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Employment Contracts: What You Need to Know Before You Sign on the Bottom Line

Avitzur, Orly, MD

doi: 10.1097/01.NT.0000390231.13923.fa
DEPARTMENTS: In Practice

Regardless of practice setting, we're all faced with contracts during our careers — for our own jobs, when hiring employees, or entering into agreements with HMOs—and signing a poor contract can bring years of regrets. Neurology Today spoke with several neurologists, some of whom learned about contracts the hard way. They shared their experiences, and offered advice to other neurologists.

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REVIEW CONTRACTS WITH AN ATTORNEY

Wayne E. Anderson, DO, joined a multispecialty group in San Francisco after finishing his neurology residency in 1998, and was told that if he didn't respond to the offer immediately, he'd lose the job. He didn't hire an attorney to review the contract, he explained, because the arrangement appeared straightforward: the group would take 50 percent of collections and he would get the rest. It quickly became apparent, however, that the group's referral base was inadequate to sustain a neurologist —a typical day generated only one new patient.

“So a member of the group, who was the also medical director of multiple nursing homes, began to actively seek neurology consults for me to do, ultimately asking me to see almost every patient,” recalled Dr. Anderson. When those patient consults were exhausted after two months, he was then asked to see them again in follow-up. Dr. Anderson felt increasingly compromised by the situation, so when he was offered a position as the medical director of a hospital department at about the one-year contract anniversary, he grabbed it, and gave his group both verbal and written notice.

The office manager changed the locks, refused him access to his medical charts, and immediately stopped paying him when he announced his departure. “They then sued me, stating I was still employed and owed them 50 percent of my new job salary,” he said.

The lawsuit took three years and by the time it ended, had cost him $300,000. The group had legal insurance, and it became clear that their strategy had been to create roadblocks and delays to drive up his hourly legal fees.

For a long time he lived cheaply and moonlighted on weekends, just to pay his retainer. Eventually, the case settled, but the group then declared bankruptcy, thereby eliminating their financial liability.

Dr. Anderson, who currently practices as a pain management and headache specialist at the California Pacific Neurosciences Institute in San Francisco, now knows the importance of having an attorney review a contract. He advised: “Don't let anyone coerce you into signing a contract. Take the time to ask others in the community if the group is busy, scrupulous, and well-respected; a good opportunity should not disappear overnight.”

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VERBAL PROMISES VS. A SIGNED WRITTEN AGREMENT

When Missoula, MT, neurologist Thomas H. Swanson, MD, bought a neurology practice in Cleveland in 2004, he relied on promises about the deal, rather than including essential details in the contract. “The neurologist who was selling the practice promised that he'd introduce me to physician members of the community, and never mentioned that he had an employee who would be opening a new practice down the street,” Dr. Swanson said. But no introductions were made, and Dr. Swanson later learned that the former employee had taken his charts with him. The sales price of $120,000 had been agreed upon based on practice valuations from total revenues — including those of the departing employee. “After shelling out half the purchase price, I stopped making payments because I felt that the sale was fraudulent,” Dr. Swanson explained. The ensuing lawsuit brought by the seller and the subsequent countersuit and appeal by Dr. Swanson, lasted until last year. Dr. Swanson, who ultimately lost the case based on what was written in the contract learned a valuable lesson: Once parties to a negotiated contract express their agreement in writing with the intent that it embodies the full expression of their bargain, any written or oral exchanges made prior to the writing, are generally inadmissible in a court. No matter how well you know the other party, understand that the written contract supercedes all prior agreements, including any contemporaneous oral agreements or promises.

In the end, Dr. Swanson was out $35,000 thousand dollars in legal fees in addition to the $120,000 purchase price, and felt that he had no choice but to leave Cleveland because his practice was not viable.

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PERILS OF RESTRICTIVE COVENANTS

Gregory J. Sengstock MD, PhD, joined a solo practitioner in Jacksonville, NC, in the fall of 2001 even though he had concerns that the practice manager was the neurologist's wife. He resigned two years later after being told that he would not be offered partnership due to inadequate productivity, and gave his practice the contractually agreed upon 90-day notice.”

The collections for my final year were about $1.1 million, of which I was paid about $200,000, and was owed $175,000 as bonus,” Dr. Sengstock said. “I had had ongoing problems receiving regular financial reports, and discovered my hospital bills had not been submitted in months. I ultimately filed for breach of contract when my year-end bonus was two months overdue and I was tired of listening to excuses.”

DR. ORLY AVITZUR

DR. ORLY AVITZUR

But his employer quickly filed and won an injunction based on the restrictive covenant in the contract, and Dr. Sengstock was told that his appeal for breach of contract would unlikely be heard until his two-year non-compete term had passed. He eventually decided not to pursue a drawn out legal battle, and agreed to a settlement. “By the end, it had cost me about $100,000 in legal fees, I was out of a job, and although I owned a home in Jacksonville, I was prohibited from practicing in the county for two years,” he said.

After commuting to locum tenens jobs for 22 months, Dr. Sengstock was invited to come back to the area by his previous employer, who had been unable to staff a satellite office he had leased. Dr. Sengstock accepted the offer (at Baptist Medical Center South) and has been there since 2005. He now advises neurologists entering into employee agreements to have the partnership terms defined as precisely as possible in the contract, noting that the terms he had discussed verbally were not in the contract. He also recommends that restrictive clauses be examined carefully for three considerations: duration, geography, and penalty for breach.

“Courts usually consider anything less than two years reasonable,” he said. “Geography is more difficult, but should not encompass an entire county or surrounding counties,” he advised, “and avoid signing clauses with penalties for breach (also considered a buy-out).”

Dr. Sengstock now advocates for non-solicitation clauses in which the departing doctor is allowed to practice but not solicit any patients of the practice, referring physicians, or employees. ”I think this gives enough protection to an employer and still allows an employee to remain in a community,” he said.

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COVER YOUR TAIL (INSURANCE)

If your medical liability policy is a “claims-made” policy (as opposed to an “occurrence-based” policy), you'll need to get additional coverage — called a tail insurance policy —if you leave the practice and acquire a new insurance carrier in your new practice. The tail policy will extend the reporting period of a claim after a “claims-made” policy has expired or has been canceled. When Carrollton, GA, neurologist, Jonathan G. Kerrick, MD, recently moved from one hospital salaried position to another, he had to change malpractice insurance carriers. Because his previous employer had purchased tail insurance for him that will stay in effect as long as that hospital continues to employ physicians, he was able to save “prior acts” coverage of about $17,000 to $25,000. “I would be responsible for purchasing a prior acts policy in the event my previous hospital went under, or in the event of a merger or buyout, so it will be up to me to monitor its status,” he said.

His new employer agreed to cover the tail insurance (for after his departure), but at a prorated rate based on length of employment. “Basically, after about 10 years, they would cover 100 percent, with a sliding scale for leaving anytime before that,” he explained. “For the first two years, for example, I'm not covered at all. It certainly makes one consider the sign-on bonus in a new light.”

If the former employer-hospital had not purchased tail insurance, his new employer would have insisted on his buying a separate policy to cover potential actions for the time period before his new employment. (If he left on 01/01/10 and a lawsuit was filed on 09/01/10 on a case he saw on 12/25/09, his prior employer's insurance will cover it, having provided this “tail”.) The point is that physicians leaving one job for another need to check on two tails: one that covers prior acts for previous employment and another that will cover once they leave this current new job or even retire from this job. Bottom line: Discussion of tail coverage should be included in any negotiations.

DR. AVITZUR, a neurologist in private practice in Tarrytown, NY, holds academic appointments at Yale University School of Medicine and New York Medical College. She is an associate editor of Neurology Today, as well as the editor-in-chief of the AAN Web site, AAN.com, and chair of the AAN Practice Management and Technology Subcommittee.

©2010 American Academy of Neurology