The modern employment agreement

Legally Speaking

Daniel F. Shay
Alice G. Gosfield

Daniel F. Shay, Esq. and Alice G. Gosfield, Esq., are health care attorneys at Alice G. Gosfield and Associates, P.C.

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In view of the many changes in the dynamic health care landscape, a topic worthy of reconsideration is the physician employment agreement. Whether from the perspective of the employer or the employee, the traditional barebones employment agreement which states a term, simple bases for termination, compensation, malpractice insurance coverage, benefits provided by the employer, and perhaps a restrictive covenant, may not fit the challenges of the new environment. This article presents some new issues that are now included in the modern employment agreement. It does not address long-standing issues that have not really changed, such as the use of restrictive covenants and their scope and enforceability.


Traditional employment agreements might require the employed physician to practice within the standards of his specialty, have specified office hours, and take call. The modern employment agreement addresses the obligations to supervise other personnel such as non-physician clinicians, effectively document both for claims submission as well as medical necessity, and code services properly for reimbursement.

Requiring the employee to utilize approved referral sources can be important, especially as preferred networks emerge among providers who are collaborating with each other, whether within an ACO, a bundled payment model, or simply to enhance desired relationships. The requirement that the employee participate in appealing claims denials or utilization review decisions is sometimes included. As patient satisfaction becomes a stronger factor both for physician inclusion in networks and sustaining the practice, some agreements specify how quickly patient communications must be returned — whether electronically or by telephone.

Younger physicians are increasingly concerned about quality of life issues, so they may want greater specificity regarding their work hours, and, if administrative duties are included in the employer’s expectations of them, the balance between clinical time commitments and administrative time commitments.

Term and termination

In the olden days, many employment contracts stated that they addressed an “at will” relationship, which meant that the employee could be terminated at any time. Today, younger doctors want more certainty about their futures. Not only are they looking for some security in terms of tenure, they also want to know when they can expect to be considered for an equity stake in the group. How much notice the employee must give if he terminates without cause is also an issue. Employers generally like a longer time in order to be able to make arrangements to replace the employee, but they then have someone in the group who is dissatisfied in some way. The employee wants a balance between security and flexibility if things don’t go as planned. Some agreements say nothing about the employee’s right to terminate without cause, but these are increasingly unusual; with many dual-professional families, the employee’s life may change for reasons not entirely in his control.[pagebreak]

The traditional employment agreement provides for termination by the employer with or without cause, with some bases for cause providing the employee an opportunity to cure the breach or deficiency. Traditional grounds for termination for cause were loss of license, or DEA or board certification, loss of clinical privileges at a hospital, inability to obtain malpractice insurance at rates comparable to other physician employees, and breach of a provision in the agreement. More modern agreements list a litany of bases for termination for cause, including:

  • being charged with a criminal act,
  • engaging in fraud, misappropriation, embezzlement, or theft,
  • engaging in actions which endanger a patient or others,
  • being intoxicated while on duty, or becoming addicted to drugs or alcohol which interferes with the ability to perform, and
  • failing to work harmoniously with others in the group.

Traditional agreements require the employee to comply with the employer’s standards with little reference to what those standards are. The modern employment agreement requires adherence to the employer’s compliance programs, documentation standards, HIPAA privacy and security rules, rules regarding disruptive physicians and sexual harassment, social media policies, and more. In practices which have adopted clinical practice guidelines and other standards of performance, failure to conform with these principles can also be grounds for termination. Of course, such provisions are only meaningful if the practice has actually adopted such programs and standards. The more clinically integrated and standardized the processes within the group, the clearer the standards are. (For a Clinical Integration Self Assessment Tool, see Clearly articulated standards eliminate ambiguity for the employee about expectations and culture. They give the employer a solid foundation on which to take action if there are problems.


The traditional employment agreement stated the salary the physician should expect, and, if the agreement was for multiple years, how the compensation would increase. Over time, many agreements came to include productivity measures — after the physician had been with the group for a period of time — including percentage of revenues generated above a floor, and later to include wRVU expectations. In today’s world, there are additional sources of revenues to a group including bonuses for computerized physician order entry, meaningful use of electronic health records, PQRS dollars (which will soon be penalties if physicians do not report), commercial pay for performance bonuses, and soon Medicare’s value-based payment modifier. These are rarely addressed in the employment agreement, but increasingly ought to be, in terms of whether they are paid to the physician individually or are retained by the group to sustain the whole. How in-office ancillary services revenues are allocated, such as those from in-house dermatopathology, is an issue to be addressed.

In larger groups, the employee’s initial compensation is addressed in the agreement until he achieves shareholder or partner status. Then the compensation can be as established in the group’s compensation plan which can be modified to meet changing needs. More and more, physician compensation in groups turns on quality performance and measurement. How these compensation programs develop and evolve will be a challenge for all the employed physicians, including shareholders.

In dermatology, often there are cash payments for cosmetic procedures and for products the practice sells to customers. How these are handled is increasingly addressed as well. Still further, as the reimbursement environment puts more emphasis on value over volume of services, compensation based on wRVUs can incentivize undesirable behavior, including providing unnecessary services as well as upcoding. This raises several additional issues to include in the employment agreement, including the right of a group to subject the employee’s claims submission and medical records to audit, including by a third party, and to require remediation if necessary. In addition the employer should state the right to not submit claims which have been evaluated as medically unnecessary or not sufficiently documented prior to submission. Finally, if the practice is audited and repayments must be made, the agreement should state the right to withhold a pro rata share of payment from the employee if he or she contributed to the problem, even post termination, since audits can occur years after the claims were paid.[pagebreak]

Reassignment, billing, and collection

In order for the employer to be paid directly for the services of the employee, the employee must sign a form that “reassigns” to the employer the employee’s payments from third-party payers. In Medicare, reassignment requires that both the employer and the employee retain liability for overpayments made. This means that both will be accountable for an overpayment found by any of the increasing numbers of auditors who review physician records. The modern employment agreement not only provides for reassignment, but sets forth that the employer is relying on the employee’s accuracy of coding and documentation in submitting claims. Because the agreement typically provides that all revenues belong to the employer and the employer controls the submission of claims, the employer should expect the employee to want to be indemnified against any expenses that might arise out of the employer’s negligence in submitting claims. In addition, Medicare requires that the employee have access to all claims submitted on his behalf during the term of the agreement. Because audits can occur after the employee leaves the practice, in today’s world this provision is made to survive termination of the agreement.

While payment for the employee’s professional services is almost uniformly stated to be the property of the employer, groups vary as to how they handle outside income. Some allow no outside income or activities. Some take the position that witness fees, lecture fees, expert reviews, royalties and any other monies the employee generates by virtue of being a doctor belong to the group. Other groups take the position that as long as other work is done outside of the time demands of the practice, the employee can keep outside monies. As conflicts of interest are increasingly seen as a problem in medicine, though, some employers condition outside work on prior approval and reserve to themselves the right to reject the employee’s serving as an expert witness, for example, in a malpractice case, or taking money from industry for any of a wide range of activities.

Representations and warranties

Representations and warranties are an inducement to the other party to enter into the contract; if they are breached and the aggrieved party is harmed, punitive damages are sometimes available because the breaching party engaged in fraud in inducing the other party to enter into the agreement. In the modern employment agreement, representations can flush out potential problems and protect the employer from problems stemming from the employee’s other relationships. For example, the employer today often wants a representation that the employee is not subject to a restrictive covenant that would impair his ability to serve the employer because the employer itself could be sued for interference in a contractual relationship if the employee has not cleanly exited his prior employment. Rather than investigating a potential employee, an employer can ask him to represent that he has never been a defendant in a malpractice case, has never had his clinical privileges restricted or revoked at any institution, has never paid civil money penalties to Medicare or Medicaid, and has never lost his license or DEA registration.[pagebreak]

Other provisions

Increasingly employment contracts address the business confidentiality of the employer, precluding the employee from using any information that would not otherwise be considered public for any reason other than to fulfill the obligations of employment. Confidential information includes payer contract terms, price lists and fee schedules, referral sources, marketing techniques, and patient lists. While the medical records typically are stated to belong to the employer, the employee will need access to them, even post-termination, for an audit or malpractice action. Some employment contracts now address how notification to the public will be made if a physician leaves the practice. In other words, they will say that an advertisement in a local newspaper is fine, but sending a note to each of the physician’s patients is not.

Some employment agreements provide for dispute resolution, either informally within the group or formally, with reference to arbitration rather than going to court. With the dynamism in health care, modern contracts often also include a change of law provision which allows changes if the law changes, such as on what constitutes permissible compensation within groups under Stark. These provisions sometimes also include allowing modifications if there is a substantial change in the financial context of the practice, as might occur if Medicare will no longer pay for dermatopathology in a dermatology practice.

The boilerplate provisions at the back of the contract are frequently overlooked by physicians, but they have real meaning. For example, a waiver of breach provision says that if one party breaches and the other person does not take action, then if he breaches again he can’t say, “Well you didn’t do anything about it the first time so you can’t raise that as an issue now.” The provision on amendments being signed by both parties is an important discipline for the employer and the employee, assuring that both understand the continuing basis for their relationship. Because employment is a personal relationship, the employee is almost never permitted to assign the contract to someone else, but as groups merge and change, the employer may want to require the contract to be assignable to a successor company.


The employment context for physicians has changed over time and is still changing. The barebones employment agreement which is little more than a paper handshake can still work, since the real test of an agreement is the culture within which it is implemented. The employment agreement itself does not determine a successful employment relationship but as the world within which it sits becomes more complex, the employment agreement can certainly serve the dual purposes of helping the parties understand their intentions at the outset, and giving them good guidance on how to terminate if things don’t work out.