may be assigned. By contrast, a clause that specified the physician must work specific hours on specific days could limit the physician’s flexibility with respect to scheduling.
Another concern relating to the specificity of contract language regarding duties arises when considering the fact that the party with whom the physician may have initially negotiated the agreement could leave the practice at some point in the future. If, for example, the president of a group steps down and a new individual with no prior relationship with the physician becomes president, that new president may have no knowledge of the negotiations and mutual understanding that the physician had with the former president. Ideally, the employment contract will be drafted with enough specificity that a new party will be able to review it and understand the requirements of the relationship, but also with enough flexibility that the parties can adjust to day-to-day realities.
“Represents and warrants”
Some contractual provisions may state that a party “represents and warrants” something. For example, physician employment contracts often state that the physician “represents and warrants” that he or she is currently licensed to practice medicine in the state(s) where the employer operates, has a current DEA certification number, or has never been terminated from participation in a private or governmental health insurance program.
Representations and warranties are promises the parties make to each other which act as an inducement to the other party to enter into the arrangement in the first place. In other words, if a representation and warranty was not true, the other party would never have signed. If a party breaches a representation and warranty, and the non-breaching party is harmed, the non-breaching party may be able to obtain punitive damages against the breaching party. [pagebreak]
As a result, physicians should make absolutely certain that any representations and warranties they are required to make are true in every single respect when signing an employment agreement. If the contract says that the physician represents and warrants that he or she “has a valid license to practice medicine in [state],” it means the physician must currently have such a license. A physician who has just moved to the state and has not had time to obtain a license should therefore request that the language be revised to read that the physician “has, or will obtain within [number] days, a valid license to practice medicine in [state].”
“Incorporated by reference”
The phrase “incorporated by reference” may appear at first glance to be just more legalese. However, when a physician sees this language in a contract, pay close attention. This language is used to take documents that are external to the employment contract itself and make them legally a part of the contract. In other words, whatever is “incorporated by reference” becomes just as legally binding as the main body of the contract itself.
The types of documents that are “incorporated by reference” can vary. In some cases, it merely refers to exhibits or addenda that are physically attached to the contract. In others, however, it may refer to employee handbooks or policies, medical staff bylaws, manuals, and other documents which may or may not have been physically provided to the physician along with the contract. For example, in many employment contracts with hospitals or academic medical centers, the contract itself may be relatively brief, but also incorporates by reference a host of other documents, and the contract may merely provide a Web address where the physician can download copies of such documents.
Physicians should review any documents which are incorporated by reference prior to signing the agreement. Likewise, the agreement should explicitly “represent and warrant” that such documents have been provided to the physician before signing. In some cases, given the volume of these documents, the physician may be better served by reviewing them first, and then asking an attorney for clarification or advice regarding any provisions the physician did not understand or found problematic.
Practical advice in negotiations
Whether there is much room for negotiation depends on context. Depending on how badly the employer wants to hire the physician, the physician may be able to negotiate for more favorable terms. In very large groups, there may be little flexibility. In smaller groups the stance may be “We all signed it, and you should, too.” However, even in circumstances where the employer claims “We never modify our agreements for anyone,” physicians should understand that they may still be able to make changes.
Most employers will not object to a physician asking for clarifications of contractual language; this will not “kill the deal.” An employment contract may have been through multiple rounds of edits, which may have resulted in missing language, typos, or other errors. When these problems are pointed out, most employers will correct them. Similarly, if the language in a clause does not clearly convey what the parties understand, illustrating the ambiguity by raising an alternate interpretation may convince the employer to change the language to make it clearer, especially if that interpretation could cause problems for the employer.[pagebreak]
Likewise, if the parties previously agreed to something that was not added to the agreement, most employers will revise the agreement to reflect what was promised. For example, if the physician was told that the employer would pay up to $10,000 for moving expenses, but that does not appear in the agreement, most employers will revise the document accordingly. Likewise, if an employer agreed that the physician would only have to work a particular schedule (e.g., no weekends, and no weekdays after 5:30pm), the employer will likely revise the agreement if it says otherwise.
When it is time to negotiate, a physician may choose to conduct negotiations personally, or may have a lawyer do so. There are pros and cons to either approach. Negotiating personally can be less expensive, but the physician may not be comfortable with the process. Paying a lawyer to negotiate can sometimes be more efficient, and can make the process less personal or emotionally charged. Another option is to ask the lawyer to write a letter that the physician can give to the employer, outlining recommendations and requests for changes or clarification.
Employment contracts are meant to establish a mutual understanding of the physician and his or her employer’s duties and rights during employment. As such, they are a critical aspect of the practice of medicine. Physicians need to understand what their employment contracts say, and how such contracts will affect their daily lives. However, employment contracts can be complex, confusingly worded, and often contain jargon unfamiliar to even the most legally savvy physician. Hiring a lawyer to review and explain what is in the contract can help.
These sections often contain three types of restrictions that survive after termination of the contract:
- business confidentiality,
- anti-solicitation, and
Physicians should pay close attention to other clauses that survive termination. Three of the most important are:
- malpractice insurance,
- post-termination records access, and
“incorporated by reference”
The phrase “incorporated by reference” may appear at first glance to be just more legalese. However, when a physician sees this language in a contract, pay close attention.
This language is used to take documents that are external to the employment contract itself and make them legally a part of the contract.
In other words, whatever is “incorporated by reference” becomes just as legally binding as the main body of the contract itself.