Healthcare employers (whether a hospital or private practice (each generally, for purposes of this bulletin, an “Employer” or collectively, “Employers”)) on one hand, and physicians, on the other hand, share the common goal of providing top-notch patient-care services, but their respective business interests do not necessarily align. Given that Employers are interested in protecting the entity (and the physician owners) and physicians are interested in securing employment and certain rights, an Employment Agreement is likely the foundational document that will govern the relationship between an Employer and physician. In fact, Employment Agreements are commonly utilized with physicians at all stages of their careers—from physicians first entering practice to more senior physicians (including physicians whom are owners of their professional entity)—although the specific terms may vary based on the specifics of the relationship. As an Employment Agreement outlines the duties, compensation and restrictive/binding terms that govern the employment relationship, the parties should fully understand the terms and provisions contained within the Employment Agreement and the Employment Agreement should clearly memorialize the parties’ negotiated terms.
At a high level, the period prior to the entry into an Employment Agreement between an Employer and a physician can generally be categorized into the following phases: i) the recruitment period during which the Employer provides basic information to a physician about the potential position and the Employer (and its staff) become acquainted with the potential physician on a personal level; and ii) the negotiation period during which the parties discuss specific terms of the employment relationship and negotiate/refine the Employment Agreement. Once the terms of the Employment Agreement are finalized, the final Employment Agreement will govern the legal relationship between the parties. In connection with the foregoing process, the parties must fully explore nuances of the relationship to clearly identify and memorialize each party’s expectations about the employment relationship. If the parties fail to fully understand the terms of the Employment Agreement or the terms of the Employment Agreement do not reflect the parties’ discussions, once the Employment Agreement is executed, the parties may realize that they have diverging understandings and the employment relationship may suffer and even fail. Although the parties are particularly interested in the terms of the relationship during the term of the Employment Agreement, they must also consider how the Employment Agreement may be terminated, impacts of termination, and any provisions addressing the post-term period.
Although there are many different nuances that are related to the negotiation and drafting of an Employment Agreement, this bulletin will focus on some considerations (although certainly not exhaustive) that could be applicable in connection with the parties’ exploration of an employment relationship:
1. Initial Discussions. As mentioned above, the initial discussions between an Employer and physician are an important step in identifying each party’s expectations regarding the employment relationship. Failure to understand the other party’s expectations at an early stage can result in the parties discontinuing discussions (and failing to execute an Employment Agreement) after potentially devoting significant time and resources to the process. Thus, it is important for the parties to discuss, at an early juncture, the compensation package (both base compensation and any incentive compensation), duties (clinical/administrative), productivity requirements, benefits, locations at which the physician will be expected to work, malpractice terms, vacation policies, continuing medical education policies, restrictive covenants, call coverage obligations, physician-specific requests, etc. Moreover, it is important for the Employer to fully understand the physician candidate’s experience, education, and practice preferences in order to determine whether the Employer is able to accommodate the physician’s specific requests. Thus, during the initial discussion phase of the recruitment process, each party has an opportunity to express must-have requests and work through potential expectations and disagreements. The parties will also obtain valuable insight into how the Employer operates and how the physician may fit in the Employer’s environment.
2. Letter of Intent. After the parties explore the employment terms, some Employers present physicians with a Letter of Intent that outlines some of the key employment terms. Although a Letter of Intent is not utilized in all recruitments, some Employers desire to present a Letter of Intent to a recruited physician to detail some of the proposed employment terms (and omit the legalese that is typically found in an Employment Agreement) as the Employer desires to obtain the physician’s acceptance of the proposed terms prior to incurring the expense of preparing an Employment Agreement and devoting additional time toward negotiations if the parties are not on the same page regarding the employment terms. However, although a Letter of Intent can be structured to be both binding or non-binding, each party should consult with healthcare legal counsel prior to executing a Letter of Intent (even if the Letter of Intent states that it is non-binding).
3. Employment Agreement. Employers commonly structure Employment Agreements to: i) have broad rights under the terms of the Employment Agreement; and ii) create harmonious terms across the various physicians’ Employment Agreements. Physicians, on the other hand, desire to have the Employment Agreement reflect the parties’ discussions and incorporate specific terms. Thus, during the negotiation phase, the parties will determine whether each party is amenable to incorporating specific language to reflect the parties’ understandings and nuances governing the relationship. The following are high-level contractual considerations in connection with the parties’ entry into an Employment Agreement:
a. Compensation. Compensation is generally the first topic that the parties discuss and will be based on the types of services being performed (for instance, is the physician’s duties solely clinical in nature, will the physician perform any administrative tasks, will the physician be responsible for any teaching, will the physician conduct any research, etc., which should also be clearly detailed in the Employment Agreement). Once the compensation is determined, from a contractual stand point, each party will need to consider how such compensation might be impacted by scheduling issues, any audit/clawback/overpayment obligations, billing issues, productivity shortfalls, termination, etc. Such nuances (and others) may impact compensation, and as such, the compensation needs to be considered based on the entire Employment Agreement. Additionally, during the term of the Employment Agreement, the parties should consider whether the physician be eligible for any increases in compensation or ownership opportunities, and if so, pursuant to what schedules. Given the regulatory considerations surrounding compensation arrangements, the compensation should be reviewed to ensure that it is consistent with fair market value and is commercially reasonable. The respective parties may consult a third-party valuation consultant or review third-party sources, such as Medical Group Management Association (“MGMA”) or other similar survey companies.
b. Term and Termination. The term of the proposed Employment Agreement is inextricably related to the parties’ termination rights. For instance, if an Employment Agreement states that it has a three (3) year term but the parties have certain bases to terminate, the actual term could be much shorter. Thus, when considering the term of the Employment Agreement, the parties should carefully consider the termination rights. In general, an Employment Agreement can be structured to be terminable: i) without cause (for any or no reason) upon the provision of a defined notice period (or at-will, without advanced notice)); ii) for cause, if a material breach of the Employment Agreement is not cured within a certain period of time; and/or iii) for cause, for certain non-curable events (e.g., the physician loses his/her license to practice medicine, is excluded from participation with federal or state payors, etc.). The parties should carefully consider the termination rights and obligations as a termination of an Employment Agreement can impact other components of the Employment Agreement.
c. Benefits. In addition to compensation, it is important for the parties to consider the benefit package the Employer provides to employed physicians, as it will be important in the parties’ analysis of the physician’s proposed compensation package and Employer’s analysis of the physician’s cost center. Some of the benefits that an Employer may provide to physicians include the following: health insurance (medical, dental, and/or vision), professional liability insurance, disability insurance, life insurance, retirement plans, etc. Moreover, the parties should discuss whether the Employer provides a CME stipend, reimburses for any business-related expenses, etc.
d. Professional Liability Insurance. The parties should discuss the terms of the professional liability insurance policy, the type of policy (occurrence based or claims-made), and the limits of such policy. Due to the different types of professional liability insurance that are available (occurrence based or claims-made), the physician will need to understand whether the physician will need to obtain tail or nose insurance following the physician’s prior employment and consider whether the physician will need tail insurance following the physician’s employment with the new potential Employer. Additionally, the parties will need to discuss which party will pay for any necessary tail upon the physician’s discontinuation of services with the potential Employer. It is possible to structure the payment of tail policy costs based on how the Employment Agreement is terminated or whether the Employment Agreement naturally expires.
e. Restrictive Covenants. Provided that a covenant not to compete complies with applicable law, a covenant not to compete can restrict a physician’s ability to practice within a certain territory, for a certain period, and for other defined terms. From the Employer’s perspective, the Employer wants to restrict the physician from competing against the Employer during and following the physician’s engagement. Conversely, the physician is interested in maintaining freedom to perform professional services following the expiration or termination of the Employment Agreement and knowing the exact bounds of the non-compete (i.e., does the restriction apply to certain offices, or any office developed in the future). Thus, a covenant not to compete is a delicate provision and topic and the Employer’s decision to include a non-compete may impact the Employer’s ability to recruit a physician. Moreover, an Employer’s inclusion of a covenant not to compete at a late juncture in the negotiation process (if it was not discussed early in the negotiation process) can also disrupt an otherwise successful negotiation. Contrary to many physicians’ statements that covenants not to compete are not enforceable, covenants not to compete can be enforceable in Michigan if they satisfy certain reasonableness standards. Moreover, other types of restrictions—such as non-solicitation, non-disclosure, or non-interference—may be included in an Employment Agreement. Thus, given the restrictive nature of such covenants, the parties should carefully review the terms to ensure a mutual understanding and agreement prior to agreeing to such terms.
4. Summary. Employers and employed physicians are well advised to thoroughly explore the employment relationship during the recruitment and negotiation process and memorialize any agreed upon terms of the arrangement in the Employment Agreement. In fact, failure to memorialize any discussed terms (or promises) into the final Employment Agreement will likely result in such terms (or promises) not being binding on the parties as the final executed Employment Agreement will likely contain language that it supersedes any previously discussed/written (but not included) terms. Thus, it is important for the Employment Agreement to contain all binding terms of the relationship. While both parties desire to have a successful and respectful working relationship where they do not need to consult the terms of the Employment Agreement, it is imperative that the Employment Agreement expressly detail the parties’ obligations (in the event the parties need to consult the Employment Agreement if a party is not abiding by such party’s obligations) and also include provisions that address termination rights and related obligations. Thus, although the employment relationship may seem straight forward, the Employment Agreement can be quite nuanced, and each party should work with experienced healthcare counsel as each party has unique interests to protect.
This bulletin is for general informational purposes only, and does not constitute legal advice