Contracting for Departure: Understanding the Covenants That Will Impact Your Separation
Published: Aug 21, 2012
Career Resources articles posted on NEJM CareerCenter are produced by freelance health care writers as an advertising service of the publishing division of the Massachusetts Medical Society and should not be construed as coming from the New England Journal of Medicine, nor do they represent the views of the New England Journal of Medicine or the Massachusetts Medical Society.
By Thomas Crawford, MBA, FACHE, Faculty, Department of Urology, College of Medicine, Affiliate Faculty, Department of Health Services Research, Management and Policy College of Public Health and Health Professions, University of Florida and Aisha D. Horne, MHA Student, Department of Health Services Research, Management and Policy College of Public Health and Health Professions, University of Florida
After presenting a talk on common contractual pitfalls to a group of early careerists, I overheard one physician make the following telling statement to a colleague: “I didn’t realize that there were so many contract terms that could financially hinder my departure from an organization.” The statement was impactful, yet intuitive. When looking at separating, the natural inclination is to turn to the term and termination covenants; however, there are other issues that may impact your ability to leave. The purpose of this article is to mitigate any unwanted surprises through an increased comprehension of the common contractual covenants that are typically overlooked and may hinder your departure from an employment setting. These items – malpractice insurance, upfront money, and non-compete language – should be closely examined and negotiated in a manner that mutually benefits both parties.
Do you know the personal financial liability you may incur when separating based on your malpractice insurance? Shockingly enough, the most common separation surprise for physicians occurs because they are unaware of the type of malpractice insurance under which they are covered. This lack of knowledge leads to a lack of negotiations which, pending on the type of coverage, could place a significant financial burden on the physician upon separation.
There are two major genres of malpractice insurance:
- Claims made: Covers claims filed within the dates for which you are covered by the insurance.
- Per occurrence: Covers claims for dates of service that occurred when the policy was in effect.
Although the basic premises of the insurances are similar (covering malpractice claims), the major nuance is the length of the coverage.
A claims-made policy will cover you while you have the insurance; however, once the policy is no longer in effect, you are not covered. For example, if you have a claims-made policy from January 1, 2010 to December 31, 2012, and a malpractice suit is filed against you on June 15, 2012, for a service provided on February 8, 2010, you are covered. However, if the malpractice suit is filed against you on January 1, 2015, for the same date of service (February 8, 2010), you are “bare” (meaning you have no coverage). Even though the “act” occurred when you had insurance coverage, it is fully dependent upon when the actual claim is filed.
A per-occurrence policy will cover dates of service when the policy was in effect even if the policy is no longer active. For example, if you have a per-occurrence policy from January 1, 2010, to December 31, 2012, and a malpractice suit is filed against you on June 15, 2012, for a service provided on February 8, 2010, you are covered. Additionally, if the malpractice suit is filed against you on January 1, 2015, for the same date of service (February 8, 2010), you are still covered, because the “act” occurred during your coverage period.
Knowing the type of malpractice insurance under which you are covered is extremely helpful when negotiating your contract. If you are under a claims-made policy, be sure to negotiate who will pay for the cost of the “tail” insurance. Tail insurance is expensive, generally costing 150% to 200% of a mature claims-made policy. Of course, the cost of a claims-made policy will differ depending upon specialty and geography. Nevertheless, to illustrate the potential financial burden, consider the following: A mature urology claims-made policy in a rural relatively non-litigious state could cost $35,000 per year. If the urology physician decided to move, and the tail coverage wasn’t provided in the contract, the physician would need to come up with $70,000 to ensure that “prior acts” were covered.
The competition to recruit and retain physicians has become increasingly intense; consequently, employers who seek to have a competitive advantage in the marketplace are willing to create financial incentives in exchange for services over a defined period of time. The most common financial incentives provided to physicians for accepting open positions are: tuition reimbursement, sign-on bonus, relocation expenses, and pre-employment stipends.
Numerous physicians are saddled with substantial undergraduate and medical school debts, and potential employers are willing to help early careerists pay off their loans and provide other monetary incentives to ensure tenure. Generally, these incentives are mutually beneficial for the employer and physician; however, it must be structured appropriately and reflected within your contract. Although it may be very tempting to take a lump-sum payment of, for example, $100,000, you need to know that it will be counted as income and that income taxes will be deducted. Additionally, the payment will lock you contractually to your employer for a “forgiveness” period of time as demonstrated by the following sample contract language:
The tuition reimbursement will be forgiven over a period of five (5) years ($20,000 per year). If, for any reason, you are no longer employed by Name of Employer and/or are no longer providing full-time health care services, defined as forty (40) hours of patient contact time per week, to the Name of Employer’s community within a timeframe of five (5) years, you will be expected to repay a prorated amount of the tuition reimbursement back to Name of Employer with interest, prime plus 1% as established by the Wall Street Journal.
One way to eliminate the time commitment and provide mutual benefit to you and your employer is to decline the offer of any upfront money; on the contrary, request that for every 12 months of service worked that you are provided $20,000 in tuition reimbursement (up to $100,000). You will still receive the full benefit of the tuition reimbursement without incurring a debt that is forgiven over time.
The sign-on bonus has become increasingly more common, and like tuition reimbursement, it is generally forgiven over time. If you structure the sign-on bonus with language that is analogous to the aforementioned tuition reimbursement example, you are essentially transforming your sign-on bonus into a retention bonus. If you need the upfront money, the key is to minimize the length of the forgiveness period. Avoid exceeding two years for the forgiveness of a sign-on bonus. Remember, if you leave, for any reason, within two years, you will have to pay a prorated share of your sign-on bonus back with interest.
It is reasonable and customary for your employer to provide a relocation allowance. As a general rule-of-thumb, there should be no forgiveness period for moving expenses.
There are a number of employers who are willing to offer stipends to residents in difficult-to-recruit specialties during the last year or two of their residencies. It goes without saying that residents work long hours for nominal pay, and being offered additional compensation can be quite enticing. Nevertheless, you need to remember that you could be contractually obligated to an employer prior to negotiating the terms of your contract or, conversely, if negotiated as a covenant within an employment contract, the interest will accrue prior to the forgiveness period commencing.
Non-compete covenants generally have two defining factors — distance and time. We do not disagree with the basic premise behind a standard non-compete clause. Why? Because there are considerable upfront costs your employer is investing in you and your practice, and if you decide to leave and hang out your shingle down the street, your employer has essentially financed its own competition. Even so, you need to ensure that your non-compete is reasonable based on time and distance, the optimal timeframe should not exceed one year and the optimal distance should not exceed 25 miles from a single physical address. Lastly, all contracts have termination without cause covenants; with this stated, you need to ensure that if you are terminated without cause, that your non-compete covenant is null and void.
When contracting, you always need to ensure that you comprehend the personal financial liabilities that will impact, if not impede, your departure. If your malpractice coverage is through a claims-made policy, ensure that the tail coverage is provided by your employer and “reverse engineer” the upfront money forgiveness covenants so that you are accruing a financial incentive versus a liability. You and your employer will receive the same mutual benefits outlined within the original contractual verbiage: You are provided with a financial inducement to stay and the employer is rewarded through your tenure. Nevertheless, you are ensuring that you can depart gracefully and without the burden of additional and/or unforgiven debt.