Non-Compete, Non-Solicitation, and Non-Disclosure: What are they and do we need them?

Congratulations! You have a thriving practice and have hired your first associate veterinarian who will not only share the workload but help build up your caseload and the practice’s goodwill. This hopefully will translate into more free time and higher profits!! Your new associate immediately embraces the culture of your practice and everyone upon meeting her instantly loves her. Life couldn’t be better.

The associate, with your blessings of course, begins to build her own clientele within your practice. Over the course of her 3 years of employment, she builds a very large following of loyal pet owners. A win-win situation for all, right? Wrong, think again! Your young protégé decides not to renew her employment contract. She in fact decides to branch out on her own and open up a mobile veterinary practice in the very same town as your hospital. Why not work for herself, control her own work schedule and make more money? Sadly, you watch that very large client segment of your practice, you have handsomely paid her to build, walk right out the front doors of your hospital and into her mobile small animal practice.

You may not be able to prevent an associate from leaving your practice and working for another practice or starting her own, but there are preventative measures you can implement to protect your clientele and goodwill from being unfairly poached by your former associate. This is where the importance of non-compete, non-solicitation and non-disclosure and agreements come into play.

What is a non-compete, non-solicitation and non-disclosure agreement?

When creating an employment contract for a new associate, you want to make sure you protect your investment in the event things do not work out and your employee decides to stay and practice in “your” neighborhood. One of the many ways in which you can do this is by having an attorney include within the employment contract several “restrictive covenants”, provisions that contractually prohibit an employee from engaging in certain forms of unfair competitive conduct that are harmful to your business.

These restrictive covenants come in three general types; Non-Compete, Non-Solicitation and Nondisclosure (Confidentiality) Agreements.

1. Non-Compete agreements are generally found in employment contracts of key personnel, which generally, includes, veterinary associates, partners, and management staff. This restriction places formal limitations on such individuals from providing competitive services similar to those offered by their prior employer. For example, equine practice employers can prohibit former employees from competing in equine practice, but not small animal practice, since small animal veterinary medicine is not competitive with an equine practice. This limitation must be limited to business’s client list or the employer’s trade area (meaning the geographic area from where approximately 85% of the clientele come from).

2. Non-solicitation clauses restrict former employees from soliciting clients or other employees away from a practice. Solicitation is a broad concept and can include, direct mailings to a specific list of clients (printed out from the prior employer’s computer program) or general forms of advertisement such as listings in newspapers or periodicals distributed within the practice’s client trade area or enticing employees to leave the current practice and work with the former employee at the new practice.

3. Non-disclosure (or confidentiality) covenants prevent the use or disclosure of confidential information, such as client lists, fee schedules, marketing strategies, financials, and other forms of proprietary information, which have been available to employees during their employment.

Together these covenants protect the employer’s investment in building and developing the practice, its clientele, reputation, staff, and services. The “practice’s goodwill” is the key ingredient to determining a practice’s value and its ability to generate income from future growth and profitability. These covenants when applied in conjunction with the policies and procedures in the practice’s employee manual go a long way to protect client relationships and the tremendous efforts expended in fostering them.

Another important preventative measure you can start implementing immediately, is ensure that your clients begin to build a relationship with all your veterinarians in your hospital as opposed to just one! Your client services representative should be trained to schedule appointments amongst all the doctors and your clients should be educated on the value of establishing a client/doctor relationship with all of your practitioners, not just their “favorite” one. This helps build the loyalty of your hospital as a whole and not be vulnerable to the loyalty following the departing associate out the door. This of course includes YOU as the owner. Make sure you know your clients and provide their pets with professional services every couple of years.

Courts will enforce these restrictions if they are deemed to be fair and reasonable and generally look at three factors to assess “fairness”: the employer’s need for protection, the hardship experienced by the employee, and the effect restraints will have upon the public. In doing so, the court evaluates the employers’ and employee’s relationship and whether each of the restraints is reasonable, in terms of the scope of the restricted activity, geographic and time limitations. Laws vary from state to state regarding enforceability of these restrictive clauses and some states, like California, do not enforce non-compete agreements in employment agreements. Therefore, it is advisable that one check with legal counsel when considering including them in employment contracts.

Think of these protections as a form of vaccination. It takes discipline and some legal advice to implement them, and while they may not be 100% effective in protecting the business from a disgruntled employee who wishes to unfairly compete against your practice, they can certainly afford you significant protection against the unfair competitive disease.

Malpractice Risks… Where are they?

In the law of professional negligence, the standard of care is the benchmark by which others assess a veterinarian’s competence. To be within the standard of care, veterinarians must perform their duties with an average degree of skill, care and diligence exercised by colleagues practicing under the same or similar circumstances. Unfortunately, this is a general rule and not always helpful when one is trying to determine whether or not to do something in a given situation. For example, when is it or isn’t it necessary to refer a patient?

In general, compared to other professionals, veterinarians are minimally regulated. Aside from the state board of examiners, DEA and OSHA, few governmental agencies interfere with how we practice medicine. This is a good thing, because veterinarians can still exercise independent judgment. It is a bad thing, however, because it is not clear as to what and what is not the standard of practice. For this reason, authors of this manuscript have compiled a set of veterinary care standards for various exotic species. We believe that it is better such standards are articulated and published “within” and “for” the industry, rather than waiting around and having the lawyers and courts determine the standards one by one, each at the expense of a veterinarian’s career.

There are primarily two areas of law that regulate the conduct of veterinarians and help ensure that veterinarians act prudently and reasonably in their dealings with clients and their animals. The first is the civil court system that adjudicates claims made by clients who allege that their veterinarians have acted negligently. The second is the state board of examiners which is an administrative office charged with enforcing a state’s veterinary practice act which sets forth laws with which veterinarians must comply to obtain and maintain their veterinary licenses. In performing their daily clinical duties, veterinarians should be cognizant of these two areas of law since they represent the two principle avenues by which clients may have complaints addressed.

Receiving letters from the state board of examiners and or a disgruntled client’s attorney can be very distressing, causing veterinarians to respond impulsively and not always in their best interests. This is especially the case with veterinarians who have been practicing for only a few years since they are not likely ever to have been named in a lawsuit or reprimanded by a regulatory agency. It is important for veterinarians to realize that how they initially respond to such allegations can have a significant impact on the outcome. For this reason it behooves us to become knowledgeable about the processes by which state boards and the courts adjudicate such allegations. The following scenario illustrates how these procedures work in real life.

Martinique’s Case

Mrs. Bridges brings in Martinique, her 2 year-old female iguana, to Dr. Steel, a small animal practitioner who prides himself in being knowledgeable about exotics as he is a member of the Association of Avian Veterinarians. Mrs. Bridges informs Dr. Steel that Martinique has not eaten for 2 weeks and after performing a physical examination, Dr. Steel diagnoses “Egg Binding”, a common condition in both birds and reptiles. Without advising Mrs. Bridges of his limited experience with reptiles, nor offering her a referral to a colleague who has more experience, Dr. Steel obtains Mrs. Bridges’ consent to perform a spay surgery on Martinique. Dr. Steel has performed many spay surgeries on birds to treat “Egg Binding”, and performs the same surgical procedure on Martinique whereby he removes the shell glands without removing the ovaries. Martinique is sent home and recovers well from surgery after 3 weeks of antibiotics and hand feeding.

Next spring, Martinique goes off her food again, but this time, she is lethargic and has a markedly swollen abdomen. Mrs. Bridges is concerned this is a recurrence of the same problem and brings Martinique to a new vet in town, who advertises herself as an exotic veterinarian with expertise in reptiles, birds and pocket pets. Dr. Zoo examines Martinique, performs an x-ray and ultrasound, and diagnoses “Egg Binding.” Mrs. Bridges is puzzled and frustrated as to why Martinique has the exact same condition, when the surgery performed by Dr. Steel, a year ago, should have permanently fixed the problem. Dr. Zoo, also is confused, and with Mrs. Bridges’ consent obtains a copy of Martinique’s medical records and contacts Dr. Steel.

The medical records are vague at best. The only notation relative to the surgery is “spayed, surgery routine, recovery uneventful.” Dr. Steel confirms the information in the medical records and informs Dr. Zoo, in a patronizing manner, that his experience is that reptiles are just like birds, and their shell glands can be removed without removing their ovaries. In a defensive tone, he tells her that he has been performing these procedures on reptiles long before she was ever admitted to veterinary school.

Dr. Zoo responds to Dr. Steel by informing him of her residency training in exotics, experiences working at various zoos around the country, and tells him that reptiles are not at all like birds and must have their ovaries removed. She further explains that since the ovaries were not removed during the first surgery, Martinique has re-presented with the same symptoms because she has ovulated eggs, which are now in the coelomic cavity. In fact, she tells Dr. Steel that it is likely that Martinique was just pregnant a year ago and did not have “Egg Binding” condition as he had diagnosed and due to his misdiagnosis, Martinique will need a second surgery.

After speaking with Dr. Steel, Dr. Zoo informs Mrs. Bridges that Martinique will need a second surgery and discusses the procedure and fees involved. Mrs. Bridges, who is angry that she has to pay a second time for the exact same procedure, asks Dr. Zoo to discount her fees. While sympathetic and understanding, Dr. Zoo explains to Mrs. Bridges that a discount is not possible. Frustrated, Mrs. Bridges leaves Dr. Zoo’s hospital with Martinique. Later that night Martinique became weak, started mouth breathing and was unresponsive to touch. Mrs. Bridges rushed her pet to the local emergency clinic where the doctor on duty performed an emergency exploratory. Sadly, Martinique died during the recovery.

Three months later, Dr. Steel receives two letters; one from the State Veterinary Board of Examiners and another from Mrs. Bridges’ attorney. The state board letter requests Dr. Steel to respond to Mrs. Bridges’ assertions that Dr. Steel was negligent in (a) failing to inform her that the he was not experienced in treating reptiles; (b) failing to offer a referral to a veterinarian who was qualified and experienced in treating reptiles; (c) misdiagnosing Martinique’s condition; (d) performing a surgical procedure below the standard of care; and (e) failure to maintain appropriate medical records. The correspondence from Mrs. Bridges’ attorney includes a copy of a complaint filed with the state court alleging malpractice and a demand for $100,000, for economic and emotional distress damages.

What should Dr. Steel do? Responding to Allegations of Professional Malpractice

How veterinarians address such accusations will in part depend on whether the allegations are in the form of a lawsuit, state board complaint, or both. Regardless of the form in which the allegation is made, the first step veterinarians should take is to carefully read the complaint and determine what is being requested of them and in what time frame. Once this information has been assimilated, they should gather the pertinent medical records and any other documentation relating to the services in question and write down in chronological order their recollection of the events.

In this case, the complaints allege that Dr. Steel performed a procedure for which he had insufficient knowledge, failed to refer the case and had poor medical records. The facts indicate that Dr. Steel examined Martinique, made a diagnosis and performed the spay to treat the “Egg Binding.” Dr. Steel should carefully review the medical records to corroborate his recollection of the events. Unfortunately in this case, because the documentation is poor, it will be a scenario of Dr. Steel’s word against Mrs. Bridges’. For example, it will be difficult for Dr. Steel to claim that he informed Mrs. Bridges of alternatives, including a referral, as there is no such notation in the records. Since Dr. Steel has a legal obligation to maintain medical records, the fact that he hasn’t will imply that he also was careless with his medicine. As he reviews the records, Dr. Steel should write down the events that led to Mrs. Bridges’ complaint. Most veterinarians will find this helpful since it will refresh their memories, help them develop a consistent “story” as to what happened, and provide a draft from which to develop a written response.

So as not to compromise his defense in the lawsuit, Dr. Steel should immediately upon receiving the complaint, contact his professional liability insurance carrier and ask for advice. However, if Dr. Steel suspected earlier that Mrs. Bridges was likely to pursue legal action, he should have contacted his insurance carrier at that time. Insurance carriers may differ in how they handle negligence actions, but usually require the defendant to fill out a claims form in which the veterinarian describes the circumstances that led to the claim. A claims representative then reviews the facts, makes a recommendation as to a course of action and may assign an attorney to the case if the complaint cannot be settled quickly. In this case, if Mrs. Bridges is offered a settlement and rejects it, it is likely an attorney would be assigned to defend Dr. Steel since in this case it appears that Dr. Steel’s care was substandard in several respects.

In dealing with the letter from the state board, Dr. Steel should be aware that he will most likely be defending his conduct at his own expense, since professional liability insurance carriers generally do not provide coverage for state board actions (exception: AVMA-PLIT now offers a limited policy insuring against state board actions). While Dr. Steel may respond on his own, it is usually advisable for him to obtain legal advice as to how he should respond to the allegation(s) and at the very least have an attorney review his letter. In drafting his response, Dr. Steel should not underestimate the time and effort it will take to address all the issues in the complaint, in an organized and articulate manner. Responses that are, disorganized, incomplete and difficult to follow, often lead to further investigation by the board as opposed to an early dismissal of the charges. Additionally, Dr. Steel may find it helpful to consult with other veterinarians to determine whether they use inform their clients of alternatives and/or “wing it” on exotic patients. This will assist Dr. Steel in determining whether he acted within the standard of care and provide an indication as to his liability.

Negligence

The burning issues for Dr. Steel of course, are whether he was negligent in failing to (a) refer Martinique, (b) remove the ovaries and, (c) maintain proper medical records. Our courts and juries decide negligence on a case by case basis in light of the specific facts and circumstances of each situation, but, veterinarians should be aware of a few general principles. First and foremost, it is important to note that a veterinarian can be found negligent even if he or she did not intend to cause harm. Simply put, “I didn’t mean to” is no defense to “you should have known better”. A simple mistake can lead to liability.

Secondly, veterinarians can be found negligent even if the rest of their colleagues would have acted in the exact same way. Judges can determine that the entire industry is at fault if it is in the public’s interest. Judge Leonard Hand, a famous judge once wrote in his opinion “courts must in the end say what is required; there are precautions so imperative that even their universal disregard will not excuse their omission.” Hence it is a false security to rely on what the rest of your colleagues are doing.

To recover damages from a veterinarian based on negligence, a client must prove four elements by a preponderance of the evidence, meaning it is more likely then not that the veterinarian erred:

Duty of Care. Clients must show that their veterinarians “owed” them a duty of care to provide veterinary services of a certain standard. This element is easy to prove, because courts almost always find that once a veterinarian has agreed to provide veterinary services, the veterinarian also has assumed the legal duty to take reasonable care in providing such services. In our scenario, Dr. Steel clearly owed Mrs. Bridges a duty to take reasonable care in providing veterinary services to Martinique.

Breach of Standard of Care. A duty to provide services within the standard of care is breached when veterinarians fail to meet the standard of care as established by the veterinary profession, that is, when they fail to act with the level of skill and learning commonly possessed by members of the profession in good standing. Mrs. Bridges probably will be able to prove breach of duty if her attorney can show that veterinarians routinely remove ovaries when spaying iguanas. Conversely, Dr. Steel will attempt to establish that he did not breach his duty of care, by showing that most general practitioners do not remove the ovaries and the patients do just fine. It is at this stage that expert witnesses are hired to testify as to what is the standard in the case at issue.

Proximate Cause. Clients must then prove that the veterinarian’s failure to provide services within the standard of care “proximately” or “closely” caused the harm suffered by the clients. If the harm suffered by the client is not a result of the veterinarian’s actions or omissions, it would be unfair to hold the veterinarian responsible. In our case, it is clear that Martinique’s death was caused by Dr. Steel’s initially performing the incorrect surgical procedure. Suppose, however, that Mrs. Bridges is suing Dr. Steel because Martinique died of renal failure a month after spay procedure. It will be a lot harder to prove that Martinique’s death resulted from anything Dr. Steel did or failed to do during the procedure.

Damages. Even after they have proved negligence, clients also must establish that they suffered harm resulting from such negligence. Since animals are considered as property under the law and most state courts do not recognize loss of companionship, this harm is usually in the form of an economic loss. As a result veterinary malpractice awards are usually much lower than in human malpractice cases and clients usually only recover the fair market value of the animal, costs incurred for veterinary care, and loss of income or profits in cases where the use of the animal is lost. However, we are seeing more and more states entertain the possibility of awarding non-economic damages and this is likely to increase the scrutiny with which standards of care are evaluated as well as the number of lawsuits filed against veterinarians.

Responding to Client Complaints

Veterinarians often can avoid receiving letters from clients’ attorneys and state boards by addressing client complaints long before client dissatisfaction leads to legal recourse. Clients often resort to litigation and or state board action when they believe their veterinarian either acted negligently or failed to respond appropriately to their concerns. When faced with a client complaint, veterinarians should consider the following:

1. Listen to the client.
a. Clients who have complaints are often angry and need the opportunity to “vent”.
b. Veterinarians should show their clients that they are taking the matter seriously by listening carefully to what their clients have to say and taking notes of the conversation.
c. Do not interrupt the clients since this will only anger them further and likely interfere with a clear understanding of the facts.

2. Remain calm and objective.
a. Avoid becoming defensive and emotional, since this may inadvertently reinforce the client’s belief that the veterinarian acted inappropriately with respect to the care of the client’s pet.
b. A client’s criticism of a veterinarian’s actions, even when fully justified, does not necessarily mean that any negligence occurred. Veterinary medicine is an imperfect science and veterinarians are not omnipotent.

3. Communicate, communicate, communicate.
a. Many lawsuits are filed because veterinarians fail to adequately communicate with their clients. Often the client does not fully understand the diagnosis or proposed treatment and has unrealistic expectations as to the veterinarian’s services and the respective outcome.
b. Veterinarians can enhance communication and reduce potential misunderstandings by 1) obtaining informed consents, 2) providing fee estimates, 3) encouraging questions, and 4) providing handouts explaining the contemplated services.
c. Veterinarians should use “plain English” when communicating to clients since medical jargon may not only confuse clients but also intimidate them, making them reluctant to ask important questions.

4. Show sympathy and concern.
a. Clients whose pets have died are often emotionally distraught and under certain circumstances may seek to blame someone, sometimes their veterinarian, for their pet’s death. Veterinarians who are compassionate and attempt to comfort their clients are more likely to diffuse their client’s perception that the veterinarian should be held accountable for their pets death.
b. Veterinarians should not hesitate to recommend grief counseling for clients who appear to have difficulty coping with the loss of their pet. Several veterinary schools have such hotlines, including, the University of California at Davis, University of Florida and Colorado State University.

5. Coach the staff.
a. Staff members can help diffuse client complaints and should be coached in what to do and say, if anything, when a client complains.
b. The staff should remain professional at all times and avoid “offensive – defensive” discussions with clients who may be less intimidated by staff members and therefore more hostile to the staff as compared to the veterinarian.

6. Do not admit fault or offer a settlement.
a. Veterinarians should avoid making apologetic statements or excuses and should not admit fault, since this would compromise their case in the event a lawsuit was later filed. Veterinarians with only a few years of experience are more likely to feel guilty and accountable for bad outcomes, even though there was no negligence. Remember that “feeling guilty” is NOT the same thing as “being guilty.”
b. Veterinarians should not offer to settle a malpractice charge or agree to any settlement offered by the client without first contacting their insurance carrier and attorney since it may be interpreted as an admission of fault, thereby prejudicing their case. Under certain circumstances it may be appropriate to reduce the client’s bill in an attempt to amicably and expeditiously resolve a dispute, but without admitting liability.

Avoiding Client Complaints

Just as an ounce of prevention is worth a pound of cure, the best practice to avoid being dragged into a lawsuit or state board investigation is to take measures to avoid client complaints. Even if successful, Dr. Steel will spend a lot of time, effort and money, defending himself in court and before the state board. In retrospect, it would have been far less costly and burdensome if Dr. Steel had informed Mrs. Bridges that he had limited experience with reptiles and Martinique should be referred to an exotic veterinarian with expertise in treating reptiles—at a minimum Dr. Steel should have done his research before performing surgery.

Veterinarians will save themselves a lot of grief if they periodically evaluate their practices to identify areas where preventive measures and procedures will help avoid complaints before they start. Additionally, veterinarians should regularly consult with the staff, their colleagues and perhaps even their insurance carrier to ensure that they are aware of the latest preventive measures adopted by other practitioners. Keeping abreast of developments in the legal liability field should be an integral part of any veterinarian’s continuing professional education. Because people are people, there is no way to prevent client complaints entirely. But in this area like many others, ignorance is dangerous and a preventive attitude is the best approach.

Conclusion

Being accused of malpractice can be a disconcerting experience for any veterinarian, but especially for associates who have been in practice for only a few years. These allegations can come in the form of a civil law suit or state board action and require veterinarians’ immediate attention so as not to compromise their defense. Preparing a defense against such allegations is facilitated by having knowledge of the law of negligence and an understanding of the adjudicatory process. Nonetheless, the best defense lies in addressing client complaints when they first arise by using honed listening and communication skills, keeping abreast of the standard of care within the industry and adopting preventative measures.

Veterinary Employment Contract Legal Issues

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.

Buy-Sell Negotiations: Ethical Disclosures or Buyer Beware

Buying or selling a veterinary practice generally is a long and arduous process. Preparation and a good lawyer are key to smoothing the bumps along the way.

I. PLANNING

How well you plan determines whether you will control the process or vice versa. Beyond identifying what is to be sold and the purchase price therefore, here is an overview of the main planning issues:

A. What Seller should be doing. Future retirees should note that it can take a decade to properly prepare a practice for sale.

  • Tax. Find out how the sale price will be taxed. Tax planning may require transformation of the practice legal structure and long waiting periods to optimize tax on sale. Bear in mind that the buyer may not accept the structure you wish to use for the transaction (e.g., he may prefer to buy assets rather than an interest in the practice entity.)
  • Practice Appraisal. To increase practice profitability and sales price, it may be worthwhile to get an appraisal. Implementing the appraisal’s recommendations may take several years. From the buyer’s perspective, a purchase without an appraisal may mean the practice does NOT have the cash flow to fund the purchase payments. If the buyer defaults on the payments, seller may have to take back practice, long after retirement.
  • Cleaning Up. Consult with your lawyer to see if there are any liabilities that should be taken care of before the sale (e.g., settle a claim). You also need to address any personal guarantees you have given to the business, and third party claims on any assets to be transferred (such as spouse and secured lenders). If the practice entity owns the real estate, you may need to divest it (at what tax cost?) back to yourself or another entity you own because the buyer may be unable to afford to buy both.
  • Financing. Many potential buyers can’t afford to pay cash and can’t get bank loans on acceptable terms. Consider whether you should provide financing by taking buyer’s promissory note (secured of course) for a portion of the purchase price.

B. What Buyer should be doing. Buyer’s planning phase usually is much shorter than seller’s. Try to minimize preparation expenses until you are reasonably sure that you have a deal with the seller. If the deal is aborted, you want to be as little “out-of-pocket” as possible.

  • Hiring Counsel. When hiring counsel, trust your instinct. If you don’t feel comfortable with him or her, get another one, there are plenty around. You find a good lawyer the same way you find a good doctor: by word of mouth. Your lawyer should be at least as smart as you are. Avoid lawyers that not nothing about assisting buyers purchase medical practices.
  • Tax. Find out how the sale can be structured to minimize taxes down the road for the new owner(s) and the practice, including taxes when you sell or withdraw from the practice. (Remember every buyer is destined to be a seller.)
  • Due Diligence. You don’t buy a house without visiting it, nor a car without a test drive. Buyers need to spend time at the practice to “kick the tires.” One of the most important goals of due diligence is to make sure buyers are not picking up hidden or poorly identified liabilities. Due diligence allows early detection of potential problems, so that the parties can address them…or separate. Not infrequently, good due diligence leads to a reduction in purchase price.
  • Financing. If you can’t pay cash, you need to line up financing (or be prepared to ask the seller for same) well before the sale.
  • Co-Ownership Issues. If you are just buying a portion of a practice or joining with other partners to buy a practice, there are many co-ownership issues that need to be addressed. Like marriage, co-ownership works a lot better if the principal terms governing the relationship before getting hitched. At least as much time and effort should be allocated to properly establishing and documenting your relationship with your partners, as to the purchase itself.
  • Investment Vehicle/Practice Structure. Unless you are buying into a pre-existing structure, consult with your lawyer to find the investment vehicle or practice structure best suited to fulfill your tax, financing and (co)ownership goals. (In making this choice, do not omit to factor in you succession or exit strategy.) Even if buying into a pre-existing structure, be aware of the consequences. For example, stock purchases are riskier than asset purchases because all of the liabilities of a corporation automatically are transferred with the stock, whether or not such liabilities were disclosed to buyer.

C. What Seller and Buyer should be doing Together.

  • Employees. The practice’s employees constitute its most valuable asset by far and it’s in the interest of both parties that the transition take place smoothly. For the buyer, smooth transition is critical, since the departure of one or more key employees can cripple the practice. While legally (to avoid trailing liabilities), the buyer will insist that all employees be terminated prior to the sale (and to the extent the buyer wants to retain them, rehired after the sale), it is up to the parties to work together to ensure that the ownership change disrupts the employees as little as possible.
  • Contracts. In asset sales where contracts are to be transferred (e.g. real estate and equipment leases), the consent of the other party to the contract is required. Obtaining such approvals is often easier when both buyer and seller approach such other party together (although as a contractual matter, it is almost always the seller’s responsibility to get these consents).

III. NEGOTIATING THE DOCUMENTS

A. Preliminary Documents. At some point during the preparatory stage, the parties usually negotiate some form of preliminary document which can range from: (a) a short letter of intent, pursuant to which the parties agree to negotiate in good faith with each other (in some cases exclusively) and confidentiality; to (b) a detailed memorandum of understanding detailing the process for going forward; to (c) an at least partially binding detailed letter of offer which sets forth the main terms of the deal. The parties should make absolutely sure they understand to what extent these documents bind them to go forward, and what liability, if any, a party will incur if he withdraws from the deal.

B. Purchase and Sale Agreement. While the preliminary documents set forth an intent, a process or a framework, the purchase and sale agreement (called stock or asset purchase agreement depending upon the transaction) is the contract in which the buyer binds himself to purchase the practice and pay the price, and the seller binds himself to sell the practice, in each case subject to a limited number of conditions precedent to closing the deal. Some conditions precedent are applicable to both parties obligation to close (e.g. no litigation exist challenging the transaction). Some are applicable to only one party (such as buyer obtaining satisfactory bank financing).

Other than the price and conveyance language, the most important clauses of the purchase agreement are seller’s representations and warranties, pursuant to which seller makes a series of declarations about the business (there are no hidden liabilities, there is no outstanding litigation against the practice; all inventory is saleable in the ordinary course, etc.) These provisions are designed to protect the buyer in case the practice isn’t what it appears to be, but the devil is in the wording, and both parties should make sure that they are comfortable with the language.

Another key clause is the non-competition provision (a.k.a. restrictive covenant) which prohibits the seller from competing with the practice for a certain period of time (e.g., five years) within a certain radius (e.g., 15 miles). This is an important provision to protect the practice’s goodwill.

III. TOWARDS CLOSING

Signing the purchase agreement means that the parties commit to consummate the transaction once all of the conditions to closing have been satisfied. Closing the transaction means actually transferring legal title to the shares or assets and paying the purchase price. Between these two dates, the parties and their lawyers do what is necessary to ensure that the closing conditions in the purchase agreement for which they are responsible will be satisfied by the closing date. (For example, buyer may have to obtain bank financing and seller get certain third party consents to the deal.)

In many cases, the signing of the purchase agreement and the actual closing of the transaction take place simultaneously, in which case there are no closing conditions.

***

The preceding was merely a simplified overview. It seems that there are a billion issues and details that seller and buyer must keep track of when selling and buying a practice. That’s why competent legal advice is crucial. But if you feel overwhelmed, just ask yourself how you’d behave if the transaction involved a house or a car. Usually the solution will come to you as if by magic.

Employee Manuals – Friend or Foe

An employee manual (or handbook) contains the veterinary practice’s policies and procedures. It provides employees with information on practice rules, policies, scheduling, working conditions, expectations, employee benefits, ethics and philosophy regarding its employees, clients, patients, as well as the profession and community.

WHY BOTHER WITH AN EMPLOYEE MANUAL?

• For Self Defense. The EEOC, DOL, NLRB, IRS, INS, OSHA, DEA and EPA , among others, as well as their local counterparts have all issued detailed rules and regulations applicable to employees and/or the workplace. A considerable number of these rules require the institution of compliance or disclosure policies. The employee manual is the best place to show compliance with such requirements. Violations are likely to be judged less harshly when the owner can show that the alleged conduct was contrary to the practice’s policies as stated in the employee manual (i.e., an isolated incident vs. a pattern of violations).

• Manage Employees More Efficiently.

1. Employers with more than one employee quickly learn that failure to establish clear and consistent policies applicable to all employees results in considerable time wasted resolving disputes. Employees are less likely to challenge reasonable rules and policies laid out in advance to which they have agreed when they were employed. Sloppy, inconsistent or discriminatory decision- making regarding employees quickly creates a climate of distrust.

2. Employee manuals lay out what is expected of employees and details the employee benefits they may receive, thus cutting down on orientation “hand-holding” time.

3. While most employment contracts are negotiated, often heavily so, employees rarely challenge the employee manual. The manual is therefore a good vehicle to address a myriad of issues in a favorable way. (Within reason of course!)

  • A Good Investment. The employer must spend time, effort and money up-front in consultation with the practice’s counsel establishing the policies to be incorporated in the manual. This is one of the best investments that the employer could make, however, because the return in lower regulatory risk and better employee relations far outstrips the initial outlay. Moreover, thinking about employees in a disciplined way will surely reveal ideas on how to improve practice efficiency.

KEY EMPLOYEE MANUAL PROVISIONS

Employee manuals vary greatly depending upon the type and size of the veterinary practice, but here is an outline of the key provisions to be considered:

1. Disclaimer.
a. Manual does not modify employee’s at-will employment contract (if applicable).
b. Manual can be modified by the employer without notice. (Recommend binder form to facilitate updates. Each page of the manual should be clearly dated so that in case of claims, the employer can tell which version is at issue.)

2. Acknowledgment that employee has received and agrees with manual’s provisions. (Separate page to be signed by employee and returned to employer).

3. Confidentiality Agreement (if not in employment contract). (Separate page to be signed by employee and returned to employer).

4. Preface. (Welcome, practice philosophy, practice mission statement (client & patient satisfaction), practice history (try not to be too corny).)

5. No Discrimination Policy and Sexual Harassment Policy. (With person(s) to contact in lieu of supervisor at employee’s option.)

6. Work Schedule. (Breaks, lunch, overtime, flex time, attendance, punctuality, jury duty, voting on election day, holidays, snow days)

7. Leave. (Vacation, sick leave, maternity leave, continuing education leave, personal days.)

8. Employee Benefits. Qualified employee benefit plans often require employer to provide employees with “plan documents” complying with ERISA. Since these documents are subject to frequent updates, recommend that they be kept separate from manual and include employee acknowledgment forms similar to the one described in Section 2 above.

a. Insurance. (Health, malpractice, disability, workers’ compensation, unemployment, life.)

b. Retirement/Profit Sharing Plans.

c. Continuing education expenses (and perhaps approved community service expenses?). (Fair to provide maximum deadline for reimbursement after employee submission of receipts).

d. Veterinary license fees and professional association membership dues. (e.g, AAHA). (If many employees, consider having them pay a portion of such fees.)

9. Performance Evaluations (if not in employment contract). (The best way to get employee feedback.)

10. Other Practice Policies.

a. Workplace safety (with contact persons). (For the benefit of OSHA.)
b. Hazardous waste disposal rules. (For the benefit of the EPA.)
c. Controlled substance handling policy. (For the benefit of the DEA.)
d. No hiring of illegal immigrants policy. (For the benefit of the INS.)
e. Animal treatment policy. What constitutes “abuse” should be in employer’s sole discretion be cause for immediate dismissal. This section should also address employee’s right to refuse to perform acts he or she deems unethical (e.g., tail cropping).
f. Personnel records. (Kept confidential, employee may review his or hers on request.)
g. Code of conduct. (E.g., dress code (do not dress your technicians like parking valets!), no offensive language, cleaning up, no solicitation, no gum chewing in public areas, statements to the media.)
h. Injuries. (Provide contact person).
i. Keys, locks security. (Last person out must lock-up, turn on security alarm and turn off lights; persons working after hours must lock doors.)
j. Employees’ friends and family on premises.
k. Personal phone calls. (Discourage but do not prohibit outright.)
l. Personal use of computer. (Beware of employees engaging in actionable behavior on the practice’s computers.)
m. Employee grievance procedure. (With contact person in lieu of supervisor at employee’s option.)
n. Drugs and alcohol while on the job.
o. Smoking while on the job.
p. In case of fire…
q. Use of practice automobiles and parking rules.
r. Causes of Termination (must be consistent with employment contract).
s. Return of property upon employee termination.