August 30th, 2024
TERMINATING PHYSICIAN EMPLOYMENT CONTRACTS by Jim Vogele
INTRODUCTION
Most Washington, Oregon, and California physician employment contracts are at will, meaning that they can be terminated “without cause,” for any legal reason. Montana physician contracts are generally a little different, due to Montana’s unique Wrongful Discharge from Employment Act (“WDEA”), which exempts from its coverage “a written contract of employment for a specific term[,]” i.e. a contract providing for employment for a predetermined period of time/years. Because many employers wish to exempt themselves from the WDEA, a Montana physician employment agreement is likely to be for a set duration, e.g. 2 years, and may not have a standard at-will termination provision. We will talk a bit more about that later, but, in short, this does not mean that a Montana physician can never leave employment before the term ends; however, the contract will typically provide that doing so must be by mutual agreement. Unless stated otherwise, this article focuses on the standard Washington, California, or Oregon physician contract.
AT WILL CONTRACTS MEAN “AT WILL” (OR “WITHOUT CAUSE” OR “FOR ANY REASON” IF YOU PREFER)
A general principle applicable throughout the United States (again, setting aside Montana for the moment) is that both employees and employers are free to terminate the employment relationship at any time for any legal reason. This makes sense, because employees are not indentured servants, nor do employers wish to be forced to retain an employee who is not ‘working out’ (or who is not working, as the case may be). Outside of contracts in the healthcare professions, when at will employment applies there is generally no requirement to provide advance notice of termination – either party can end the relationship with no notice at all (although the 2-weeks notice concept is sort of an unwritten rule).
Physicians and other healthcare providers, however, operate in a qualified universe. In this universe, for a variety of reasons – especially avoidance of patient abandonment but also the substantial time required for job searches as well as credentialing, privileging, and licensing – a period of advance notice prior to termination of employment is usually required by the employment contract. In short, a convention has developed whereby physicians are free to terminate their contract at any time, at will and/or without cause, but the terms of a written employment agreement typically require them to give a reasonable amount of advance notice. The amount of this notice as specified in physician employment contracts will vary; the most common provision requires 90 days notice, but this can be anywhere from 30 days to 180 days or something else.
At will termination is also referred to as termination “without cause,” and some contracts will simply say termination is allowed “for any reason.” This means that either party may terminate the agreement and employment relationship for no reason at all, or in any event for any legal reason. We say “legal reason” because pursuant to a variety of local, state and federal statutes an employer cannot legally terminate a contract, e.g., for reasons of unlawful discrimination or in retaliation for an employee’s engaging in protected activity such as whistleblowing concerning health or safety issues. These are simply examples of generally unlawful bases for termination, even with an at will contract, but there are others.
While in practice few if any employers or employees will end a relationship for ‘no reason,’ that is indeed what the at will employment doctrine allows. No reason needs to be given for termination of an at will employment contract. You can simply cite the relevant contract provision and submit your notice following the notice provisions set forth in the contract.
That sounds simple enough and it usually is.
However, when I hear from physicians who need legal advice regarding termination of a physician contract in Oregon, California, Washington, or Montana, there is usually some sort of ‘twist’ involved. The next section briefly discusses one such potentially more difficult scenario, a twist if you will.
TERMINATING THE CONTRACT BEFORE THE EMPLOYMENT START DATE
The first level of advice here is to avoid doing this, i.e. signing a contract and then terminating the contract before the first date of employment. If that is unavoidable, then you should follow the notice of termination provision of the contract. If you have questions about the potential consequences of doing this, and there can be some, I recommend talking to a physician employment contract attorney. There are a variety of considerations that are beyond the scope of this general article; but suffice to say that if you read the contract literally in these situations, you will see the correct path forward. The contract will almost always specify the notice that must be given, when and how, and may discuss the consequences of doing so, if anything, other than the fact you have changed you mind and won’t be proceeding with this employer.
The rub or somewhat more difficult situation may arise when you cannot provide the full measure of notice (90 days or what have you) prior to the start date of the employment. In such a case, it is possible that the employer could seek to recover damages incurred in replacing your services during the balance of the period that is short of the full contractually-required notice. In such cases the general rule in most jurisdictions is: The recoverable damages for breach of an employment contract by an employee is the cost of obtaining other service equivalent to that promised by the employee but not performed. See
Arrowhead Sch. Dist. No. 75 v. Klyap, 79 P.3d 250 (Mont. 2003), (extensive discussing liquidated damages provisions in employment contracts).
You can imagine that this cost might be hiring a locum tenens practitioner to in effect cover for you when you are not available during a period when the employer was relying upon you to be available. You should consult with a physician contract attorney if you are confronted with an employer’s claim that they have been damaged by your provision of notice of termination of a physician contract. I frequently consult with healthcare practitioners who need advice in terminating physician employment contracts. Often the key to avoid damage claims is to handle the termination properly in the first instance, while also working for a reasonable, mutually-agreeable resolution before the threat of a damages claim ever arises.
TERMINATING THE RELATIONSHIP WITHOUT CAUSE CONSISTENT WITH THE CONTRACTUAL NOTICE PROVISION
Most Washington physician contracts, as with California and Oregon physician contracts, will contain a provision for at will or without cause termination (as mentioned above, this is also sometimes termed “for any reason”) by providing written notice to the other party. These provisions may provide an equal amount of notice required for both employer and employee; sometimes the employer will tilt the scale in its favor by allowing itself a shorter notice period for without cause termination than is required of the employed physician. Again, if you have questions about such asymmetrical provisions in your physician employment contract, you should speak with a physician contract attorney. The unequal notice provisions are often not a big deal, if the disparity is not extreme or unreasonable.
In any event, many but not all physician contracts will include an ‘acceleration’ proviso whereby, upon the receipt of an employee’s notice of termination, the employer is allowed to end the doctor’s employment before the full running of the notice period. Ideally, if the employer were to exercise this acceleration option, the contract will also stipulate that the employer must nonetheless pay the physician employee the physician’s full compensation through the end of the notice period as if the doctor had worked through to the end.
When availing yourself of the without cause notice process, be sure to check the balance of the contract to determine what, if any, repayment obligations you may have to repay some or all of your signing bonuses, relocation expense reimbursements, or student loan assistance payments. These obligations may be pro-rated or amortized. For example, if the contract is for a term of 3 years and you work for 2 years before leaving, then you will repay approximately 33% of the bonus amounts. In other contracts, the repayment requirement will be an all or nothing matter, whereby, using the above example, if you do not remain employed for the entire 3-year period, you will need to repay the entire bonus at issue.
A related issue that I encounter occasionally in my physician contract review work is that when your physician compensation is based on a production model, the contract may neglect to provide that you will receive collections for your services received by the employer for a certain period of time after your final date of employment. This can involve a significant amount of money and you should be sure to review any such provisions carefully and discuss with a physician contract attorney if you have questions.
Finally, check to see who has the malpractice tail insurance obligation, if tail insurance is required. These also may have earn-out provisions where the cost of tail insurance is split or potentially waived if the physician has fulfilled certain tenure requirements.
MAY AN EMPLOYER’S MATERIAL BREACH RELIEVE THE EMPLOYEE FROM CONTRACTUAL OBLIGATIONS
In a word or two, maybe, but don’t get your hopes up.
The majority of Oregon physician contracts will include a provision for termination of the contract, in essence for cause, due to one party’s material breach. The same is true for doctor’s employment in Montana, Washington, and California – nearly every employment agreement will address the prospect of material breach and provide a right to cure same.
Having said this, note the immediate caveat here that rarely do employers materially breach Montana, Washington, California, and Oregon physician employment contracts. Do breaches occur? Yes, they do. But the most common breach is less than material. Without getting into the weeds in this very general article, please note that something like a minor schedule change is rarely a material breach. Indeed, most contracts include various ‘savings’ clauses, wherein the employer reserves the right to make changes to terms and conditions of employment such as schedule, assignment of clients, and compensation. With regard to the latter – compensation – any such changes of course must take effect only prospectively; an employer cannot simply advise an employee that compensation terms changed effective last month, so the pending paycheck for that work will be less than expected. That will not fly.
In the wide world of employment law outside doctor’s employment contracts, such a shady tactic is most often found in the context of commission sales agreements. More than once over my career have I been contacted by commissioned salespeople who closed a huge deal only to learn after-the-fact that the formula for calculating the commission had allegedly changed, or, in the most egregious circumstances, the salesperson will be terminated shortly before the date by which the commission was to be paid (with employment upon the date of pay-out a ‘vesting’ prerequisite to being paid).
Furthermore, physician employment contracts will, in most cases, require written notice to the breaching party of an alleged breach; that party will then have a “right to cure” the breach within a short, defined period of time, e.g. 15 or 30 days.
Just about every jurisdiction has established precedent in the field of employment law holding that a material breach may relieve the non-breaching party of performance under a contract. However, as briefly discussed above, establishing a material breach is a steep uphill battle. An interesting example of such a dispute is a case from a jurisdiction in which I do not practice – Illinois. In 2006, the Illinois Supreme decided the case of Mohanty v. St. John Heart Clinic, S.C., 225 Ill.2d 52 (2006)
In that case, two doctors sought to prevent the enforcement of the restrictive covenants in their employment contracts. The trial court denied the employer’s request for a preliminary injunction; the Illinois Appellate Court reversed the trial court’s denial of the preliminary injunction; and the Supreme Court of Illinois affirmed the Appellate’s Court’s decision. Under this holding, the noncompete clause in the employment contracts would be enforced.
The two doctors in Mohanty were challenging the noncompete made a variety of arguments, including that the covenants were against public policy and also that a prior material breach of the contracts relieved them of the restrictive covenant obligations. The doctors argued that their employment agreements had been breached because the employer clinic had not compensated the doctors fully for the services they performed. Specifically, the doctors argued that the clinic had improperly handled the billing and reimbursement from Medicare for myoview tests, including errors with respect to the separate Current Procedural Terminology Codes (CPT Codes) for the technical and professional components of the tests. For those interested in reading more of the Court’s discussion concerning the technical versus professional components of the billing process, you may wish to read the Court’s opinion. It is not light reading, but it is somewhat enlightening. Ultimately, in any event, the Court found that “we cannot say that it was against the manifest weight of the evidence for the trial court to determine that a material breach of contract was not established.”
Thus, if your goal were to terminate the contractual relationship due to your healthcare employer’s material breach, which could relieve you of the necessity of providing full notice or complying with restrictive covenants, you would, first, want to consult with a physician employment contract lawyer. In all but the most egregious fact patterns, you may well be dissuaded from claiming there has been a material breach because the standard of materiality is, frankly, extremely difficult to meet. Second, you would almost certainly, depending upon your contract’s terms, need to provide written notice to the employer of the material breach and allow the employer the opportunity to cure the issue (even if your contract did not include a right to cure provision, presenting the issue to the employer and requesting a prompt cure is often the best approach in any event). Finally, keep in mind that the question of whether a party’s breach of contract is material is generally a question of fact – what that means in layperson’s terms is that you may need to go to trial and have a jury (or arbitrator, if your contract contains an arbitration clause) answer the question, should your employer choose to take the matter to the mat so to speak.
PHYSICIAN CONTRACT TERMINATION WHILE UNDER INVESTIGATION
The law mandates reporting requirements for health care entities which must provide reports under various circumstances to the National Practitioner’s Data Bank or state licensing boards. Among the triggering events requiring a report is a surrender of clinical privileges, “(i) while the physician is under an investigation by the entity relating to possible incompetence or improper professional conduct, or (ii) in return for not conducting an investigation or proceeding . . . .” 42 U.S.C. Section 11133.
Detailed discussion of National Practitioner Data Bank regulations is beyond the scope of this article, but suffice to say that the issue of what constitutes an “investigation” is far from cut and dried; and courts have been called upon to grapple with the question. See, e.g., Doe v. Leavitt, 552 F.3d 75 (1st Cir. 2009). Complicated issues surrounding medical licensing are best left to a specialist and I would typically refer such questions to an attorney or firm with an established specialty or sub-specialty in this area.
CONCLUSION
In sum, terminating a physician employment contract in most cases is not and should not be a cause for undue stress. An employment relationship is a business relationship, and, as I occasionally have to remind my clients, it’s just business, your employer will understand. Nonetheless, the termination process can be stressful and it will often be the case that consulting with a physician employment contract attorney will alleviate a good portion of that stress.
