Physician employment contracts are a fact of life for healthcare employers everywhere. But drafting effective and enforceable agreements with physicians can be a tall task—one that requires a deep understanding of both the physician-employer relationship and the growing, state-by-state patchwork of regulations that can impact such contracts. Ultimately, healthcare employers must take great care to ensure their physician agreements are both fundamentally sound and legally compliant.[1]
In this article, we will highlight five common drafting pitfalls that healthcare employers should avoid when drafting employment contracts for physicians.
Pitfall 1: Overreaching Restrictive Covenants
Restrictive covenants—such as non-competes and customer or employee non-solicits—have become increasingly scrutinized across industries. Healthcare is no exception. In fact, non-competes with physicians are often the most highly scrutinized by courts and lawmakers.
Generally, under a non-competition provision, a physician agrees that if they leave the practice, they will not provide competing medical services for a set period of time in an agreed geographic area. Similarly, non-solicitation provisions act to prohibit a departing physician from interfering with or diverting an employer’s relationships with patients, employees, or other referral sources.
Public policy concerns specific to physicians—and, in particular, the physician-patient relationship—have birthed legislation significantly limiting the scope of permissible restrictive covenants with doctors. As a result, many states have regulated or altogether banned non-compete and non-solicit provisions in physician employment agreements. In Alabama, for example, physician non-competes are generally void. The same is true in Rhode Island.
In states where restrictive covenant agreements with physicians remain permissible, they are often highly constrained in scope. For example, Louisiana prohibits physician non-competes lasting longer than three years, while Connecticut imposes a one-year maximum. Other states have passed stringent geographic limitations. Maryland limits physician non-competes to 10 miles from the primary practice location while West Virginia generally permits no more than 30 “road miles”.
Other jurisdictions have adopted more creative approaches. Texas, for example, requires that any restrictive covenant agreement with a physician include a “buy out” clause, permitting the departing doctor to purchase themself out of the restraints for a stipulated, capped amount.
States without black-and-white limits on the permissible scope of restrictive covenants with physicians often still impose “reasonableness” tests that require employers to demonstrate the covenant is necessary to protect its legitimate interests and sufficiently limited in geography, time, and scope.
How to Avoid the Issue: Healthcare employers should ensure their existing restrictive covenant agreements are compliant in applicable jurisdictions. New (or renewed) agreements with doctors should be closely scrutinized by experienced counsel to ensure that any restrictive covenants are appropriately tailored and enforceable. Further, given the recent trend of regulation in this space, healthcare employers must stay abreast of legal and regulatory developments that may impact the enforcement of their employment agreements.
Pitfall 2: Compensation Structure and Bonus Incentives
The specific mechanics of physician incentive compensation are often poorly drafted. Bonus thresholds or wRVU targets can be complicated—but all too often these provisions are drafted without specificity. For instance, many employment agreements do not address how to handle shortfalls (i.e., what happens if the physician does not satisfy certain thresholds), or they fail to grapple with what happens to bonuses upon termination (e.g., does the physician forfeit them, are they paid pro-rata, or otherwise), in each instance creating legal risk and potential disputes between the employer and physician.
How to Avoid the Issue: Pay attention to “pay.” Incentive compensation methodologies should err on the side of specificity and seek to address all reasonably foreseeable scenarios—such as shortfalls and treatment upon termination. Ultimately, detail-oriented drafting can mitigate against future disputes.
Pitfall 3: Misclassifying the Physician as a Contractor
Employers sometimes categorize a physician as an independent contractor to minimize administrative obligations. But where the independent contractor agreement contains terms more consistent with an employment relationship—such as providing benefits, dictating work schedules, or exercising significant control over the manner and means of a physician’s work—misclassification risk can arise; even when both parties initially intended otherwise.
Whether a physician is classified as a contractor or employee will vary from jurisdiction to jurisdiction—but agreement terms should align with the physician’s label. Specifically, provisions regarding benefits, level of control exercised and the providing of equipment and office space may be critical in determining whether a physician is a contractor or an employee under applicable law.
How to Avoid the Issue: Healthcare employers should develop a deep understanding of applicable law regarding worker classification. After doing so, it is vital to ensure the substantive terms of any physician’s agreement align with the intended label—employee or contractor. Ultimately, the terms of the contract should not undermine the parties’ intent.
Pitfall 4: Term-Employment vs. At-Will: Unclear Termination Mechanics
A common issue in physician employment agreements is silence on whether the relationship is at-will or for a fixed term. Misalignment on this issue—i.e., when and how the agreement and relationship can be renewed or terminated—can have practical consequences.
Employers often assume an initial term guarantees retention, or that broad termination language preserves flexibility. Without the right wording, however, the agreement may do the opposite: limiting the employer’s ability to end the relationship or undercutting the employer’s expectation that the physician will stay for a defined period.
At-will employment generally means either party can end the relationship at any time and for any reason, with or without cause. A fixed-term agreement is designed to preserve the relationship for a specified time. But the latter should stipulate when and how early termination is permitted. If the agreement is silent or unclear, an employer may find themselves locked into the relationship unless the physician commits a pre-defined “for cause” event. Often, whether a “for cause” event has occurred is a matter of significant dispute that requires litigation.
How to Avoid the Issue: Employers seeking to establish a fixed-term agreement should consider expressly stating both the duration of the term and the parties’ intent to create a fixed-term (rather than at-will) relationship. The agreement should also define, clearly, what constitutes “for cause” termination, include appropriate notice and opportunity-to-cure requirements, and address what occurs at the expiration of the term—i.e., whether the agreement automatically renews, expires, or is subject to renegotiation. In fixed-term contracts, at-will termination language should be avoided, as it can undermine the enforceability of a fixed-term structure.
Pitfall 5: Failing to Properly Address Regulatory and Compliance Obligations
Physician employment agreements sometimes overlook important regulatory and compliance dimensions. These can include the physician’s obligation to participate in mandatory compliance training, adhering to the employer’s corporate compliance program and code of conduct policies, addressing what happens if the physician is excluded from participation in federal healthcare programs (e.g., is the employment agreement immediately terminated, is that circumstance deemed a for “cause” event, and is the physician eligible for severance in such an event due to the termination), and addressing representations by the physician regarding a clean history of discipline, malpractice actions and/or OIG exclusion status. Some agreements defer to policy in lieu of specifying these matters within the four corners of the contract. Regardless, it is important to weigh the pros and cons of expressly addressing—or not—regulatory and compliance obligations within the contract.
How to Avoid the Issue: Work with regulatory counsel to ensure the appropriate and requisite provisions are included in the employment agreement to provide clarity, protect the employer, and ensure compliance with applicable laws and regulations.
Key Takeaway for Healthcare Employers
Physician employment agreements can pose a variety of unique and profound risks—non-compliance with restrictive covenant legislation, worker-classification standards, and malpractice tail coverage are just some key areas that employment agreements in this space should address.
Employers can mitigate these risks at the drafting stage by working with experienced counsel who understand the minefield of laws and regulations that must be navigated effectively.
FOOTNOTES
[1] This blog does not address Federal health care program concerns. Employers seeking advice on the potential implications of the Stark Law, the Federal health care program anti-kickback statute, and other federal health care program regulatory compliance concerns should seek experienced counsel.
