Finding the right resident for your practice is a lot of time and work. Protect your investment and keep your resident from straying to other practices by including proper retention provisions in your residency agreements.
The basic bargain you make with your resident is simple: you agree to pay all or part of your resident’s training and residency living expenses; and your resident agrees to work at your practice for a minimum period—the “retention period”– after she is board certified.
To implement this bargain, residency provisions typically use a stick and/or carrot approach. The stick requires your resident to pay back the residency expenses you fronted if she fails to timely pass her residency or if she leaves your practice before the agreed upon retention period expires. The carrot, which is optional, pays your resident a bonus at the end of the retention period.
Here’s a list of the principal issues your residency provisions should address, bearing in mind that the main variable affecting their structure and content is whether or not the residency will be in-house.
- Residency Rules. If you are sponsoring the residency, both you and the resident should agree to respectively follow the residency rules and guidelines set by the applicable veterinary college (“Residency Rules”). Accordingly, you would be prudent to ensure that compliance with Residency Rules will not unduly burden your practice before you commit to sponsoring the residency. The residency provisions should also: (a) require the resident to keep track and inform you of any rule changes; and (b) allow you to terminate the residency without penalty in the unlikely event a rule change makes compliance too burdensome for your practice.
- In-House Residencies. With in-house residencies, your resident will invariably be your employee during the residency period, so all the usual employee issues relating to compensation and benefits apply. However, you will need to adjust your standard employment agreement to give your resident time to: (a) complete whatever externships are required by the Residency Rules; and (b) study for her boards. (In this regard, you may consider reducing her compensation accordingly.) Do not forget to check that your insurance and benefit plans will cover your resident during this period.
- Off-Site Residencies. If a veterinary school or other hospital is going to sponsor the residency, you need to consider whether you want your resident to be your employee during this time. If the resident will be attending a veterinary school or other hospital far from your practice, you may not want her to be your employee, since an employer is generally liable for their employees while they are acting within the scope of their employment. Since you have deeper pockets than your (normally) impecunious resident, plaintiffs will be motivated to sue you if your resident gets into trouble.
If this liability worries you, then you will need to loan your resident the amounts she needs, with the understanding that you will employ her as soon as she is permitted to take the boards (and then forgive the loan at the end of the retention period).
Loaning residency expenses to your resident with an employment agreement to follow will be more complicated to structure, negotiate and document, than simply employing your resident from the outset. This will take more time and cost more in legal fees. You will need to balance this increased cost against the risk of incurring liability for your employee’s acts and omissions while a resident. Such balancing will require weighing various factors, including the extent to which the veterinary school or other institution is liable for their residents and to which your resident employee will be deemed to be acting within the scope of her employment. Common sense would indicate that the school or institution should be primarily liable for all resident activities and that the risk of your incurring such liability is remote. But all bets are off in our sue-happy society. It may also be possible to cost-effectively insure against any residual liability. As a precaution, your resident should agree to seek your permission before engaging in any remunerative activity while a resident, (e.g., working at a shelter or temping at an emergency clinic), so that you can evaluate the risk thereof.
Finally, depending upon the residency program’s schedule and how far away it is from your practice, consider whether you want your resident to work for you during week-ends, holidays and/or residency program breaks.
- Ensuring Diligence. Whether or not your resident will be completing her residency at your practice, she should agree to diligently pursue her residency to completion, which will include studying and sitting for the boards as soon as she is permitted to do so. Your resident should commit to become board-certified by a certain deadline (which can be extended for a limited time if your resident becomes disabled). If the residency program is held off-site, your resident should agree to provide you with adequate documentation to monitor her progress.
- Residency Expense Tracking. Your residency provisions will also need to specify the residency expenses for which you will be responsible and how they will be documented and paid. Consult with your tax advisor to ensure that this is done in a tax efficient manner.
- Residency Expense Repayment. Now for the stick. The residency provisions typically will provide that the resident will repay the residency expenses you have advanced, unless she works at the practice through the end of the agreed upon retention period. In essence, your resident is “working off” her “debt” to you. (The “debt” being your advance of residency expenses to her.) Thus, during the retention period, your former resident’s compensation should be less than market to reflect this “repayment.”
This loan analogy cuts both ways however, because a savvy resident will demand that the repayment obligation be suitably pro-rated, so that if she leaves, say, in the middle of the retention period, she need reimburse only half of the residency expenses.
The provisions should provide for a repayment schedule and an interest rate (or specify that the resident will owe no interest). In attempting to reduce interest as much as possible or eliminate it all together, a savvy resident will argue that the practice is benefiting from the services of a “captive” specialist, who cannot leave without incurring a substantial reimbursement obligation. This benefit is above and beyond what an un-affiliated lender would receive, and in consideration for this benefit your practice should not charge interest. (Be advised, however, that charging below market interest or no interest may subject you to tax liability.)
- Disability and Early Termination. Proper residency provisions must also cover life’s more foreseeable contingencies. The two principal intervening events that should be addressed are disability, and employee termination before the expiration of the retention period.
7.1. Resident disability generally will extend the deadline for obtaining board certification and also length of the retention period. If your resident’s disability lasts longer than this extension, she normally would be terminated, just like any other employee subject to long-term disability. But what about her repayment obligation? Should she still owe you for the residency expenses you advanced? If you’re tough you might say yes. If you’re nicer you might want to forgive your disabled resident’s repayment obligation in whole or in part. (Note that you might be able to insure against this risk.)
7.2. What happens if you terminate your resident before the end of the retention period? If you terminate for the usual “for good cause” reasons, then the resident should still repay you for the residency expenses you advanced. In this regard, the residency provisions should allow you to terminate your resident “for good cause” if she fails to become board-certified by a specified date.
But if you terminate your resident at your discretion, i.e., for any reason other than “for good cause”, then the provisions should extinguish your resident’s obligation to repay you for the residency expenses.
If your resident leaves before the end of the retention period she will owe you the residency expenses you advanced. That is after all the whole point of having retention provisions in the first place. But heads up: a savvy resident will require the provisions to address what happens if she terminates her residency agreement because of your breach of that agreement.
- Retention Bonus. If you wish to motivate your resident with a carrot in addition to the stick, the residency provisions can provide that you will pay your resident a specified bonus if she stays through a specified date (which need not coincide with the end of the retention period, and could even be paid periodically in installments). As with your resident’s obligation to repay residency expenses, the bonus provisions will need to deal with disability and early termination (either implicitly or explicitly).
- Residencies as CLE. Residency programs at veterinary schools or other institutions can constitute a valuable educational resource for your practice. Accordingly, do not forget to require your resident to provide copies of all interesting residency documents and give your practice periodic presentations of residency activities.
Like many things in life, residency provisions are simple in concept but complex in implementation. You will need to invest some time and effort, and incur some expense in preparing a proper residency agreement. Accordingly, it makes sense to temporarily employ your future resident at your practice before committing to any residency obligation—just to make sure that she is worth the investment.
High turnover among veterinary associates is caused principally by the failure of practice owners and employees to properly articulate their respective expectations and negotiate and document the employment relationship. Time and effort invested up front will help avoid mismatched expectations, misunderstandings and separation down the road.
Can the practice even afford another full-time veterinarian? Management consultants estimate that a small animal practice vet needs to produce 3,000-4,000 transactions annually and collect a minimum of $225,000-$300,000 gross income (excluding OTC product sales) to be worth his salary.
I. WHAT IS AN EMPLOYMENT CONTRACT? A contract is a set of bargained for promises between two or more people, where one party promises to do X in exchange for another party’s promise to do Y. Courts require that an enforceable promise meet certain conditions. For example, the parties must be of age (no minors), of sound mind, and not under duress; there must be no fraud or mutual mistake over an important aspect of the transaction, and the deal must not be so one-sided as to be “unconscionable.”
Consideration. To distinguish binding promises from charity or gifts (you can’t sue Santa Claus because he didn’t give you enough presents last year), the law requires that the party to whom the promise is made give “consideration” for the promise in the form of a benefit to the promissor and/or detriment to the promisee. Thus, Dr. Newgrad promises to work 50 hours per week in consideration for an annual salary of $58,000 (i.e., a benefit to Newgrad and detriment to Oldguy). Oldguy promises to pay such salary to Newgrad in consideration for Newgrad’s labor (benefit to Oldguy and detriment to Newgrad). Consideration exists for each promise which is therefore enforceable.
Avoid Oral Contracts. Oral contracts generally are binding only if their performance lasts less than a year, because the law assumes that the parties’ recollections of what was agreed to become unreliable over time, increasing the tendency to remember events in a self-serving way. Few disagreements are less productive than the “you promised X,” “I don’t remember X but you promised Y” litany. Prevent such wasteful bickering by always insisting on a written contract, regardless of it’s term.
II. CONTRACT FORMATION. Legal theory provides that a contract is formed once an offer is accepted. Real life usually is a lot messier.
Offer An offer can be oral or written (e.g., employer advertisement in a professional journal, on a bulletin board or mailed to the applicant). Typically, the prospective employee will ask for clarification and wish to change the terms of the original offer by making a counter-offer. The employer counters such counter-offer with his own counter-counter-offer. This confusing and frustrating process continues until either the parties reach an agreement or, realizing they can’t make a deal, go their separate ways.
Acceptance Legally, the contract is formed as soon as the offer is accepted. This can be a trap for an impulsive party who accepts an offer, but who later (like Columbo) asks for “just one more thing.” After acceptance, it’s too late and the other party can sue for damages if the impulsive party doesn’t perform his or her obligations under the originally accepted offer.
Ideally, an accepting party will clearly indicate his acceptance to the offering party, at best by signing an employment agreement or acknowledging acceptance in writing on the offer. More difficult to prove, but still unambiguous is an oral “I accept” or words to that effect.
Avoid unclear contract formation situations. Courts have created the so-called “action in reliance” (promissory estoppel) doctrine to find enforceable contracts even when one of the parties thought no contract existed. Courts have found valid contracts in cases where an:
- employer knew or should have known that the employee had acted “ in reliance upon the offer” such as incurring expenses to move to the job location, searching for lodging thereat, and informing other employers they no longer are job applicants; and
- employee made the last offer or counter-offer, and such employee knew or should have known that in reliance thereon, the employer ceased advertising for the position, informed candidates that the job was filled, or bought new equipment or hired additional support staff in anticipation of the employees arrival.
Accordingly, a party considering an offer should not talk or act in a way it knows or should know will lead the other party to believe that such offer was accepted and should make sure that the other party is not taking action “in reliance” on anything it did or said.
III. CONTRACT TERMS. Assuming that the offer, counter-offer, counter-counter offer, etc. ballet results in the bliss of acceptance, the employment contract terms contain the nuts and bolts of the “meeting of the minds” of the parties. Following is a list of the main questions addressed in a proper employment agreement:
1. How Long? Is there a fixed term (period) of employment (six months, one year, two years, or is it “at-will” (i.e., the contract continues until a party decides to terminate it)? Is the term automatically renewed on the expiration date?
2. Work Schedule. How many scheduled hours per week must the employee work, and beyond the schedule, how many additional hours will employees actually spend phoning clients, performing diagnostics, interpreting laboratory work, overseeing patient care, etc. What is the schedule for any required emergency work? Is it equitable?
3. Duties. What are the associate’s responsibilities? May employees decline (without penalty) to perform procedures they deem ethically wrong? How much emergency duty is required?
4. Compensation. Is compensation a fixed salary or commissions based on the revenue generated by the employee and collected by the practice, or is it a hybrid system under which the employee earns the higher of a base salary or a percentage of generated (and collected) revenue (a.k.a. percentage based compensation)? How are production bonuses calculated? Is there a performance bonus and if so what are the evaluation criteria? what is it based? Is emergency work paid extra? How much?
- National starting salary information is published at least annually in the Journal of the AVMA. See also the latest biennial edition of the American Animal Hospital Association’s Compensation and Benefits-An In-Depth Look and the AVMA’s Economic Report on Veterinarians and Veterinary Practices Two periodicals, Veterinary Economics and Veterinary Hospital Management Association Newsletter, also regularly publish helpful articles.
- Pay attention to deductions. What will be deducted from employee compensation? Some employers deduct not only the employee’s portion of payroll taxes but also the employer’s share.
5. Employee Benefits. Practices usually offer at least some of the employee benefits described below to their employees. The cost of many benefits (such as health, professional, and disability insurance, qualified retirement plans) are tax deductible business expenses to the employer and are not included in the employee’s income, resulting in a savings to the employee of 25 to 40%. Not taking advantage of this juicy gift from Uncle Sam is wasteful. On the other hand, employees must realize that the practice probably can’t afford all the benefits they desire. One leading veterinary management consultant has calculated that small animal veterinary employers cannot afford to allocate more than 23 to 27% of the collected income generated by an associate veterinarian to pay his or her salary and benefits (due to lower overhead, the range is 28 to 32% for large animal practices).
- Health Insurance. Does the employer offer health insurance? If not, what does the employer do when he gets sick? If so, what kind of medical plan is it (e.g., fee for service, HMO, PPO)? What about pre-existing conditions, vesting, eligibility, deductibles and co-payments?
- Disability Insurance. Employees at age 25 have a 58% chance of becoming disabled for more than three months (with an average disability duration of three years), so employees need disability insurance to protect their greatest asset: the ability to work. If the employer does not offer disability insurance, employees are well advised to get it on their own (after asking, of course how the employer, protects himself or herself against disability).
- Professional Liability Insurance PLUS License Defense. Do employers pay the premiums on the employees’ professional liability insurance?
- Retirement Plans. Has the employer established a retirement plan for the employees? (Profit sharing plans are the most common type of retirement plan offered by veterinary practices.) When do employees become “vested” or “eligible?” If the employer does not offer a retirement plan, employees will need to save on their own (and that means more than just the annual IRA contribution).
- Vacation. One week? Two weeks? More? How many consecutive days may be taken? How much advance notice must be given? May unused vacation days be carried forward to next year? How are vacation days paid for percentage compensated employees?
- Sick Leave and Disability. Does the employer offer paid sick leave? Disability leave? After how long can disabled employees be terminated? May unused sick days be carried forward?
- Continuing Education. How many CE leave days are granted and are they paid? To what extent do employers reimburse CE expenses?
- Association Dues. Are national, state and/or local veterinary association dues reimbursed?
- Veterinary License Fees and DEA Registration. Are these fees paid by the employer? Should the employee register with the DEA so she is permitted to prescribe and order controlled substances (rather than just administer them under the supervision of a DEA licensed veterinarian)?
- Relocation (moving) expenses. Most corporate and government employers provide some form of moving expense. Sometimes a “signing bonus” or short term loan can cover all or part of these costs.
- Vehicle allowance or mileage payments. Employees using their personal vehicles for practice business should be reimbursed for a pro-rata portion of their insurance, general maintenance, registration and inspection fees, fuel, repairs, depreciation, and lost opportunity costs.
6. Performance Evaluation. Will the employer provide written and/or oral performance evaluations? How often? Will these be used to modify compensation?
7. Non-Competition. Many employers require their employees to sign non-competition clauses (also called restrictive covenants) forbidding terminated employees from competing with the employer. Such clauses must be limited in time (e.g., three years after termination) and geographic area (e.g., 15 air-miles from the practice) to be enforceable. The precise limits on the scope of such clauses vary from state to state. From the employer’s perspective, this is the most important reason to have a contract. Without a non-compete, employers cannot protect the goodwill they have worked so hard to build.
8. Termination. Does the contract have a specific term (e.g., “this agreement will expire after one year”) or is it employment “at-will”, in which case, either party can terminate the relationship at any time, for any reason? Contracts with no term are deemed to be “at-will” in most states. If there is a term, then an employee leaving or an employer firing before the term would constitute a breach unless the contract provides otherwise. Most contracts which provide for termination before the expiration of the term require that the terminating party give advance notice (e.g., 30 days) to the other party. Such contracts usually also contain a list of situations (e.g., suspension of the associate veterinarian’s license) permitting the employer to fire the employee at any time without notice (a.k.a. termination “for cause”).
Employees should make every effort to leave their employer on good terms even if they are not requesting a reference. The veterinary industry is quite small, and an employee’s reputation can easily suffer through casual conversation among colleagues.
9. Option to Buy-In. Experienced associates that have their own clientele, may not wish to enter into an employment agreement with a non-compete, without also being provided with an opportunity to buy an interest in the practice after a 1-3 year “try-out” period. These often are complex provisions to negotiate depending on the amount of security the associate wants up-front, and should not be undertaken without consultation with an attorney that has experience with medical practice transactions. Too often associates lock themselves into a non-compete, and agree to an “option” provision that turns out to be a smoke screen.
IV. LAWYER REVIEW. Negotiating and drafting an employment contract can be long, painful and complicated. It therefore makes as much sense to seek professional help in this endeavor as it does to take a pet to a qualified veterinarian when it is sick. Lawyers are expensive, of course, just as much as veterinarians…
Dr. Lacroix assists veterinarians nationwide with drafting and negotiating veterinary employment contracts and can be reached at her office at 908-782-4426 or through her website at www.veterinarybusinessadvisors.com.
V. ADDITIONAL INFORMATION. This is just a thumb nail sketch.
- For an exhaustive study, consult, Contracts, Benefits, and Practice Management for the Veterinary Profession, written by James F. Wilson, DVM, JD; Jeffery D. Nemoy, DVM, JD and Alan J. Fishman, CLU, CFP.
- For what you need to know as a new veterinarian associate, look for The Veterinary Associate Survival Guide published by AAHA.