Why Use an Employment Contract?

At the beginning of an employment relationship, it’s often hard to see how things could go south. Your hiring and interview process was detailed, and your new employee is excited to join your practice. So why complicate things by asking them to sign an employment contract?

In many states, employees work “at will.” They can quit or be fired for any (non-discriminatory) reason or no reason, with or without notice. But if you use an employment contract, you can make other agreements that create a more predictable employment relationship for both parties.

See our related articles: 

“Which Employees of a Healthcare Practice Should Be Covered By Employment Contracts?”

“Hiring for Your Healthcare Practice? Mind These Legal Issues”

If you posted a job description when searching for your new employee and sent them an offer letter when you offered them a job, you’ve already started creating a paper trail for your employee’s role at your practice. The job description likely identified job responsibilities. Meanwhile, the offer letter formalized compensation and benefits information. If your new employee negotiated the salary or benefits, those details might be contained in separate emails or notes you jotted down during a phone conversation.

During the interview, did you casually agree to waive any prerequisites or responsibilities? Perhaps you had sought someone with a certain certification but told them you’d happily hire them without it. Or, perhaps you agreed to a three-day workweek rather than the four-day week you described in the job posting. And what if, during negotiations, you agreed to give them additional paid time off for attending educational conferences? Is all this information readily accessible and clearly documented for future reference? 

Papering Up Your Employment Relationship

An employment contract can help consolidate all of the critical information in one place. By signing the contract, you and the employee agree that everything relevant to your agreement about their job is within the document. Without a written contract, you have no comprehensive source to reference if you and your employee disagree about their role.

If you decide to end their employment, are you clear about how to proceed? See our article, “When Can I Terminate an Employee at my Practice?” for more about this process. 

Ultimately, a written contract is the best way to protect your business interests and confirm that you and your employee have adopted the same interpretation of the conditions of employment.

If you do decide to use an employment contract, it’s best to implement it at the start of employment. If you ask a staff member to sign a contract after they’ve begun work for you, it could turn into a new negotiation rather than a routine document that formalizes what you’ve already agreed to.

Do Small Practices Need Employment Contracts?

It’s important to weigh your risk tolerance against your budget. Some practice owners might decide they would rather risk a dispute than spend money upfront to have an attorney draft a contract. This can be a reasonable course of action for some very small practices, those hiring non-clinical employees, or those hiring a part-time employee who isn’t benefits-eligible. However, if you do choose to go this route:

• Collect all of your employment-related documents in one place and create an HR file for each employee.
• Carefully evaluate your employment practices to ensure you are not engaging in any implicit bias when setting your employee’s compensation. If appropriate, include the context for their compensation in your offer letter (e.g., “because you are not certified as a ___, we are offering you $X per year,” or “because you have even more experience than required in our job posting, we are offering you $X per year.”). 
• Consider asking your new employee to sign a confidentiality or non-disclosure agreement, even if you won’t be using an employment contract. See our related article, “Non-Disclosure Agreements for Healthcare Practices.”
• Require your new employee to sign a document acknowledging that they have read and agree to adhere to your employee handbook and workforce standards.
• Consult an attorney If an employment arrangement involves splitting professional fees (e.g., you keep 30% and the employee keeps 70% of revenue from their treatment sessions). Many typical fee-splitting arrangements run afoul of healthcare fraud laws, and an illegal or unethical payment agreement could land you in an investigator’s crosshairs.

Benefits of Employment Contracts

Here are a few benefits an employment contract offers and why you might consider using one for your employees.

Employment contracts define the employee’s role at the practice.

An employment contract establishes what your employee should, must, and cannot do at the practice. For example:

• What authority does your employee have? Can they terminate patient relationships or discipline junior employees? 
• What are the employee’s responsibilities? Perhaps the job description identified the role of your “ideal employee,” but this specific individual needs additional training before they can take on the full scope of responsibilities. How do you ensure that your expectations align?
• Is the employee joining your practice indefinitely or for a term (e.g., one year, the duration of another employee’s parental leave, or for a multi-year post-doc position)?  

For licensed employees, their contract may reiterate the content of your job description and offer letter. It may also require that the employee keep their license active and in good standing. 

For non-clinical employees, defining their role may mean explaining what they cannot do, such as offering medical advice to patients (even if it’s a question they’ve heard you answer 100 times before!) or wading into any professional’s scope of practice.

Employment contracts create a single document that reflects all of your employment-related agreements.

As discussed earlier, without a contract, you likely don’t have all of the employee’s employment terms and agreements memorialized and organized in one place. For example:

• When your employee tried to negotiate their salary, you verbally told them they would receive a raise after 60 days. You meant 60 working days, but they counted off 60 calendar days. How do you handle this?
• You assumed the employee would work from 8 am–5 pm every day. However, they’ve always enjoyed seeing patients in the evening and scheduled appointments from 11 am–8 pm. When you introduce a work hours requirement that you didn’t include in their offer letter, they balk. Who’s in the right?

It’s easy to misunderstand or disagree about the implementation of verbal agreements about compensation and duties. Without a contract, it can be challenging to keep track of the terms you and your employee agreed to upon their hiring, such as compensation, supervision, taxes, or insurance. If there’s a question about your employee’s obligations, a written contract is a good reference point.

Employment contracts contemplate situations you didn’t consider in the hiring process.

In some ways, an employment contract is like a prenup. If everything goes perfectly, then no one ever looks at it again. But if there’s a disagreement or dispute, its terms will be carefully scrutinized.

For example, your employee expects that you’ll provide them with liability coverage, but perhaps you disagree about the amount. Or, perhaps your employee has a past claim against them that they didn’t disclose in the hiring process, making them pricier to cover under your policy. Is this just the cost of doing business, or can you push the excess cost onto your employee?

And, more broadly, is there a formal process for resolving disputes between you and your new employee? While this might not be at the top of your mind when bringing on a new employee, a good contract should contemplate what will happen if you don’t see eye-to-eye down the road.

Employment contracts facilitate and demonstrate your compliance with the law.

Working with an attorney on the details of an employment contract can help ensure that your compensation arrangements don’t run afoul of healthcare laws.

Perhaps a 70/30 split of professional fees is common in your profession, and you’ve agreed to this compensation structure with your new employee. In preparing your employment contract, your attorney may flag this as a problem under your state’s fee-splitting requirements or the Anti-Kickback Statute. Even if you need to renegotiate your employee’s compensation, aren’t you glad you caught it at the outset?

A well-drafted employment contract will ensure that the terms of your relationship — compensation, benefits, buyout options, liquidated damages, and other provisions — comply with state and federal laws.  

Employment contracts anticipate and address how the employee will leave the practice.

One of the most common reasons healthcare practices use employment contracts is to give them some control over when and how providers leave. For instance:

• How much notice must your employee give you if they decide to leave the practice?
• If they leave, what is their ongoing responsibility to complete their patient charts or cooperate with the submission of insurance claims?
• How will they inform patients of their departure?

You may want employees to give you a certain amount of notice before leaving, allowing you time to find a replacement. If an employee doesn’t provide that notice, some contracts require the employee to pay a certain amount to cover the practice’s lost revenue from their unplanned departure. (Note that states like California are considering legislation that would prohibit such restrictions and penalize those who use them anyway.) 

Employment contracts contains restrictive covenants.

Employment contracts are crucial if you plan to protect your practice using restrictive covenants such as non-competition or non-solicitation provisions. However, some states have prohibited restrictive covenants or made them unenforceable. Meanwhile, the federal government is considering regulatory action to roll back their enforceability nationwide. But, if you’re in a state that still allows these clauses, they must be drafted to maximize the chances that a court would enforce them and find them reasonable. 

Employment contracts safeguard your confidential and proprietary information.

Contracts can also help to protect your practice’s confidential and proprietary information — the kind of information that a confidentiality agreement or non-disclosure agreement would protect. Keep in mind that HIPAA protects patients’ health information. All workforce members will need to be familiar with those policies and sign your workforce agreement to demonstrate their understanding of those obligations. While your employment contract might note that the employee agrees to comply with HIPAA, it’s not the place for lengthy HIPAA-related provisions.

The employment contract can help to prevent employees from sharing your practice’s confidential information with a competitor or using it to launch their own practice. It may also state that any inventions or processes the employee develops while at work will belong to the practice, as they’re created on the practice’s time (and dime). 

Employment contracts can prevent expensive litigation.

Going to court to fight about an employment relationship is expensive, so some employment contracts include arbitration clauses to delay or prevent lengthy litigation.  Arbitration is a kind of alternative dispute resolution in which the parties agree to use an arbitrator to hear both parties’ views of the dispute and then issue a binding decision. Arbitration typically offers a quicker resolution than the court system and can deliver a clear-cut outcome at a lower cost.

An experienced healthcare lawyer can help draft a contract that best fits your practice and facilitates smooth hiring so that you can focus on finding the best providers for your practice and your patients. If you practice in one of the states where we have licensed attorneys, reach out to us for a free consultation.

This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.