First, under California law, am I an employee or an independent contractor?
If you are a California physician, or soon to be one, you may be an employee or you may be an Independent Contractor (a “contractor” or “IC”). The nomenclature is important here, because one does not want to refer to an IC physician as an employee or vice versa. This is a matter of both form and substance.
Besides taxation issues (W2 employee vs. 1099 IC), your eligibility for other employment law protections will be determined by your employee/IC status. Specifically, ICs are not covered by many basic employment-related statutes; for example, ICs are not covered by workers compensation, unemployment insurance, wage and hour laws or by most civil rights laws banning discrimination due to protected class status. California’s Fair Employment and Housing Act (“FEHA”) does include ICs within its provisions banning harassment under Cal.Gov. Code 12940(j)(1) (this provision extending legal protection from harassment to ICs is not found in most state jurisdictions, and, thus, California provides greater protections to ICs in this area).
The relative prevalence of Independent Contractor physicians in California (nationally only approximately 5% to 7% of physicians are ICs) is based in part on California’s strong policy against the corporate practice of medicine (“CPOM”). California’s ban on CPOM means that hospitals (with a few exceptions) may not directly employ physicians. Thus, physicians who provide healthcare in California hospitals must be their own independent contractor entity or employed by a medical group or other entity which in turn provides contracted services to the hospital.
Effective 2020, California enacted AB5, which contains authority for determining IC status under California law, where there is not an exemption (which most physicians now have). The ABC test adopted in AB5 and codified at Cal. Lab. Code Section 2775 (and as amended by AB 2257, effective September 4, 2020) provides that an independent contractor:
1) must be “free from the control and direction by the hiring entity”;
2) must perform “work that is outside the usual course of the hiring entity’s business”; and
3) must be “customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed” for the hiring entity.
However, with the passage of AB5, physicians are specifically exempted from the stringent “ABC” independent contractor test of the Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018) decision.
See Cal. Lab. Code Section 2783(b), which provides that the pre-existing Borello test applies to physicians.
AB5 established a test that is understood to be more difficult to meet than the 11-factor Borello test to determine IC status for many employees in California. But the law includes an exemption for various workers, including: physicians, surgeons, dentists, podiatrists, psychologists, and veterinarians. Id. Note that many other healthcare workers were not included in the exemption, to the displeasure of some employers and individuals who prefer IC status. Other healthcare professionals who are not currently exempt from the ABC test should stay tuned for future developments in this area of the law and should direct questions to an experienced California employment attorney.
While a detailed treatment of this topic is beyond the scope of this discussion, if a regulatory agency, such as the IRS or California Department of Fair Employment and Housing (“DFEH”), happens to investigate your legal status, it is important that your contract provides the proper foundation for either employee or IC status. Nonetheless, you will also find that many similar contractual provisions are included in both employment agreements and IC agreements.
If you are a physician or other medical professional who falls within the Lab. Code Section 2783 exemption from the ABC test, you still must meet the 11-factor Borello test in order to qualify as an IC under California law. Unlike the streamlined ABC test, however, the IC need not meet all 11 Borello factors to be properly characterized as an IC.
Again, if you have questions concerning IC versus employee status, you should consult with a California physician employment attorney.
Where are California physicians employed?
In California, approximately 29% of physicians are solos, 31% are in a small/medium group, 16% are in a large group, 12% are employed by Kaiser, and 11% are engaged in “other” settings.
As mentioned above, California will have a higher percentage of IC physicians than other jurisdictions, given that an increasingly high percentage of physicians are employed by hospitals in other parts of the country, and that is generally not allowed under California law.
Different employers = different employment contracts
Your California physician employment contract may vary from a short, relatively to-the-point agreement (e.g. of the type typically used by The Permanente Medical Group, the largest medical group in the U.S., with over 9,000 physicians and 35,000 nurses and staff) to a much more elaborate agreement used by many private, academic, and local county health system employers. The latter will resemble in most respects the employment agreements used in many jurisdictions across the country for employed physicians.
Nearly all physician contracts have been prepared by the employer’s attorney and you are well-advised to have your own attorney review your contract. In some settings, edits or amendments may be possible; and, in any event, with the assistance of a California employment contract review attorney you will have a clear understanding of your contract terms. In addition, establishing a relationship with an employment attorney may be useful later should questions arise concerning other employment-related issues, such as family medical leave, civil rights or disciplinary matters, or the termination of your employment relationship.
Below you will find a brief summary of some of the important employment contract provisions you are likely to encounter throughout your career.
Employment term
The term of your contract may be 1 year, or many years, and may or may not include an evergreen or “automatic renewal” provision. Your California physician employment agreement will also invariably include an at-will termination with notice clause that effectively makes a contract for years a contract for 90 days or whatever duration is set forth in your “without cause” termination provision. You can expect that your contract will provide an anticipated duration for the contractual relationship, subject to the contractual termination provision.
If your contract includes an “automatic renewal” provision, be sure to confirm the notice period governing renewal, as prior to automatic renewal is the time to negotiate any terms and conditions of the original contract that you feel may be appropriately amended.
Physician duties and obligations
Whether in general or specific terms, your contract will set forth your duties and obligations as an employed or contracted physician. Certain matters such as Board Certification, credentialing and privilege requirements are nearly always addressed in your California physician employment agreement.
Unless you are an IC, your contract may state that your full-time commitment is required, with written notification and/or permission necessary for any outside work. You should be prepared to honor these restrictions, as a failure to do may provide your employer cause to terminate your contract under certain circumstances (e.g. if such work interferes with your performance for that employer), and you do not want to exceed the scope of your malpractice coverage. Having said that, California Lab. Code Section 96(k) does provide legal recourse for a “loss of wages as a result of demotion, suspension, or discharge from employment for lawful conduct occurring during nonworking hours away from the employer’s premises.”
In other words, moonlighting is generally legal and cannot be prohibited under California law, although an employer can nonetheless prohibit an employee from holding a second job that directly conflicts with or causes a material and substantial disruption of the employer’s business.
As mentioned, the specificity with which your contractual duties and obligations are spelled out will vary from one contract to another. You should carefully review this section, along with the rest of your employment contract.
Compensation
Your California physician employment contract or independent contractor agreement will include a compensation provision, whether in the body of the contract or as an attached exhibit, schedule, or appendix. California physician contracts may provide for straight salary or may be exclusively production-based, and often are a combination of the two. A new physician may be presented with a hybrid compensation formula, including a guaranteed base salary with additional productivity compensation or bonuses available if you exceed established benchmarks, whether measured in wRVUs or otherwise.
Pure productivity compensation formulas can vary from relatively straightforward to much more complicated plans. Note also that treatment of expenses can be a major factor in your productivity compensation, just as expenses are key factor should you become an owner, shareholder, or partner in the course of your professional career.
Indeed, if you become a partner or shareholder your compensation is more likely to be productivity based. California physicians can function as sole proprietorships and professional medical corporations. Employment law is my wheelhouse, as opposed to entity formation, and thus you should contact a business entity attorney and your tax professional for advice concerning the structuring of your medical practice.
Benefits
Your employment agreement may specifically address benefits, or may simply provide that the physician is entitled to the same benefits the employer offers to your colleagues in the practice. Typical benefits may include payment of professional licensing fees, Continuing Medical Education (“CME”) dues and travel reimbursement, paid time off (or “PTO”) including vacation and holidays, health insurance, disability insurance, life insurance, and retirement plans. One also occasionally sees provisions for flexible schedules (or even remote work, which is possible in some physician settings), or sabbaticals. PTO is of course often tied to tenure, with enhanced PTO as your tenure with the employer increases.
Confidentiality
It goes without saying that confidentiality is of the utmost importance in the medical field. Confidentiality provisions are nearly universally included in physician employment contracts around the country, and California is no exception.
In addition to obligations under the Health Insurance Portability and Accountability Act (“HIPAA”), employed physicians have a duty, absent agreement otherwise, to ensure that all proprietary and confidential information and property, including but not imited to patient medical records and medical mailing lists, remains with the employer upon termination of employment. The patient medical records restriction is, of course, subject to a patient’s entitlement to formally request that the records be produced or provided to another practice. See Cal. Health and Safety Code Section 123110.
Liability insurance
Professional liability (malpractice) insurance is a key consideration that you will find addressed in your contract. Most employers will be paying for malpractice insurance. If you are an IC and/or provide your professional services for more than one entity, you may be obtaining and paying for your own malpractice coverage.
Responsibility for “tail insurance” (aka an Extended Reporting Period, or “ERP,” coverage) is another matter worthy of your deliberate consideration. “Occurrence” policies do not require tail insurance, whereas “claims made” policies do. The cost of tail coverage ranges from modest to quite expensive depending on several factors, including how long you have been practicing, and your practice specialty and location.
If tail insurance is required, your contract should determine whether the employer or employee will bear the tail insurance expense. Responsibility may depend upon employee tenure, i.e. there may be a formula for amortization of tail coverage costs. For example, there may be a 3-year amortization period. If the employee remains with the employer for 3 years or more, the employer pays; if the employee remains for 1 year, the employer pays for 1/3 and the employee pays for 2/3 of the tail coverage, and so forth.
Tail insurance expense may also be contingently allocated based upon the reason for termination of employment. With this approach, if the employer terminates the contract “without cause,” or the employee terminates the contract “with cause” (e.g. the employer stops paying the employee’s salary or otherwise breaches the agreement), then the employer will pay for tail coverage; conversely, if the employee leaves “without cause,” or the employer terminated the relationship “with cause,” then the employee will bear the expense of tail coverage.
Termination provisions
In addition to providing for the expected term of your employment, physician employment agreements generally contain automatic termination provisions, triggered upon certain events, such as loss of your medical license or inability to maintain malpractice coverage, commission of a felony, and the like.
Your agreement will also include a “without cause” provision establishing that either party may terminate the contract upon a notice period of 60 days or 90 days or sometimes 6 months. Thus, while your employment is likely at-will because of the nature and business exigencies of employing healthcare professionals, it is common for the parties to agree to a reasonable notice period for a “without cause” termination. This allows the parties, employer and employee, to implement the transition in an orderly fashion, including avoiding patient abandonment issues. See, e.g., Hongsathavij v. Queen of Angels/Hollywood Presbyterian Medical Center, 62 Cal.App.4th 1123 (1998).
This notice period also takes into account the significant time and resources necessary to hire and on-board physicians, including obligations concerning credentialing and privileges.
While it goes without saying, please note that employees should always avoid burning bridges on the way out the door. One does not want to provide 6 months notice of without cause termination, and have the next half year of your professional life be uncomfortable or worse. Also, on that topic, California MD employment contracts will generally contain a clause that permits the employer to cut short the active employment tenure of a physician after either party provides notice of termination, so long as the employer pays the applicable compensation and benefits to which the employed physician is entitled for the duration of the notice period. In practice, what this means is there is the possibility that you will not be allowed to continue working throughout your notice period, even if you will be paid for the duration.
Restrictive covenants
“Restrictive covenants” in the employment context are contractual provisions concerning noncompetition, nonsolicitation, confidentiality, trade secrets, and invention assignments. Importantly, California physicians are not subject to the most problematic of all restrictive covenants – the noncompetition covenant — because noncompetes are not enforceable under California law pursuant to Bus. & Prof Code 16600.
Section 16600 provides:
“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
California courts strictly enforce Section 16600. Furthermore, effective January 1, 2017, California’s statute codified at Cal. Lab. Code Section 925 provides that a California employee may not be required, as a condition of employment, to enter into a contract that would (1) require the employee to adjudicate in a forum outside California any case arising in California, and (2) deprive the employee of the benefit of California law for any claim arising in California.
While it’s unlikely you will see a noncompetition agreement in California, an occasional employer may still include some form of a noncompete in a California employment agreement, either because they are unaware of the prohibition (unlikely) or because the employer wishes to make the employee or contractor feel as if their mobility is limited (obviously this would probably be a dispositive red flag, and/or is certainly something you would want to address with the employer). One area in which a noncompetition agreement could be enforceable under California law is if the noncompete applies to a physician partner or LLC member when the restrictive covenant applies only to the sale of an interest in the business when the sale also includes compensation for good will. See Cal. Bus & Prof. Code Sections 16601, 16602, and 16602.5.
Another restrictive covenant is a non-solicitation provision. Again, under California law standard non-solicitation of customer agreements should not be enforceable. See AMN Healthcare, Inc. v. Aya Healthcare Servs., Inc., 28 Cal.App.5th 923 (2018).
At this point in the evolution of California law, non-solicitation of employee provisions, i.e. anti-poaching agreements, are also likely void under California law, although there is some disagreement about how courts may address these provisions in the future.
Dispute resolution
Another important provision of your employment or independent contractor agreement will likely be a dispute resolution clause. A number of the reported decisions in California appellate reports have addressed the enforceability of arbitration agreements. While California law is well-established, yet evolving, with regard to arbitration agreements, in most instances, physician arbitration provisions have been enforceable under California law.
However, note that California Labor Code Section 432.6 prohibits employers from requiring employees to execute arbitration agreements as a condition of employment, effective January 1, 2020. The gist of this statute is that, while employees may voluntarily agree to arbitration, they may not be forced to do so in order to gain employment. In the case of Chamber of Commerce of the United States v. Bonta, 13 F.4th 766 (9th Cir. 2021), the Ninth Circuit Court of Appeals reinstated the validity of Section 432.6, which had been held unlawful in the trial court.
Consideration of a petition for rehearing by the Chamber of Commerce in Chamber v. Bonta has been deferred by the Ninth Circuit until the U.S. Supreme Court issues a decision in a case pending before the high Court.
Other standard contract terms
Toward the end of your California MD contract, you will generally find a series of boilerplate legal provisions that are often included in employment contracts. For example, these may include:
- Integration clause
- Severability clause
- Multiple counterparts
- Governing law and venue provision
- Amendment
- Assignment
Incorporated exhibits, appendices, and attachments
Your California physician employment contract may include one or more documents as attachments, e.g. appendices, exhibits, or schedules, addressing matters such as compensation, academic appointments, employer policies incorporated by reference, benefits, and so forth. As with the rest of your contract, you will want to carefully review all attached documents as they are part and parcel of your agreement with your employer.
Conclusion
Before you sign your California physician employment agreement, the best practice is to take the time and incur the modest expense to review the contract with a California employment attorney who is familiar with both physician contracts and California employment law. California employment law is complex, and, while employment agreements may include many boilerplate provisions, it is wise to thoroughly understand the written agreement governing the terms and conditions of your employment. I have been a member of the California bar for decades and have experience in employment law and have substantial specific experience with drafting, interpreting, and enforcing physician contracts. I’d be happy to help with your due diligence to ensure that you know what you are signing up for when you execute your employment contract.
