Physician Employment Contracts

Medical educators do not prepare us to understand or negotiate employment contracts.  I will teach you the basics of what you need to know.

This will likely be your first job contract ever.  Your prior jobs probably didn’t require an employment contract.

Too often doctors just sign it without understanding the terms and conditions. That is not a smart move. I have seen that come back to bite several physicians.  They wish they spent a little time on it upfront to prevent problems, misunderstandings, or even lawsuits later.

Contract Basics

What is a Contract? It is a binding agreement between 2 or more persons or parties. Your future employer’s attorney wrote the contract.  Their attorney wrote it to protect them, not to help you.

A contract is a document that describes the terms of employment. It must be legal (not against public policy). There must be ‘consideration’; for example, you give them your work hours and they give you a paycheck. 

If you have just received an employment contract – congratulations! Celebrate!

And then what? What to do?  Don’t “Just sign it.”  Read the contract yourself! Every word! Make a list of questions. Is everything there? Do you understand it?

Have you read the supporting documents? Sometimes the most important information is in an ‘exhibit’ and it may not even be with your version of the contract. Never agree to something you have not seen, read, and had adequate time to consider.

Getting Help

Will you need a lawyer? This is a bit controversial, but my answer is yes.  Get an attorney to review it but not to negotiate. Your employer’s attorney wrote that contract in legal language. You won’t fully understand that language without an attorney. That is intentional. Don’t feel bad or ignorant. It is ok that you are not an attorney. Hire one.

Get an attorney with physician employment contract experience. I recommend against having them negotiate for you. It is very costly and they sometimes create ill-will when being overly aggressive about the terms that may not even matter to you. Attorneys who aggressively negotiate on your behalf can damage relationships and even cause a job offer retraction.  

When you do hire, clarify the fee method and amount up front. It is best to get either a flat fee for the process or a stated hourly rate up to a cap. The typical fee is $500. $750 – $1,500 is possible if somewhat complex.

Nuts & Bolts of a Contract

What is in the contract? It is normally divided into sections, such as Components; Preamble; Recitals; Definitions; Physician obligations; Other party obligation; Mutual obligations; Term and termination; General conditions; Signature; Exhibits.

Out of that list, the physician obligations and the exhibits will likely be the most important.

Common Physician Obligations

This section will detail what your employer will expect of you.  Typically they include things like, an unrestricted license, DEA license, Medicare/Medicaid participation, and professional liability insurance.  Those are common and reasonable.  Read carefully for any other less common requirement like board certification (within a timeframe), other insurance (e.g. auto), or location of residence (e.g. must live in the county or within 20 miles).  They may also detail your hours and duties, the number of patients, on-call hours, staff meetings, holiday coverage, and practice location. Beware of having too much of this in the contract since it could restrict your options in the future.

Other important clauses to understand include the: Non-solicitation covenant (to prevent you from stealing patients when you leave); Non-disclosure agreement (NDA) (to prevent you from sharing trade secrets); and Non-competition Clause (to discourage you from leaving and competing against them).

Employer Responsibilities

What about your employer’s responsibilities? These ‘other party obligations’ often include information on benefits, retirement plans, sick time, and CME support.  Understand the details with your employer match, malpractice coverage, and vesting schedule.

Insurance

Your employment contract or the accompanying HR documents should outline the details of any employer insurances.  Know your benefits.  Large employers will often offer the most comprehensive coverage including medical, dental, vision, short and long-term disability, and occurrence malpractice coverage.  Require your employer to purchase ‘tail insurance’ for you if your malpractice coverage is ‘claims made.’

Salary & Compensation

Salary is obviously important.  Starting salary isn’t as important as the upside opportunities.  Too many employers lure residents with a first-year high salary.  Many of those have no upside or worse yet their salary drops significantly after year 1 or 2.  Some guarantees last for the initial term but then switch to productivity-based and that may result in a large compensation drop at the start of year three.  I prefer a lower base but an opportunity for profit sharing or generous incentive bonus.  Focus on likely compensation for year three, not just year one.

Look for compensation that is market-competitive and on the higher end.  A sign-on bonus or loan repayment can sweeten the pot, but nothing beats a high salary that will go higher.  Over time the increase from a high starting point is much more valuable than a $20K signing bonus, even though it is hard to turn that down as an impoverished resident.  Know the compensation numbers for your specialty.  Ask attendings and recently-graduated residents.  Study data from MGMA, AMGA, Medscape, Medical Economics, PayScale, and Salary.com

If the upside potential is based on productivity know how likely that is.  Know whether productivity is based on wRVU or billings or collections and get an idea where your numbers will lie. Look out for complicated or impossibly difficult incentive formulas.

Partnership

When joining a private practice, plan to become a partner.  Partners are owners in the business and help make the decisions.  The partners also generally have higher compensation or ownership equity in the business.  Know your partnership requirements.  Know how long it would take.  I recommend 12-18 months.  4-5 years would be too long in my view.  To become a partner you may need to buy hard assets, or accounts receivable.  Know whether you will need to pay for goodwill, how much it all may cost, and how will you pay for it.  Some pay cash, but others reduce receipts over time or work with a commercial lender.  Plan for the most likely scenario.

Other Goodies

Look for or ask for additional benefits.  These may include moving expenses, loan repayment, sign-on bonus, promotional events, advertising campaigns, or additional equipment (e.g. an ultrasound machine).

Termination

We all hope for the best but must plan for the worst.  Know what would make them fire you.  Look for those reasons under “For Cause.”  They can fire you for any reason or no reason if it says termination is “At Will.” Clarify how much notice you need to give when quitting the practice.  Notices can range from 30 days to one year. 

Understand the retirement fund’s vesting schedule.  Clarify whether they will void the non-compete clause if they fire you.  If you are a partner and leave, is there a buyout process?  How will the assets be assessed and who will get your remaining accounts receivable?  Figure this out before you get to the point of leaving.  Your employer will be much more likely to make changes in your favor early on.

Noncompete Clause

If you are a physician and considering signing a contract, be sure you understand the non-compete clause. Too many physicians sign it without understanding what it could mean for them if things sour at their current employer. If you know that you would leave the area if the job doesn’t work out then it may not matter much. For everyone else, it is extremely important.

Non-competition clauses (or ‘nocompete’) are also called restrictive covenants.  It is a contractual clause that would provide that the employee agrees not to engage in a particular competing activity in a specified geographic area for a specified time after termination of employment.  Know the three important variables: what is forbidden; where it is restricted; and for how long.

You may be able to negotiate more favorable terms. If nothing else you need to know the options for what the future holds. I know several physicians have been limited in practice, forced to stay at a suboptimal job, barred from working 2 years or who paid a six-figure buyout just to be able to practice.

This Clause can Wreck You

Let me share a true case:  I know an orthopedic surgeon who liked two different private practice opportunities in the same town.  After joining one, she realized she made the wrong choice and left to join the other practice.  The first practice enforced the non-compete clause and threatened legal action.  She was forced to pay the 250K as laid out in the buyout provision of her contract.  She had to take out a loan to be able to practice.  It was basically a second mortgage payment for decades.

I know others who didn’t understand the terms and were sued after an apparent violation of the agreement. Others had to practice in a city 30 or more miles away for two years because of a clause they didn’t know was in their contract.  The stakes are big and emotions can run high after a doctor wants to leave the practice so it is best to make things clear at the outset.

Enforcing the Clause

The AMA opposes non-compete clauses since they restrain trade and limit options for doctors and patients.  They tend to be highly litigated and they can result in anger, resentment, and loss of goodwill with your employer.  Nevertheless, they continue in most contracts.  Employers see them as a way to reduce physician turnover, decrease competition, retain patients, and keep good people from leaving. 

Know that enforceability of covenants not to compete vary from state to state.  Some courts uphold them consistently, others see them as an illegal restriction.  If the clause in your contract is too restrictive (e.g. you cannot practice medicine in the entire state for five years after leaving) then it likely would not be enforceable.  Still, it may take a lot of time and legal fees to prove that it isn’t enforceable and is a restraint of trade.  I recommend you strike out such overly restrictive clauses or renegotiate them prior to signing.

Make a Deal

Understanding these basics of employment contracts should start you off on the right foot and prevent unexpected surprises later.  Know what you are signing.  Negotiate more favorable terms, benefits, and compensation.  But don’t get too hung up on details of the contract.  You want to start off your new job with goodwill, not animosity.  There is a balance in all this.  Fight for your rights but respect your future colleagues and the business you want to join.

You need to be smart about the process and understand or change what you are signing. But, ultimately, “If the shoe fits, wear it!”  You should join the practice if you feel comfortable there. If they are committed to excellence, transparency, integrity, and innovation then go for it. Don’t let the contract language prevent you from taking a wonderful opportunity.

What about your employment contract?  If you signed a non-compete clause, do you know the details?  Did you successfully renegotiate your contract?  Any stories to share about contracts?  Was an attorney ever helpful to you?

4 Comments

  1. Very informative piece WD. Good point on looking beyond the first year salary and looking at 3rd year and beyond total pay package. After all, it’s a long term career and that’s what counts. Also, most of the contracts with big groups are boiler plate anyway. The last 25 docs that joined probably have the exact same contract. You want to understand the contract, but you don’t want to nitpick the details like you said. There is no better way to get a reputation as a NON-team player. And that reputation will carry with you wherever you go in the future. Medicine is a very small world and reputation is everything. We are currently interviewing for a spot and checking provided references (and non-listed references). It’s amazing how someone’s reputation can totally take them out of contention just like that.

    October 8, 2018
    Reply
    • Wealthy Doc said:

      Millionaire Doc,

      Thanks for the comment.

      I tell all residents to get a clear picture of how they will be paid in year three and how much they are likely to get. That often requires some digging. They can ask the partners or doctors 3-4 years ahead of them. They may need to talk to the practice office manager or CPA, etc. Sometimes the answers are not easy or clear but are worth the effort. Too many young doctors who do not do this are shocked in year three or four. They end up leaving over these issues sometimes. Better to know ahead of time. As a starving resident, it is hard to get beyond the year one income. I get it.

      As far as contract negotiation: I agree that reputations persist. However, I don’t see someone who negotiates their contract as someone I would avoid hiring. As long as they are professional and reasonable, I may actually respect them more. They read things, think, and fight for what is their right. This can get out of hand, if the demands are not respectful or are excessive. However, I see the error in the opposite direction primarily where the doctors just sign and then are resentful later.
      Being a team player is important in clinical medicine. Nevertheless, I think it is okay to advocate for yourself with comp and contracts. Although the major features may be “boiler plate” in big groups, there can still be differences. I’m sure this varies some by specialty. If you are doctor #22 in a clinic and you all do exactly the same thing then maybe all contracts are the same. I think that is actually pretty rare though.

      I am amazed at how much variation there can be in departments that have “standard contracts.” I once had access to all contracts in such a group and my analysis was eye opening. If you bring a unique skill set at the right time, most employers will agree to make reasonable changes.

      Personally, none of my contracts has ever been the same as anyone else’s. For example, I may have certain outside income exempted or have a modified bonus or a slightly different non-compete. I am not the exact same person as everyone else. My interests, goals, and skills are different too. My contract may need to reflect that. I do not think anyone has ever considered me anything but a team player in my clinical practice.

      October 8, 2018
      Reply
  2. Great summary WealthyDoc.
    I think contract negotiations is an often over looked topic. Too many of us just look at the salary and think it will be OK and sign the contract. That contract was drawn up by an attorney who works for the hospital, so it will be slated in their favor. You need an attorney to help slant it back to even.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

    (If your readers are looking for more information on physician contracting, they can get a free copy of “Negotiating your contract like a pro.” by signing up for my blog at DrCorySFawcett.com. )

    October 8, 2018
    Reply
    • Wealthy Doc said:

      Thanks Cory,
      Yes, that is the point. I don’t worry much about being a “non-team player” like MD mentioned. The contract was written by an attorney, not your future clinical partners. You have to understand the legal and financial ramifications. It doesn’t mean you are not a good doctor or colleague. I actually think the opposite. I want someone who will look out for our interests and not just sign every payer contract or hospital request without some negotiation.
      Thanks for offering that resource to my readers.

      October 8, 2018
      Reply

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