Physician employment and independent contractor agreements
By Matt Dickstein
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In this article, I look at the essential terms of a physician employment contract and a physician independent contractor agreement. But first, let’s ask the threshold question…
Is you is, or is you ain’t, a contractor?
This is an important question because, from time to time, to generate revenue, the IRS and CA EDD will audit medical practices on the issue of whether a physician is an employee or independent contractor. These governmental agencies hope that the practice has misclassified the physician as a contractor (not an employee) so that they can collect on the plethora of taxes and premiums for employees, e.g. trust fund taxes, interest and penalties.
A medical practice should always be clear and confident in how it classifies employees and contractors. The cost of misclassification is very high, and it’s never worth it. Please read my article Classifying a physician as employee or contractor to learn more, including the factors for classifying physician employees and contractors.
Essential terms of a physician employment contract and an independent contractor agreement
The essential terms are about the same as between a physician employment contract and a physician independent contractor agreement. Once beyond the boilerplate, both contracts deal with the same basic issues, such as the description of services, compensation, reimbursement of expenses, and term and termination (all discussed below). One significant difference is that employment agreements sometimes have clauses that address the physician’s purchase of ownership in the practice, whereas independent contractor agreements rarely have such terms.
Job Description. Whether or not the agreement is for a contractor or an employee, it must clearly delineate the job responsibilities. Physicians particularly care about their hours, be it full-time or part-time, night and weekend coverage, on-call hours and the like. Be sure to clarify the physician’s administrative duties.
Compensation. You probably don’t need a lawyer to explain physician compensation, so I’ll keep it short. I frequently see physicians receive a fixed base salary + an incentive based on the income that the physician personally generates. For example, the physician might receive an incentive of X% of the gross revenue he or she generates in excess of $Y (Y being the expenses associated with the income including an allocation of general overhead, that is, the break-even point in income).
IMPORTANT — Have an attorney run the compensation arrangement through the federal and CA Stark and Kickback laws. Read Stark and Anti-Kickback laws re physician employment and contractor agreements.
Expenses. The practice’s payment of a physician’s “personal” expenses is an everlasting and wondrous source of conflict. Everyone wants to run their expenses through the corporation. The employment contract or independent contractor agreement must clearly delineate the expenses that the practice will pay for the physician. A practice usually will pay more expenses for an employee than for a contractor.
Here is a list of expenses that practices frequently pay:
* Professional society dues (within reasonable limits)
* Hospital privileges
* Malpractice insurance
* Continuing medical education and related travel costs (again, within reasonable limits)
* Board certification
Term and Termination. I prefer that a physician’s employment contract or independent contractor agreement have a minimum term of 1 year (to satisfy the Stark and Kickback laws), but otherwise be at-will with a notice period, meaning that either the physician or the practice can terminate the relationship at any time (after the notice period) for any reason. I prefer a free relationship, as opposed to contractually locking the two sides into a relationship that isn’t working – this only leads to unhappy endings and litigation.
If you want a contract for a term of years, be sure to include termination for cause. Common examples of cause are:
* Loss of medical license or federal DEA registration
* Termination or suspension of hospital privileges
* Violation of a material provision of that agreement
* Felony conviction or abuse of controlled substances
For more on the termination of a physician employment contract or a physician contractor agreement, see my article, Termination clauses in physician employment and contractor agreements.
Physician Buy-In. Physician employment agreements sometimes have clauses on the physician’s purchase of ownership in the practice. Usually the clauses are vague and non-binding, and only express the parties’ expectations on the subject. If the physician’s buy-in is a material part of the deal, however, specify these deal terms:
* The ownership percentage that the physician will obtain
* The purchase price
* The period over which the physician will pay the purchase price
* The extent of the physician’s participation in control decisions for the practice, e.g. is the physician on the board of directors?
For more information on this subject, see my article, Bringing a new partner into a medical practice. See also, Buy-in and buy-out of physicians to a medical group.
To learn about another crucial contract for medical practices, read Shareholder buy-sell agreements for medical corporations.
To learn about non-competition clauses for physicians, read May a physician compete against his or her former practice? and also, Stealing employees.
This article only gives a short roadmap of physician employment contracts and independent contractor agreements. There is a lot more to this topic than introduced here. Please get competent legal counsel before you hire a physician.