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Five FAQs Regarding Employment Contracts

Signing a contract always takes careful consideration. This is even truer when entering into a professional employment relationship. Having reviewed more than one hundred physician employment agreements, I know the most frequently asked questions well.

The top five questions are:

1. Do I need an outside review of the contract?

2. Can I be employed full-time at a medical group as an independent contractor?

3. Who pays for professional liability insurance tail coverage if I leave my employment?

4. What are the differences between non-competition clauses and non-solicitation clauses?

5. Can you explain the interplay between the term of the agreement and the no-cause termination clause?


Do I need an outside review of my employment contract?

Let’s face it: Many physicians sign contracts without reading them, much less having outside counsel review the agreement. You are just too busy. Moreover, the contracts may be “take it or leave it.” The employer may be unwilling to change the terms and lose uniformity in contractual language among its employee physicians.

But there are plenty of reasons to spend the time and money for an outside review. First, it is good to know your obligations up front. For example, many employers incorporate into their contracts their general policies and procedures and contracts between the employer and managed care plans. By incorporating these documents into the agreement, the employer has made their terms, which you probably have yet to see, legally binding on you. Knowing the policies and procedures and managed care agreements are contractual commitments by you, so I encourage you to read and understand the policies and procedures and other agreements so you know what is expected of you.

Second, many contracts contain illegal terms. These terms would not be enforceable in a court of law and thus are not legally binding on you regardless of your signature on the contract. One common example is a term permitting your employer to assess monetary penalties against you for violating policies or procedures of the employer or taking too much time off (even uncompensated time). It is good for you to know, and good for your employer to know you know, that these clauses are illegal and unenforceable.

Third, you may be surprised by the negotiating power you do have. I have seen employers change language to:

·       Pay for tail coverage upon contract termination;

·       Include language making call schedules equitable; and

·       Add a termination provision requiring written notification of any breach of the agreement and an opportunity for the physician to “cure” any breach before termination of the agreement.

Finally, as you develop your practice and business skills, you may be called upon to sign contracts. Understanding the importance of reviewing them yourself and having counsel review them can avoid pitfalls seen in litigation over contract interpretation.


Can I be employed full-time at a medical group as an independent contractor?

Designating an employee as an independent contractor is a charade and also is not in the best interests of the physician. I recommend that physicians reject independent contracting designation clauses.

The law treats employees and independent contractors differently for tax, liability, and worker's compensation obligations, among other things. Here are the major differences between being employed and serving as an independent contractor:

·       As an employee, your employer is responsible for some of your taxes. As an independent contractor, you are responsible for all tax payments.

·       Under California law, an employer is legally responsible for the work of an employee (and thus likely to purchase professional liability insurance). As an independent contractor, you alone are legally responsible for your conduct.

·       An employer is responsible for obtaining coverage for any harm that befalls workers on the job. As an independent contractor, you are on your own.

Because of the advantages, some employers attempt to recast employees as independent contractors. Using the label alone, however, does not change an employee's status. Courts usually see through the charade. If you are working full-time at hours set by the medical group, under the supervision of the medical group, you are likely an employee, regardless of the terminology used to describe your status.


Who is responsible for paying professional liability insurance tail coverage upon termination of the employment?

Tail coverage provides professional liability insurance for those cases arising out of work you performed for a medical group, but where the claim is made after you leave the group. Probably the hottest negotiation point is whether the employer or employee should pay for tail coverage. The answer is not clear and the costs may be significant, particularly if you have provided obstetrical care.

I contend that under California law the employer is responsible for the acts of the employees, regardless of when the claim was made. Accordingly, it is up to the employer to mitigate against the risk of liability by purchasing malpractice insurance, including tail coverage. Due to the significant expense, many employers attempt to shift the burden of the cost of tail coverage onto the departing employee.


What are the differences between non-competition clauses and non-solicitation clauses?

Employment contracts often contain non-competition clauses or non-solicitation clauses, and sometimes both. Non-competition clauses attempt to prohibit the employee from practicing in the geographic area of the medical group within a certain time period at the end of the employment relationship.

These clauses are illegal and unenforceable in California. Employers sometimes include the clauses in the contracts because they guess (often correctly) that a physician will not obtain legal advice and presume that the clause is valid and enforceable through legal means.

Non-solicitation clauses attempt to prohibit you from recruiting patients or employees of the medical group to your new practice. Clauses strictly prohibiting solicitation are legal. However, many solicitation clauses purport to prohibit the physician from contacting patients regarding the physician’s departure from the medical group. This provision is unethical and illegal. Patients have an absolute right to know the whereabouts of their treating physician. An announcement card sent by the physician to former patients simply identifying the new practice location is not solicitation: it is information legally protected.

Can you explain the interplay between the term of the agreementand the no-cause termination provision?

Typically, physician employment contracts are for the term of one or two years; however they routinely contain a provision permitting either side to terminate the agreement with a 60- or a 90-day notice for “no-cause.” This clause effectively negates the term of the agreement by permitting either side to unilaterally change the term by terminating the agreement for any reason or no reason. Nonetheless, the term has a purpose. It generally sets the date for the parties to reassess their relationship to one another after the term period. For example, following the initial term many medical groups will consider the physician for shareholder status or reassess the compensation package. Some employers agree to pay for tail coverage if the physician completes the term of the agreement. Thus despite this seeming inconsistency, the term language and “no-cause” termination provision reside in harmony in the physician employment agreement.

Now that you have answers to the common questions, the issues related to reviewing physician employment agreements and the negotiations surrounding them are not that complicated. Nevertheless, there are many good reasons to have an attorney review your contract before you sign. If you do retain counsel to review the contract for you, be sure to familiarize yourself with the attorney’s qualifications and obtain an estimate of the cost of the review.


Barbara Hensleigh, Esq. is a partner at Andrews and Hensleigh, Los Angeles, CA. She specializes in health care law and is frequent contributor to California Family Physician magazine.