Managing the Associate – The Contract
Throughout my history of working with hundreds of clients through SuccessfulChiro and http://HireADC.com, I am continuously surprised at how many associate type arrangements do not have a contract in place.
I must admit, early in my career I too operated without a ‘written’ contract. My assumption at the time was that if the doctor I had the arrangement with didn’t want one, then I would be better off not being ‘locked in’ either. I got lucky. In my situation it all worked out well and that was many years ago. Times have changed.
After bearing witness to so many associate/partnership arrangements gone bad, I have over the years grown to understand the value of a well written employment contract that protects both parties involved.
Truly, the minor work involved in setting up a chiropractic associate contract will almost always save a ton of trouble and money down the road. And, it benefits both sides to know exactly what the arrangement and expectations are.
So, suffice it to say, there should never be a work type arrangement between a clinic and an incoming doctor that is not laid down on paper. Granted, there is such thing as a ‘verbal contract’ but the facts within those ‘contracts’ always become clouded, and then it is essentially your word verses mine.
At the minimum the exchange of emails can solidify at least the outline of an arrangement and can be considered legal. But, nothing will stand up as well as an actual attorney prepared chiropractic associate contract (I should mention too that you do not need an attorney to write up the agreement. You can prepare a document yourself and it can be just as binding, however, almost always I have found that a good attorney will bring to light issues that you have overlooked, and will word things in the way as to be of much greater protection. Therefore, I always use an attorney or attorneys to prepare the final draft of my contracts).
However, either way you need to be able to put together the basics of what will be included in that chiropractic associate contract. If you leave it up to the attorney completely I guarantee that he or she will miss issues that are very important to you and to the arrangement because they are industry specific, and it is doubtful that he will have prepared enough of this specific type of contract to have that knowledge.
So, let’s get started on what your considerations should be.
The first consideration is whether to hire this new associate as an employee or bring him on board as an independent contractor. This is a VERY important distinction, from a variety of standpoints. I will go over the basics concerning the pros and cons and let you decide for yourself which legal distinction will work for you.
From an expense standpoint, both the owner and the associate chiropractor (if he is an astute businessman) would benefit from having the arrangement be that of an Independent Contractor (IC). Reason being, the owner will save a lot of money on employment taxes, which are .765% of the gross salary. If you pay an associate 80K in salary and bonuses (other benefits aside) you are in reality paying $86,000+. This also benefits the owner who would not be expected to pay any other benefits either (i.e., health insurance, sick days, vacation days, retirement, and so on).
Initially the average associate chiropractic employee might be under the assumption that this will cost him more because they will be responsible at the end of the year for withholding all their own taxes. In actuality this is a very beneficial situation because if the doctor sets himself up in the proper legal entity and then arranges his pay as business income and therefore pays expenses out of these funds and pays himself a combination of salary and bonus, he will come out much better in the end.*
Now, from the standpoint of security, the IC arrangement might not be as good of a situation for the owner. This is because if an associate is an IC, then by virtue of what that means he would also be able to work elsewhere at the same time if he wants (think, for example, hiring a plumber). And even though you will have non-compete language in your contract, this might be much harder to enforce if your associate is an IC.
As well, from the owner’s point of view there is another risk when it comes to hiring an associate chiropractor as an IC. The IRS actually has very strict language as to who can qualify as an IC and who cannot because they don’t want people realizing those tax advantages described above. Therefore, in reality, as an associate chiropractor it is pretty hard (but not impossible) to comply with the IRS rules. Here is an article that will better lay out the aspects that the IRS considers when deciding whether or not the worker in question is an IC or an employee: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html.
Now, all that being said, most people in the IC situation may forever operate under this IRS radar, enjoy the tax savings, and still maintain a viable non-compete in their contract. However, I have witnessed more than a few instances where the hired IC associate chiropractor became disgruntled and then reported the owner to the IRS, saying that they were actually an employee and not an IC. If the IRS determines that this is true, that they were actually an employee and not an IC (and it takes them really nothing to make this determination) then you not only become liable for all your back taxes on that ‘employee’ but also that employee’s share of those taxes too. So, it is worth the risk? Only you can decide that.
As you can tell, this is a very in depth topic and I am not a lawyer. I just wanted to provide you some basics so you can discuss these issues with your accountant and legal counsel. The language you use in your chiropractic associate contract will differ significantly depending on whether you chose to hire your new associate chiropractor as an IC or an employee. This is further reasoning behind enlisting the assistance of a business attorney.
The aspects of the chiropractic associate contract I want to discuss next will comprise the ‘bulk’ of the document. These are the common issues as related to generalities and NOT specific to the deal you worked out with your chiropractic associate. For example, pay, bonuses, time off, etc., will not be in this section. As well, following this list I will delve more into the topic of the non-disclosure agreement, as I believe this is one of the greatest concerns a hiring owner has. However, this more general section I will basically outline below is more generic in nature (which is nice so that you can use it in future employment situations as well). The individualized chiropractic associate contract aspects will be placed at the end, in an addendum or an exhibit.
So, without going into extreme detail regarding all these core aspects, I will just list them so you will be sure not to miss them in your legal document:
1) Recitals: corporate name(s), owner’s name(s), associate’s name.
2) Agreements: incorporation of recitals, term, representations and warrantees of provider (services administered, licensure issues, disciplinary past, compliance with state laws, rules, participation in insurance plans, etc.)
3) Duties of Provider: hours, duties, records
4) Relationship: IC or employee and the ramifications of those
5) Office Space, Personnel and Admin Support
6) Assignment of Fees; Billing and Collection: agreement of assignment of collections in their name to the corporation
7) Consideration for Services: referring to Exhibit or Amendment attached at end.
8) Insurance: who is to pay for
9) Control of Work: Warranties: (more for the IC relationship)
10) Confidentiality and Non-Disclosure/Non-Solicitation: (covered in more detail following this list)
11) Termination: reasons the employee can be let go immediately, as well as the notice that has to be given, on both sides, for ending the relationship.
12) Effects of Termination: how things like the books, records, personal items, etc., will be handled upon termination.
13) Miscellaneous: Assignment, Incurring Financial Obligations, No Third Party Beneficiary, Binding Nature, Governing Law, Entire Agreement, Notices, Waiver, Counterparts, Severability, Additional Documents.
Now, of greatest concern is usually the non-compete language. This is usually what concerns the hiring doctor the most, and for good reason. No one wants the nightmare of hiring an associate chiropractor, training him and letting him get close to your patients, to then leave one day and open up just down the street, draining you of everything you have built over the years. It is sad, but believe me, this happens.
The first thing for you to know, and something you would not voluntarily reveal to your chiropractic associate, is that the main reason for non-compete language is to create a defensive deterrent. That is to say, you want the associate to always be aware that should they leave that they have agreed that they will comply with these tenants of the non-compete agreement, or suffer specific repercussions.
The unfortunate truth about non-compete agreements are that, legally, they hard to enforce (unless of course your attorney has done an excellent job drafting the language just right). Now, even if the language is good you will also have the issue regarding cost. Granted, once we are taken advantage of by someone we placed trust in often times in the search for justice we will make an emotional decision to pay whatever it takes to correct this wrong. But, what we really need to do is take a minute, look at the situation subjectively and answer this one question: “If it is going to cost me $10,000 (for example) to go after this person, have they or will they actually cause me much more than $10K worth of damage?”
I once had a chiropractic associate leave and a few months later go to work for another doctor essentially right across the street. We were infuriated; however, after careful consideration (and the prospect of spending many thousands) we realized that her being there was actually zero cost threat to us. In this situation the patients were not fans of her treatment and loved our new doctor, so she was not going to take any business from us.
If, on the other hand, things had been slightly different and she actively marketed to our patients and, over time, our numbers suffered substantially then likely we would have exercised our right to take legal action.
So an important point here is that you do not want the non-compete to be hidden in the agreement. Rather you want to show it and explain it to the new employee at a time when they are most agreeable to accepting and signing off on it… during the hiring process!
Now, that being said, let me mention a couple of primary considerations when it comes to a non-complete:
TIME and DISTANCE
Any judge or mediator given the job of evaluating the situation is going to first decide if the contracted arrangement is reasonable (given the business) and if it is not too over-reaching in that it would limit the leaving doctors ability to make a living. Therefore, the terms of the non-compete need to be laid out wherein the doctor is not allowed to practice within so many miles radius for so much time.
However, that needs to be followed up with language such as:
(i) Notwithstanding the foregoing subparagraph 11(b), if 2 years is determined by a court of competent jurisdiction to be overly broad, then the period shall be equivalent to 18 months;
(ii) Notwithstanding the foregoing subparagraph (i), if 18 months is determined by a court of competent jurisdiction to be overly broad, then the period shall be equivalent to 1 year;
(iii) And so on
By adding language such as this you allow the judge or mediator the option of picking something that he or she considers reasonable. Is this ideal? No, but it does offer some protection and plays into the flexibility that a judge might exercise.
Following this, your attorney would need to add language related to this such as Liquidated Damages, Injunctive Relief; Legal Fees, Severability and Scope.
Now, equally important is to also include the very same type language as it relates to Confidentiality, Non-Disclosure and Non-Solicitation. Essentially, this means they will not take what is private to you and how you operate your business and make use of it elsewhere – like for a competitor. This includes anything related to your business methods, patient files, patient lists, and your employees (like trying to hire them from you).
The individualized part, the part everyone often thinks will be the hardest is often the easiest part. That is the part that deals with pay. Now that the overall framework is set down, a page at the end of the chiropractic associate contract is attached that just says it like it is, either as an exhibit or an addendum. They will get paid X amount on X dates. The bonus structure will be X per every X and so on. Usually this page has no more than 1 or 2 short paragraphs on it. You can make it as simple or as complicated as you want.
As you can tell, this is a pretty extensive topic and I know I have only touched upon it, but I think you can definitely see how enlisting a professional in this realm is essential. As part of my one-on-one consulting the contracts are provided (which could easily cost you over $1,000.00 to have created on your own). If you want to learn more about the services I offer, visit http://HireADC.com or contact me at doc@SuccessfulChiro.com.
-Dr. Troy Counselman