Compensation Best Practices in 2020

It would be so simple if practice owners could open a fortune cookie for each one of their employees and find the method by which to fairly compensate them.  While there are commonly accepted methods of compensation, their implementation in veterinary practices varies because different entrepreneurs have different business goals.  Also, “fairness” is a relative term that introduces variability into an equation that might otherwise be consistent from practice to practice.  This article describes the factors that practice owners should consider when determining compensation for veterinarians and paraprofessional staff.

Benchmarks

Below is a table that provides a snapshot of current key indicators available for small animal companion practices.  It is not meant to be all-inclusive, but rather to provide some guidelines that enable managers to take the practice’s compensation pulse. They can then determine if the practice is on track for the next year or needs to perform some diagnostics to prevent a fiscal derailment.

Veterinary Compensation

            Many periodicals and books discuss the factors one should consider in establishing a compensation policy for veterinarians. Of particular importance is the question of whether compensation should consist of a fixed salary, a percentage of the revenue generated by the veterinarian and collected by the practice (i.e., commission-based), or a combination of the two. If a commission-based component is present, it is also important to consider how the revenue figure will be calculated. Will it be limited to revenues generated from professional services, or will it include revenues generated from items like over-the-counter medications and foods?    Percentages can also vary in relation to the magnitude of the revenue number that is generated.  Implementing compensation systems in practice requires attention to the details of production calculation and timing of payment. The key to remember is there is NO one size fits all when determining the appropriate compensation for veterinary and non-veterinary staff.  There are numerous factors that go into assessing the actual method used for compensation, which often requires the assistance of an advisor. 

National starting salary information is generally published annually in the Journal of the AVMA. (See: Employment, starting salaries, and educational indebtedness of year-2013 graduates of US veterinary medical colleges, October 1, 2013, Vol. 243, No. 7, Pages 983-987; Employment of male and female graduates of US veterinary medical colleges,  JAVMA October 1, 2011, Vol. 239, No. 7, Pages 953-957.) 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 (Wise, J., Center for Information Management, AVMA, Shaumberg, IL (Tel: 847-925-8070). Two periodicals, Veterinary Economics and Veterinary Hospital Management Association Newsletter, also regularly publish helpful articles. In addition, Wutchiett Tumblin and Veterinary Economics published Benchmarks 2019 Well Managed Practices.

Paraprofessional Compensation

Paraprofessionals are often compensated on an hourly basis and the industry has yet to develop widely adopted performance-based compensation models. Paraprofessionals generally report low job satisfaction and high turnover rates. In the 2016 NAVTA Demographic Survey, 38% of veterinary technicians left the practice due to insufficient pay, 20% due to lack of respect from an employer, 20% from burnout and 14% because of the lack of benefits. Full time technicians reported a salary between $15-20 per hour, while part-time technicians reported $14-16 per hour. After taxes, even the well-paid veterinary technicians are only slightly above what is considered the poverty line for a family of four in the United States ($24,300).

According to the United States Bureau of Labor Statistics, the median pay for veterinary technicians was $16.55 per hour in 2018. By comparison, a JAVMA published study on Jan. 1, 2016 of certified veterinary technician specialists reported that the weighted mean pay rate in 2013 was $23.50 per hour.

In AAHA’s 2020 Compensation & Benefits survey, average veterinary employee turnover was 23%.  Turnover was 32.5% for receptionists, 23.4% for veterinary technicians, 10.3% for managers, 16% for associate veterinarians, and 32.9% for all other staff. To compare with the national workforce, Compdata’s Annual Compensation Survey showed that national average turnover was 15.9% in 2010 and 19.3% in 2018.  The chart above can be helpful to calculate a practice’s turnover expenses. Turnover is a pervasive and expensive problem that can be mitigated by learning how to properly motivate employees. 

Lawful Terminations: A How-to Guide

When deciding whether or not to terminate an employee, and weighing the pros and cons, you need to assess the costs and benefits of keeping this employee versus firing him or her. Consider the following:

  • the nature of the behavior or performance issues involved
  • the seriousness of these issues
  • how this employee is affecting other employees or clients
  • how easily you can replace this employee
  • the costs of recruiting, hiring, training and retaining a new employee

If this employee is exposing your practice to significant legal or business risks, then the decision to terminate the employee will be different from one where, perhaps with coaching, the employee could potentially contribute to the company.

If the issues are increasing the workload and responsibility of other employees, then it is important to also consider the ripple effects that the behavior of one employee is having on the entire practice.

This article will review the key considerations when beginning the process of a lawful termination. Start with the question of why you are considering terminating this employee. It is important that you can determine the reason before moving forward with the rest of the process.

It may be tempting to terminate someone’s employment because he or she doesn’t fit well into the company culture, or isn’t especially likeable.  It’s easy to revert to the notion of at-will employment when that’s the case. The principle of at-will employment means that an employee can be fired at any time, for any reason, as long as there is not an illegal reason involved. Some people may conclude that there shouldn’t be a problem with this termination.

An issue can develop if you terminate an employee at will, and then that employee states that an illegal reason was involved. In this case, the employer must prove that this was not the situation.  Unfortunately, wrongful termination claims are not always easy to disprove. They can also harm your practice’s reputation, breed mistrust among other employees, and lead to lawsuits.

Next, we will review the following:

  • reasons for wrongful termination claims
  • the actual conversation about termination
  • information about high-risk terminations

Throughout this article, we will also share strategies to protect your practice.

Reasons for Wrongful Termination Claims

One reason for wrongful termination is employment discrimination. It can include discrimination based on race, color, religion, sex or national origin. An employer also cannot discriminate against an employee because of their disability, age or pregnancy. These are all illegal reasons to fire someone. You also can’t terminate an employee as a form of retaliation. 

An employer has the legal obligation to honor employment contracts, union or non-union, including termination clauses. Not doing so is considered breach of contract. There can also be an implied breach of contract, when a company implies, either in writing or verbally, that employment is protected.

This is not intended to be a complete list of potential wrongful termination claims. Instead, it can be used to show the flaws in simply firing someone, at will. There is a more graceful way to go through the process, and  when followed, it should prevent the employee from being surprised that he or she is getting fired. Therefore, the employer is better protected against claims of wrongful termination.

Poor Performance/Behavior Over Time

It’s important to create and carefully follow a disciplinary policy for your practice. It may consist of rules such as providing an employee who has demonstrated a substandard performance with a verbal warning the first time, a written warning the second, and probation or termination on the third. In order to have an effective disciplinary policy, though, you’ll also need to have clear and consistent policies about employee behavior and performance so that your employees clearly know the practice’s expectations. The policies must be consistently enforced, as well.

When a policy is broken, you should follow your progressive disciplinary procedures in a timely way, and in a way in which the severity of consequences increases if an employee doesn’t correct the behavior. In your disciplinary meetings with that employee, you can then share what policies were broken, why this is problematic, and the consequences.

Document every time that you speak to a particular employee about the issue (such as lateness or gossiping), doing so directly after the meeting and listing the following:

  • date of the meeting
  • specific behaviors discussed
  • policy broken
  • consequence for this behavior
  • consequences if this happens again
  • employee’s responses
  • date of follow-up meeting with the employee

It is recommended that you have another manager at disciplinary meetings. This allows one person from the practice to conduct the conversation with the employee, and the other to take notes and serve as a witness. Be sure to have the employee sign relevant disciplinary documents. Following this procedure gives your employee a chance to improve, while also protecting you, as an employer, from wrongful termination claims or lawsuits.

Keep in mind that each time a disciplinary procedure occurs with an employee, the documents that you create may ultimately end up in court. Be sure to professionally list all pertinent details. Avoid judging or interpreting an employee’s behavior; for example, do not comment that while George says he’s late because of traffic, the real issue is that he’s lazy. Stick to the facts.

If your employee isn’t breaking policies, but also isn’t meeting expectations, you can create a performance improvement plan (PIP). This allows you to share goals and checkpoints, while also offering concrete next steps and support. Be sure to have the employee sign the PIP. Keep this documentation, whether disciplinary or PIP, confidential and safely stored.

One-Time Incident

Although documenting behavior or performance issues over time is best, sometimes it isn’t possible. For example, if an employee steals money, becomes violent at work, or brings illegal drugs to the workplace, then the rule that is broken is so severe that the employee needs to be fired immediately. In that case, what’s important is that you respond to any future situations of this severity at a comparable level of discipline.

Conversation about Termination

If the decision to fire a particular employee has been made, then the next issue to consider is how to have the conversation with him or her. If you’ve provided that employee with verbal and written warnings according to your company’s disciplinary policy, then you have increased your protection. Another option is to consult with your practice attorney to make sure that the termination is solid. This will prepare you in case the employee decides to pursue action against the practice.

Once you’re ready to hold the meeting, be timely about making it happen. However, take into account if that employee has something significant happening that day that could make your timing inappropriate.

It can help to have a termination agenda to keep the meeting on track and provide topics to be covered. The agenda should also include items to be returned to the employee and a reminder to get a confirmation of the person’s current address so a final paycheck can be mailed. Having an agenda can also help to guide all parties involved through what’s likely to be an emotionally-charged and stressful meeting, and help to ensure that you cover all necessary items.

Be sure that the location of the meeting is somewhere private. Then, be direct and clear without being harsh. Explain to the employee that after meeting with that employee to discuss behaviors, including the issuance of verbal and written warnings, the decision was made to separate employment that day. Be transparent and make sure you state that the decision is not negotiable. If the employee tries to debate the decision, don’t engage or try to justify yourself, and avoid saying anything that could be construed as a threat.

Keep the meeting short, lasting no longer than 10 to 15 minutes. The greater the length of the meeting, the more potential that something could be said that could expose the practice to a lawsuit. Close the meeting by thanking the employee for contributions made and extend to him or her your best wishes for the future.

An important topic to discuss is the specifics about the physical separation from the workplace. Should the employee, for example, take his or her belongings now? Or do you plan to meet him or her after hours to take out belongings when other employees aren’t at work? In some cases, the employee may have missed too much work, which led to the termination; in that case, you may want to focus on avoiding a humiliating situation for the person. If the reason for termination is something such as embezzlement, then your main focus would be to have the employee leave the workplace as soon as possible. If the ex-employee has property of someone else’s at work, or vice versa, arrangements must be made to transfer belongings.

Be prepared to answer questions that might arise. You can’t predict what they will be, but a common question is whether you will provide references for that person. Regardless of your response, make sure to protect your company while also treating the terminated employee with respect.

Prepare to provide any relevant information about the employee such as benefits, unused vacation time, or any severance agreement. Summarize all relevant information in a termination letter. This dated letter should state that the employee has been terminated, along with a brief description of why and any other pertinent details.

Afterwards, let other employees know about the termination without discussing any confidential information or making negative comments about the former employee. Be straightforward, sharing information the other employees need to know, reassuring them that the company isn’t eliminating roles. Acknowledge that, in the short term, other employees may need to help to manage that person’s workload.

High-Risk Terminations

These are terminations where employees are likely to sue the employer in connection with the termination. Some situations in which this is more likely to happen include the following:

  • employee is a member of a legally protected class
  • employee is a difficult one
  • employee has a relative who is an attorney
  • employee is surprised by the termination

As far as the first example, federal law prohibits discrimination on the basis of age (over 40), race, color, religion, sex, national origin or disability. In addition, individual states may have laws that are more stringent. When terminating the employment of someone in a protected class, the employer may be vulnerable to anti-discrimination claims for any statements made prior to, during or even after the employee’s tenure. Examples of these statements are as follows:

  • I know it must be hard to balance your job responsibilities with the new baby.
  • Most 50-year-olds would have trouble meeting the physical demands of this job.

Comments such as those are commonly part of a casual conversation with no discriminatory intent, but could add credence to a wrongful termination claim.

Other employees are difficult: argumentative and/or obstinate. They may refuse to take responsibility for their behavior or performance, becoming defensive and blaming others. Employers may be reluctant to fire this type of employee, fearing confrontation or retaliation. The practice can effectively be held hostage to this type of employee and, when fired, the employee may respond with a lawsuit.

When employees have relatives who are attorneys, it may make it easier for them to sue. The relative may even make the suggestion, and if legal services are offered to the disgruntled employee at a reduced fee, or even for free, there are fewer barriers to suing. Finally, surprised employees may be so devastated that they legally challenge the termination. These situations highlight the importance of carefully creating and following policies as described.

Conclusion

The termination process is almost always uncomfortable, carrying with it a varying degree of legal risk for your practice. Your goal is to make the process as amicable as possible while continuing to minimize risk along the way. The recommendations in this article won’t cover every situation but should provide broad guidelines that you can tailor to your unique circumstances. It is recommended to consult with an employment attorney experienced in the laws for your state.

Read more on the WMPB website here!

Low-cost Fixes to Prevent OSHA Violations

Does the phrase OSHA violations cause you to shudder in fright? OSHA, the Occupational Safety and Health Administration, should not be a scary monster – it exists to ensure you and your employees stay safe in the workplace. Slay the monster with some of these low-cost fixes to common violations.

Maintain easily accessible safety data sheets on all chemicals.
Did you know that your distribution representative has electronic copies of all safety data sheets for products they sell? Take five minutes to ask them to email those over, then put the sheet in a folder on every computer’s desktop.

Required Posters

All required posters can be obtained for free from OSHA! Make sure you check what other posters are required in your state and see if those posters are also provided free of charge. You can find the OSHA posters at this link: https://www.osha.gov/Publications/poster.html

Drink Station

At your next employee meeting, ask the staff to decide on a safe location for drinks. It should be convenient but as far away from animal and laboratory areas as possible. Then, purchase some stylish washi paper tape or fun paint and have a teambuilding activity to define the new space.

Secondary Labels

Containers of chemicals that you or your staff refills from the manufacturer’s container must be labelled. Once you have your safety data sheets, it will only take a few minutes to make a label. Consider using waterproof printable labels, a laminated piece of paper, or purchased pre-printed labels specific to your chemicals. It can seem daunting to find and label every bottle of alcohol or jar of scrub, but why not try turning it into a game of scavenger hunt bingo with the staff? Many hands make light work.

Some OSHA fixes are easier, cheaper, and faster than others. If you need to establish or rejuvenate your training and reporting programs, we are here to help. Just get in touch with our human resources gurus to find the right solution for you!

Negotiating Lease Agreements

Imagine you’re a practice owner, and your practice currently has a 12-year history of consistently grossing $1.5 million—and is actually on track to earn upwards of $2 million this year! You have three exam rooms and three certified veterinary technicians, and you’ve just hired an ambitious associate veterinarian to bring your total up to three full-time associates, with plenty of support staff. Your practice’s operations are clearly excellent and the camaraderie is there but, you’re ready. You’ve decided that enough of your life has been dedicated to the prosperity of your practice and you want to enjoy the remainder of your life with your family. You have made the decision to sell your practice.

You meet with an attorney, create your practice’s profile, and garner the attention of many corporate consolidators (CC) and private contractors (PC). Prior to entertaining any offers, your attorney asks you about your plans, including whether you’d like to remain involved in the practice, post-sale. You respond, “I think I want to retire altogether. I love my practice and my staff, and I’ll visit from time to time, but I’m pretty sure I want to spend the rest of my time with my family.” Your attorney then asks about the property and you are at a loss; you thought that once you sold the practice, the property would be sold, too. Your attorney informs you that this is not the case and sends you home with homework to complete, something you haven’t had to do in quite some time. Now you have to ponder about what you want to do with your real estate if you sell your practice.  

Do you want to relinquish or retain ownership of the real estate?

This is the first question that any facility owner who also owns the property needs to answer because this will dictate what language will be used in letters of intent (LOI). You’ll need to determine whether you want to retain the ownership of the property and lease it to the future buyer or sell the property.

If you’re looking to relinquish ownership of the real estate, then you’ll need to determine how and when this will change hands—and if this is your plan, then the remainder of this article will be purely informational. On the other hand, if you want to continue to retain ownership of the property and become a landlord, then    you should continue reading.

As a third scenario, if you currently lease your property from a third-party landlord, then your responsibility is to inform the buyer about your current lease’s terms and help to facilitate the transfer of the contract from your name to theirs.

What’s the composition of the lease?

Assuming, from this point on, that you’re the owner of your property and you want to lease it to the buyer, here’s what might happen next. Typically, the buyer will present you with a drafted lease with their terms—which likely represents their interests—and you will have to negotiate from there. Since this will be a steady stream of income for you, we’ve provided you with information to maximize the revenue you’ll receive.

For clarification purposes:

“Buyer”/“Tenant” = Buyer of your practice; “Seller”/”You” = Practice Seller & Property Owner/Landlord

Lease Terms & Renewals

When discussing the value of a lease to buyers, you’ll have to think long term, literally. Most buyers, especially the CCs, express interest in having an initial 10- to 15-year lease to retain a firm grasp on the practice’s property and to ensure longevity. This may differ for PCs. You could add more value to the lease by giving the buyer options to renew at five or ten-year increments. This assures continued operations for the practice, allows for early renewal negotiations, and makes it easier for you to refinance the property, if need be. Now, depending upon your terms, you should determine how much you will charge the buyer for rent. Typically, rent is calculated as the sum of the base rent and additional rent, but you should also consider the valuation of your property. That’s because the fair market value (FMV) of your property may help to drive the base rent that you set for the buyer.

Fair Market Value

Agreeing to a base rent can represent a risk for both you and the buyer. Here’s why. Your initial lease term would be dictated by the FMV or, rather, the price your property would sell for on the open market; however, the FMV excludes the value your practice adds to the property. Zach Goldman, owner of the real estate investment trust (REIT) company, Handin Holdings, states that the valuation of a piece of real estate is therefore equal parts of art and science. It involves noting the global picture along with (1) the structure of the specific building, (2) the real estate market of the area, (3) the quality of the practice’s operations, and (4) the economic reliability of the tenants (i.e., will they be able to pay rent).

Plus, how you value your property isn’t necessarily how others will perceive its value. As a practicing veterinarian and owner of the practice, you’ve undoubtedly worked tirelessly to ensure the prosperity of your clinic. The sacrifices you’ve made and the time you’ve spent developing the practice to bring it where it is today, though, doesn’t necessarily add much value to the property itself. Daniel Feinberg, vice president of finance at the REIT company, TerraVet Solutions, notes that a common misconception they face when speaking to veterinary practice owners is that they are often infusing their personal experiences into the property value. He advises all future practice sellers to work with REITs, like TerraVet, to help determine the value of their properties from an objective lens; this way, as a seller, you can work on adding value to your property prior to entertaining offers.

Once you’ve appropriately valued your property, you can then determine how much you should charge for your initial term of the buyer’s lease. We advise that you read the terms of the lease provided by the buyer very carefully; CCs will typically request a “reset to FMV” once it’s time for them to renew their lease. This can effectively eliminate cash flow certainty during the renewal periods and, clearly, this does not always work in your favor. Whether or not this will be advantageous to you is highly dependent upon a number of factors, including your geographic location. Typically, if an FMV reset is included, then an appraisal will be needed. If you aren’t sure whether this would negatively or positively impact you, you could create appraisal rules and limitations to include within your lease. You’ll want to answer questions that add clarity to and substantiates the FMV reset; these are questions such as:

  • What appraisal method will be used and who will be conducting the appraisal? Your choice or buyer’s choice?
  • How will the future rent be determined? Will it be based on the property’s best or highest value?
  • Will the FMV-based rent take into consideration the practice’s value?

These are only a few questions that will need to be answered and you can find more information by contacting your real estate attorney or a REIT company.

Base Rent

Base rent is the amount charged to the buyer to simply occupy the premises. It can be calculated in a variety of ways, with the two most common methods being the following:

  1. Based upon a percentage of a tenant’s gross revenues: This will complicate the lease because the lease parties need to agree on (a) the method used to calculate the practice’s gross revenues; and (b) a process to resolve disagreements.
  2. Based on dollars per square feet, with “square feet” able to be defined in a number of ways: Most commonly, leases charge a dollar per foot of either the “rentable space” or the “rented space.” The former results in a higher rent, but will likely be refuted—and, therefore, the latter will be more easily accepted. No matter what standard is used, you will need to clearly define square footage.

Whether you choose the first or second option to calculate base rent, you will likely need to negotiate specific.

“Additional rent,” meanwhile, comprises all other costs, usually related to the facility’s operations, that your buyer is required to pay you in addition to the base rent. Such costs could be a security deposit (often one to three months’ rent) and reimbursing the landlord for property taxes (monthly or quarterly).  In most cases, the buyer doesn’t pay the property taxes directly; this would typically be handled by you and then you would be reimbursed by the buyer. You could, however, require the buyer to pay you an estimate of property taxes monthly or quarterly in advance, subject to an annual reconciliation mechanism. This would consolidate the buyer’s payments while concurrently allowing you to receive a portion of the property tax amount in advance.

Types of Net Leases

Briefly, net leases help to define the relationship and responsibilities between the buyer and seller. The type of net lease—single, double, or triple—determines whether the buyer will pay, in addition to the rent, any of the following three expenses: property taxes, property insurance premiums or maintenance costs. You can equate the type of lease with the amount of responsibility, in addition to the rent, that the buyer will have. Single net lease requires the buyer to be responsible for property taxes, a double net lease will require the buyer to pay for taxes and insurance premiums, and a triple net lease will require the buyer to pay for all three additional expenses.

The goal is to minimize your responsibilities as a landlord as much as possible. Therefore, most leases are triple net leases. Reducing your responsibilities increases the likelihood that the buyer will negotiate with you on topics like rent during the initial term of the lease, liability insurance requirements, and a host of other things. Your best option would be to require a triple net expenses lease while only being required to cover the maintenance and replacement costs of the property’s structural components, such as a roof replacement or maintenance of the property’s foundation.

Annual Rent Escalations

Rent increases can be considered the norm in most veterinary practice leases today. These escalations are usually based on the Consumer Price Index (CPI), produced by the Bureau of Labor Statistics (BLS), which is essentially an average price measured over a time range. The CPI allows for you to adjust the buyer’s rent to accommodate the price change of the current real estate market. Most commonly, the escalation is represented by a percentage increase over a specified period of time. Although you are able to determine a percentage and offer it within the lease, we typically see a two to three percent increase annually. You can think of this as a compounding scheme whereas you will establish the base rent for the initial year of the lease, and each year after the buyer will pay an additional percentage. To illustrate, here is an example:

You’ll have the buyer pay a base rate of $25,000 annually during your initial ten-year lease. However, you will add the caveat that states how there will be a two percent escalation that will be applied to the base rate annually. This type of increase would result in the tenant paying nearly an additional $41,000 at the conclusion of their ten-year lease term.

This provides a better, more stable and predictable method of forecasting what income you will receive from the buyer. Ideally, you’ll consider their rent in conjunction with the buyer’s responsibilities as a tenant, so you need to also consider what kind of net lease you’d prefer for the buyer to have.

Financial Reports

In addition to your lease, you can also request an annual financial report of the practice. While most landlords don’t request this information, there are many reasons why you should. Annual financial reports allow for you to gauge the operations of the practice and determine whether the buyer will be financially self-sustaining. When requesting the financial reports from the buyer, they should typically provide you with a balance sheet, profit and loss statement, and a statement that acknowledges any changes in the financial position as well as any supplemental details to explain the change. These combined reports will provide an overall view of the financial well-being of the buyer, as well as assure you of their financial stability throughout the lease term(s).

The Guaranty

This seems like a very clear and straightforward issue, right? We generally assume that the buyer will provide the guaranty, but who exactly is the buyer? In this day and age when most of the CCs are owned by a larger corporate parent, you have to ensure that the buyer who is purchasing your practice can provide a guaranty for your lease. The company backing your lease could range from, say, Midwestern Pet Hospital, a single hospital with a limited, regional reach, to Animal Hospital Operations, a generally well-known company with multiple hospital ownerships. If you did your due diligence, you would discover that Animal Hospital Operations is owned by Krispy Kreme, a company with the financial assets to assure you they are committed.

In order for Krispy Kreme to provide you with stability, using that example, you would need to confirm that their name is listed in the lease agreement. In comparison, a review of financial statements shows that Midwestern Pet Hospital has had a fluctuating history of financial stability and only within the past three years has begun producing competitive revenue. Which buyer would you choose to back your lease? You’d likely selected Krispy Kreme and rightfully so. The point here is that you should always ensure that the buyer can either provide a corporate guaranty from their parent company or can provide enough evidence to convince you that they can uphold tenant responsibilities and, essentially, foot the bill.

Assignments

An assignment clause in a lease essentially allows for the tenant to transfer the lease, and all associated tenant responsibilities, to a different entity. However, this is typically an area that you as the landlord will want to specify and limit. Commonly, CCs like to freely transfer their leases to any affiliated entities, which would almost certainly diminish the value of your property for multiple reasons. First, if the buyer was allowed to sublet or freely assign the lease, then they would receive the revenue generated from the sublet, not you. Second, if the tenant isn’t up to par, then the value of the property itself could be driven downward. Therefore, it’s in your best interest to add provisions to prevent this free assignment. For example, you can negotiate by stating that the buyer can only assign their lease to a guarantor with a net worth that is equal to or greater than the existing guarantor. This ensures that your property’s value does not decrease and that the tenant responsibilities are financially accounted for.

Are there any outstanding rights of first refusal or offer (ROFR/ROFO) with your real estate?

The ROFR and ROFO concept can be off-putting for many buyers and could severely diminish the quantity of offers you may receive. To explain, there are many variations on a theme when discussing ROFRs and ROFOs, but they all center on the fact that, as the seller, if you receive an offer to purchase the property, you are legally bound and required to send notice of the full offer to whomever holds the ROFR/ROFO. If the offer is incomplete or if you don’t give the holder sufficient notice of the offer, you have now made yourself, as the seller, vulnerable to one of two scenarios:

  • being sued for failing to protect the rights of the ROFR holder
  • losing the interest of the buyer because the ROFR holder didn’t respond or didn’t receive the notice of the full offer with enough time to respond

In some instances, there’s the ROFO, which is currently defined as “an offer made in good-faith” by the seller. This means that the seller will inform the holder of a reasonable offer before any official listing of the property or entertaining of such offer. The holder can either refuse or accept the offer. With a right of first refusal, the ROFR holder can opt to match or counter the buyer’s offer. This leaves you vulnerable to losing your initial buyer’s interest because the buyer won’t, or can’t, raise their offer to purchase the estate. Your practice facility’s future is subject to the demands of the holder. You can choose to accept their offer or remain the landlord. As you can see, the impact of the ROFO/ROFR can be quite significant; therefore, you should carefully review any and all documents for such a clause.

What are your expectations of the buyer?

As a practice owner preparing for the next step, it is important that you think about your lease, your practice, and your future, post-sale. You have to determine what responsibilities you are expecting the buyer to take on and be willing to negotiate those from the very beginning. Knowing what terms of your lease are non-negotiable from your perspective before you begin the bidding process could prove to be advantageous because you can provide them with your terms and negotiate from there. With respect to the lease obligations, the buyers can’t change the terms of the deal or alter the purchase price later in the process because you’ve already informed them of your lease terms and have negotiated the obligations at the start. Informing your buyers of what the lease terms are in the beginning and having that full transparency gives you the most leverage to guide the conversation how you see fit.

So, what does all of this mean?

There are numerous points to consider prior to the sale of your practice to prepare you for negotiations.  The process of selling your practice can be long, and it can easily be extended if you have not addressed your personal, practice and/or property needs. Many sellers are not prepared to deal with a facility lease when they sell their practice, but doing your homework now can give you the knowledge and confidence to negotiate a lease with your buyer that will benefit you for years to come.

WORKS CITED:

  1. Lacroix, Charlotte. “Property Lease Dangers, Part I” | Real Estate, 2012, Veterinary Business Advisors, Inc. http://veterinarybusinessadvisors.com/wp-content/uploads/2016/07/Property_Lease_Dangers_Part-1_2012.pdf
  2. Lacroix, Charlotte. “Property Lease Dangers, Part II” | Real Estate, 2012, Veterinary Business Advisors, Inc. http://veterinarybusinessadvisors.com/wp-content/uploads/2016/07/Property_Lease_Dangers_Part-2_2012.pdf
  3. Lacroix, Charlotte. “Negotiating a Commercial Lease” | Real Estate, 2018, Veterinary Business Advisors, Inc. https://veterinarybusinessadvisors.com/negotiating-a-commercial-lease/
  4. Gosfield, Gregory G. “A primer on real estate options.” Real Property, Probate and Trust Journal (2000): 129-195.
  5. Ackerman, Lowell, ed. Blackwell’s five-minute veterinary practice management consult. John Wiley & Sons, 2013.
  6. Bank, LiveOak. “Veterinary Acquisition Due Diligence.” Veterinary Practice Acquisitions | Due Diligence Services | Mergers, 2017, www.veterinariancpas.com/acquisition-due-diligence.htm
  7. Stein, Joshua “The Most Important Issue in Every Ground Lease: Rent Resets and Redeterminations, Fair Market and Otherwise” New York State Bar Association | Real Estate, 2018, http://www.nysba.org/WorkArea/DownloadAsset.aspx?id=86403
  8. McCormick, David; Mamalis, Leslie. “Monitoring Practice Profitability” Veterinary Hospital Managers Association 2013 Annual Conference, https://cdn.ymaws.com/www.vhma.org/resource/resmgr/imported/MonitoringPracticeProfitablityfinal.pdf
  9. Bank, Live Oak. “Veterinary Practice Acquisitions Guide 2018” Veterinary Practice Acquisitions | Acquisitions, 2018, https://www.liveoakbank.com/wp-content/themes/LOB2017/assets/downloads/Live-Oak-Bank_Vet-Acquisition-Guide.pdf
  10.  US Bureau of Labor Statistics. “Writing an Escalation Contract Using the Consumer Price Index”. Real Estate. November 2012. Beyond the Numbers, Volume 1, Number 19. https://www.bls.gov/opub/btn/volume-1/pdf/writing-an-escalation-contract-using-the-consumer-price-index.pdf

Associate Contracts for Corporate Consolidators

As the presence of corporate consolidators in the veterinary field increases, it has become even more important to understand what to look for when negotiating an associate contract with a corporate practice. Generally speaking, corporations can have a significant edge in negotiations because they can cause you to believe that their contracts are non-negotiable. They may, for example, say the following: “This is our contract for everyone.” In reality, everything is negotiable, and it’s your value that allows you to negotiate your own contract.

While it’s true you may have less negotiating power with a corporation than with a private practice, you will have more legal protection under the employment laws with a corporation. Ideally, all contracts should be reviewed by an attorney or translator experienced in reviewing veterinary employment agreements, because contracts are intended to prevent miscommunications in the future. Below are some key points to consider when negotiating a contract with a corporate consolidator (“CC”).

1. Term and Termination: How long will it be until your contract expires? Does the term automatically renew at this time? Note that, if a contract has a one-year term, that does not guarantee you a one-year employment. The employer may in fact have the ability to terminate you sooner. CCs like to use the term “at will,” meaning they can fire you at any time for any reason. Other ways of termination would be “without cause” with both parties agreeing to give “X” number of days’ notice before termination. Many CCs, though, will not want to give you advance notice, especially if they are taking over a new practice.

2. Schedule: How many scheduled hours per week are you required to work? Beyond that, how many additional hours must be spent calling owners, overseeing patient care, and more? Are there any required emergency hours? What about holidays, weekends, and nights? CCs tend not to give exact number of hours to be worked. They tend to use language such as “minimum of 40 hours” as opposed to “from 35-45 hours.” Specificity is against the interests of the CC.

3. Duties: What, as an associate, are you required to do? Review this, because some CCs may require you to do additional work that you didn’t need to do for old management. Do you, for example, have to organize staff meetings? Participate in marketing? Handle emergencies during work hours? Being specific in the contract almost always benefits the employee. Note that private practices tend to be more willing to mentor you in these duties than CCs.

4. Compensation: Typically, compensation is paid by salary, commission (production), or a combination of both. How is your production calculated? Do you get production reports? Are there any deductions from your salary and, if so, what are they? Is there negative accrual during slow production months? CCs can change how they calculate their production pay. If you’re not aware of how you get paid, you may not realize why your production pay has changed.

5. Benefits: Most practices offer some sort of benefits package, and CCs typically offer larger and better packages than private practices. However, these benefits can be subject to change and are not guaranteed by the employer. CCs tend to comply with state and federal employment laws that govern how benefits are given, while private practices may not, due to lack of knowledge. These benefits are tax deductible and are not calculated as employee income. Therefore, there is a large savings to be gained with a larger benefits package. This usually includes but is not limited to health insurance, professional liability insurance, and retirement benefits. Note that, if a CC offers malpractice insurance, it often does not cover license defense.

6. Exclusivity: Employers will usually require you to perform services for their hospital alone. This would prohibit you from doing any shelter or relief work on the side. This may even prohibit any other type of job, even if not related to veterinary medicine. CCs are no exception here, and you must negotiate specific exceptions if you wish to work outside of the CC.

7. Performance Evaluation: Will you be provided written or oral evaluations? When? Does this correlate to compensation?

8. Signing/Relocation Bonus: In today’s market, veterinarians are valuable and most places will offer some kind of sign-on bonus. CCs can usually offer a significantly higher bonus and, depending on where you are coming from, often offer a significant relocation allowance as well. Most of these bonuses are tied to retention, meaning you must work there for a predetermined amount of time—perhaps one year—to keep the bonus. If not, the money must be repaid. Also, in your contract, it’s important to find out if the bonus can be kept if you are fired without cause. One perk of working for CCs is that, if you are moving, they can often help you to relocate to another one of their locations, which can make the process significantly easier.

9. Non-Competition: The agreement states that the employee will not directly compete with the employer after termination of employment. The provision must state a specific distance and time (e.g., two years, ten air miles). This area should cover where 85% of the practice’s clientele comes from (trade area). When does your non-compete kick in? When does the non-compete become enforceable? CCs often have a much stricter policy than private practices. For example, some do not allow you to work in proximity to any of their hospitals. This could easily double or triple the area you could be prohibited from working in and can change if new hospitals open up. Also, the scope of restricted activity may be broader with CCs. In addition to small animal medicine, they may include intellectual property, research, practice management, and so forth.

10. Non-Solicitation: This agreement states that the employee will not try to poach other employees away from the business to work elsewhere. This would apply even if you are outside your non-compete area. It is important to also know that some CCs will not allow you to solicit employees from any location of theirs, even if you don’t personally know them.

11. Assignment: There is currently a very active market for the sale of veterinary practices. Many employers include provisions that allow your original contract to be signed over to the new owner. This means the buyer would not need to negotiate a new contract with you. It is important to check for this provision, whether you currently work for a private practice or already work for a CC.

It is important to understand all aspects of your contract while negotiating your associate contract to decrease any confusion during and after your contract period, whether a private or corporate practice. With the rise of corporations in the Veterinary industry, it is also important to note the differences between what a private practice and corporation could look like relating to an associate contract.

Try to make the contract as specific as possible so there is no ambiguity if an issue arises. Ask as many questions as you need prior to signing to clarify what exactly your job will entail. Always have the contract reviewed by a lawyer familiar with the field and do not feel pressured to sign prior to this. Corporations may be pushy and imply they do not negotiate, but this is your well-being and livelihood, not theirs. Know your value and pursue it in any contract.

Employment Contracts To Reel In Associate Specialists

Turnover among veterinary specialist 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 a minimum of $180,000-$250,000 gross income (excluding OTC product sales) to be worth his salary.   This number is far greater for veterinary specialists…..probably at least 3 times.

 

  1. 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. Specialist promises to work 40 hours per week in consideration for an annual salary of $125,000 (i.e., a benefit to Dr. Specialist and detriment to Dr. Owner ).  Dr. Owner promises to pay such salary to Dr. Specialist in consideration for Dr. Specialist’s labor (benefit to Dr. Owner and detriment to Dr. Specialist).  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.

 

  1. 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 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?

 

  1. 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?

 

  1. 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? Will they be required to visit rDVMs, engage in marketing activities?

 

  1. Compensation:  How Much?   Is It Enough?

 

How Much?

Serious job applicants must know the relevant “comparables” in their labor market, i.e., what compensation is paid to other starting associate veterinarians in the area were they are seeking employment.

 

Is it Enough?

Currently, the salaries that are being paid to different specialists is not well documented.  The AAHA/Care Credit 2005 Specialty & Referral Veterinary Practice Benchmark Study and ACVIM proceedings from the Hill’s Practice Health Symposium, titled “Insights on Veterinary Specialty Practice Productivity” are a sampling of the few publications that have salary figures.    Regardless of the trends, however, debt ridden veterinary specialists cannot assume that current salaries will permit them to survive (let alone live comfortably).  So the first question isn’t really “how much are they paying?” but rather “what do I need to pay my debts, buy cold cereal and go to a few movies?”

 

The only way to answer this question is by doing a budget. Budgets undoubtedly are one of the most boring tasks in the world, but boring beats finding out that you can’t make ends meet six months after you’ve been hired.  Technology has reduced the pain of budgeting, so there is no excuse for not doing it.  Any financial software program worth its salt will permit veterinary graduates to establish a budget.  See attached form to assist in determining one’s budget.  You can also do a budget on the following website: Personal Finance Simulator 2011(www.finsim.umn.edu)

 

Tips for Making More Money

As discussed below, a common way for associate veterinarians to increase their compensation is to join a practice, which pays them a percentage of the collected income they generate.  Other ways include working additional shifts, and working at another practice is the employer will permit it.

 

Compensation Types: Flat Salary, Percentage Income And Performance Bonuses

Generally, there are three types of veterinary associate compensation: (1) flat salary; (2) commissions based on a percentage of the income generated by the associate; and (3) a hybrid of flat salary and commissions.

 

Flat Salary

Flat salary (a fixed amount per year), is a common form of associate compensation.  A fixed salary provides the veterinary associate with the security of a predictable income.  It is also simple to keep track of.  Associate veterinarians earning flat salaries, however, cannot increase their compensation, no matter how much income they generate for the practice or how hard they work.  Flat salaries are not preferred by new graduates looking for the opportunity to increase their compensation in exchange for a greater contribution to the practice.

 

Straight Commission

The straight commission system simply replaces the flat salary with a commission.  The straight commission scheme link the dollars veterinary associates earn with their contribution to practice revenues.  Because practice revenues (and the commissions) will vary month to month, associates will have a more difficult time managing the repayment of their student debt.

 

Hybrid Systems

Under a hybrid compensation system veterinary associates are paid a guaranteed base salary plus an income production bonus equal to the percentage of the collected income they generate in excess of a certain target.  The base salary provides security, as well as a predictable income stream with which to service student debt.  This is a significant advantage over the straight commission system.

 

Production Compensation Pitfalls

While production compensation usually permits new graduates to increase their compensation, the system does have its problems and pitfalls.  By carefully examining practice operations and asking the right questions, prospective associate veterinarians should be able to either avoid these pitfalls or at least reduce their impact.

 

  • Assigning Cases and Receptionist Gate Keepers.
  • Staff Efficiency and Leverage.
  • Data Processing and Definition Issues.
  • Competition and Distrust Among Veterinarians.

 

  1. 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.

 

  • 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.  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).

 

  •   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,  local and specialty 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.

 

  1. Performance Evaluation.  Will the employer provide written and/or oral performance evaluations?  How often?  Will these be used to modify compensation?

 

  1. 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., 2-3 years after termination) and geographic area (e.g., 25-50 air-miles from the practice) to be enforceable. The precise limits on the scope of such clauses vary from state to state.  Specialists typically have a larger radius as the trade area for specialty practices is much larger than a generalist’s.

 

  1. 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., 90 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.

 

  1. 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…