If you have followed through on being ready, and thoroughly vetted your candidate, we need to take a quick look at contracts. In a simplified way, a contract memorializes in writing what you and your associate, trial partner, or purchaser of your practice have already agreed upon. It is at this point that you are going to involve your attorney and CPA to make this a legally binding agreement based on the laws and statutes of your state and placed in a written, formal format.
Before we go any further, I want to make sure that you do not go online and get some open source associate contract. In fact, also make sure you don’t get a contract from one of your buddies who has used it, or an old contract you have used in the past. Laws, taxes, and State Statutes change and only wise council in the form of a competent attorney and CPA should be used.
With that thought in mind, allow me to throw out a couple of things to consider. The scary thing about using just any old attorney or CPA is that most do not have the experience in dental practices necessary to draft a competent document. With that said, almost every attorney is great at contract law. This area of the law is much like biology and chemistry is for us. We have had to study a lot of it, studied it for years, and if we don’t know something, we know where to look for the information. In the legal profession, contract law is foundational to their training. They study and do a lot of this. The challenge in the legal profession is that laws change and, like many professions, there are levels of competency. These contracts are not the place to look for a bargain. With that said, even a well-known competent lawyer can fall short on delivering the best contract for you. The challenge is that an ideal contract follows all the laws and statutes of your State, but also must anticipate any challenges that the two parties might face during the time the contract will cover their relationship and work. It is here that I find most lawyers struggling to cover all of the possible challenges created in a dental practice. If you never have legal conflicts or challenges in your hiring and running of your practice, there is almost a 100% chance you will never ever go back and read your original documents. Contracts and Wills may look great, but it is only when something goes wrong that you realize that the document falls far short of your expectations and needs. A great contract creates remedy for almost anything that is likely to occur during the term of its use. It is here that I see many attorneys failing to give you what you need. The problem is you will never know until it is too late. Most run of the mill attorneys don’t and can’t anticipate all of the areas that should be covered in order to protect you in some future litigation. Bottom line: Get competent legal advice from a seasoned attorney that does this every week for dentists and dental practices.
One more thing: Never ever do this with a handshake. The only thing worse than a mediocre contract is no contract at all.
So you have found the attorney, got a dental specific CPA, and you are ready to put things in writing. In a quick, rule of thumb, bullet point way, let’s look at some of the details. Like most things, any attorney will fill the contract with legalese, and you will find this in every document. Rather that dissecting an actual employment contract, let me just hit the major points that will need to be addressed.
The document will begin with giving the names of the parties and usually will shorten the names to represent that person or entity the same way throughout the entire document. NOTE: Remember that if you are the owner of the practice, you are really just a 100% shareholder of your corporation, an employee of the corporation, and if you own the building, the landlord. But the corporation owns the practice. So, it will be the “corporation” that is hiring the doctor and not you, the owner. NOTE: If you are not incorporated, do not hire another doctor. Everyone that is reading this needs to be incorporated for the liability shield it offers and tax benefits it can create. Remember that every employee is an agent of the corporation and as such creates the liability of making mistakes that you or your corporation can be liable for.
The term of the contract: Every contract should have the date of commencement as well as the term or duration of the contract. One important aspect might be that some contracts assume that if the employee does not inform the employer or continues to work past the term of the contract, it is automatically renewed. If you are a young doctor if might behoove you to read the contract closely and make sure that if you are experiencing some challenges and the end of you contract is coming up, that you address your concerns or requests a month or so before the contract auto-renews and holds you subject to the original contract specifics.
Terms of employment: The contract will, in legal terms, will tell you what is expected and outline your work expectations, schedule, and a litany of legal statements telling you how you are expected to act and perform your duties. You will see this in every contract and they are all very similar. NOTE: If you are a general dentist going to work for another general dentist, you will be considered an “employee” and cannot be an “Independent Contractor”. Take the time and look up the definitions of Independent Contractor vs Employee. Consult with your CPA and make sure they are willing to pay the fines, past taxes, and interest if the IRS determines in an audit that while you paid them as an Independent Contractor, they were in fact an “Employee”. As far as the schedule goes, you may have to work every Saturday or evenings. Be sure you are agreeable to this and understand the task laid before you.
How you will be paid: This is usually in the form of an hourly, daily, or percentage of collections and/or net adjusted production. It may also stipulate that you pay for all or part of lab expenses for your patients. There will also be some other adjustments that might be made. For example, if you are paid on net adjusted production, then they may reduce the total if the patient uses a third-party lending institution that decrease the net adjusted collections by 7%-9%, or even a prepayment discount, or 5% discount for seniors could lower your anticipated pay. If you are a young doctor being paid on collections, I would make sure that you take the time to determine what the historical collection percentages are for the office before signing a “collections” pay contract. Most office don’t collect 100% and if it is 94%, you could lose 6% of your anticipated income from the incompetence of the various protocols and financial arrangements handled by other employees in the office. Bottom line, make sure you understand what you are agreeing to. If you find a contract that does not cover these things, make sure you have the contract adjusted to address these concerns. If we are talking about a percentage pay, understand that the going rate may be somewhere between 27% and 32% of collections or net adjusted production. The challenge here, and we have already discussed this, is that the percentage should be determined based on an algorithm created by the overhead of the office you are about to contract with. No one can pay you more than the overhead and your production allows. For example, an average office with a 72% overhead cannot pay you more than about 20%-25% and still reap any profit from your employment. Over and over again I see offices that are ill prepared for the cost of hiring a doctor but go ahead and hire them only to later discover that they are losing money every time they pay them an inflated percentage. Know your numbers and if what you can pay is not in the ballpark of what someone would work for you for, wait and improve the production and bottom line of your office. One thing the young doctor could negotiate is a ramped pay percentage. This means that for higher levels of production the employee would have a higher percentage pay. Maybe you pay 27% of the first $30,000, 29% for $31,000-$45,000, 31% for $46,000-$60,000, 33% for $61,000-$80,000, etc. (This is just an example but I hope you get the idea. More production equals a better percentage.)
Benefits: Most offices are not competitive in the job market when it comes to “pay packages” that might include benefits. The contract will address these areas if they are being offered. The bad news is that most young doctors have little to no room to negotiate their pay or benefits because there is an unlimited number of employee doctors out there. Less than 50% of graduates are becoming owners. Some of the benefits I see are money for continuing education, healthcare insurance, free dental for you and your family, moving bonus, signing bonus, and other things. Most offices will not have any of these so be prepared to shop the market.
Termination: Yep, both parties need to have a way out of this contract. Sorry to say, but many times this is completely one-sided. The contract will detail the steps, reasons, and timing of the dismissal. It will include things like death, disability, loss of license, not following the policy manual, etc. You get it, you are part of the solution or you won’t have a job. This is one area that you should consider negotiating. Many times the point of notification to actual dismissal is short for the owner, but long for the employee. Example: Owner fires you, and you have to leave now. But if you want to quit, you have to continue to work 90 days. The time periods and details should all be negotiated. I forgot to mention this under benefits. Let’s say you take a $5,000 signing bonus but only work there a couple of months. Nearly every signing bonus carries a detailed conditions list. In most cases, if you do not make the cut for at least a year, you owe some or all of the signing bonus back. This can create a huge hardship for the young doctor if they do not make it all the way through the signing bonus terms for there not being a repayment.
Non-Compete: You will find these in almost every contract. It would be ill advised for you to think that they are not enforceable. Most are, if written by competent council. While laws and State statutes vary from state to state, I have yet to find a good attorney that could not write some form of financial remedy to someone leaving the office and trying to take team members and or patients. In the traditional non-compete, the law generally will want it to be a reasonable distance and for a reasonable length of time. It is the definition of “reasonable” that will be challenged and determined in a court of law. Most of the time we are talking about 12-24 months, for 7-10 miles. NOTE: If you are a young doctor looking at working for a DSO or corporation with multiple offices, make sure that the enforceable non-compete is not for all of the offices that they own but only for the office you worked in. A couple of words changed in a sentence could mean a huge difference in the application of the non-compete. In states that tend to be lax at legally supporting a traditional non-compete, I have seen language that instead of a non-compete they have put a paragraph stating that both parties, in an effort to not infringe or create a non-competition situation, have agreed that the employee can quit at any time and work anywhere they would like to work. The employer and the young doctor further agree that the experience, work training, systems and protocols learned while working at _______________ was so valuable the young doctor is gladly willing to pay $250,000 for the experience. One last thing that may appear in the form of a non-compete is that you, the employee, agree not to solicit any patient or current employee of the practice and it will stipulate the dollar amount you will need to pay per violation. It might be $15,000 or so. While all of these not-competes whether legal or deemed not legal may need to be litigated. This alone may cost $20,000-$50,000 to defend the language or set it aside. Neither party wants to introduce dueling attorneys into this type of situation. Even in states that do have strong support for non-competition laws like Texas, doctors can sometimes arrange a settlement or pay their way out of the non-compete. Couple of more points to consider. Make sure if you are looking for a job in a town that you want to live in, that you do not sign any contract that would prevent you from working elsewhere in that city. In fact, I would look for jobs in adjacent towns until you make up your mind where you would like to settle. Secondly, if you are an owner and you have found a doctor who is coming back home, consider making the first 90 to 120 days employment without a non-compete. In this way, if it doesn’t work out in the first few months you can both go your own way without damaging your practice. I believe that this is the right way to do it. Certainly, you could diminish the time period but consider the employees future, too.
While there are many other considerations, I want to revisit them and discuss working for and selling to a DSO next time.
Michael Abernathy, DDS