Veterinary – Strategies For Success library

Associateship to Buy-in: The Importance of Written Agreements - Part 1

by A. Lee Maddox | 07/02/2009 | Legal & Business Planning , Vet

However, as associate doctor relationships continue to flourish, so do unfortunate and unnecessary legal disputes between associates and owner-doctors.

In our respective law firm's health care practices, we have discovered that the most successful doctors (either as associates or owners) recognize the need to have written associate agreements because of the protections afforded to each individual as a party to the agreement.

Below in Part 1 of our two-part series, we address four key reasons to have written associate-doctor agreements with your colleague. In Part 2 of the series, we outline 12 points that should be addressed in every properly drafted associate-doctor agreement.

Written Associate Agreements: Mandatory, Not Optional

Few business owners would spend $40,000 to $50,000 per year on their office equipment without having a detailed bill of sale setting forth both the equipment's warranties (to protect the owner) and the reciprocal promises by the owner to make scheduled payments (to protect the equipment vendor). The associate relationship is every bit as important and substantial a monetary investment because of the annual compensation paid to the associate, yet it can be fraught with greater risks. Memorializing in writing the associate-doctor relationship in lieu of maintaining a simple verbal agreement is necessary for the following reasons:

1. Written agreements cause parties to focus on and address issues that they would otherwise not have considered.

This is especially true if the parties have sought experienced attorneys able to apprise them of those legal issues unique to the veterinary field. For example, owners can compensate their associates in a variety of ways: daily salary, a percentage of collections, a percentage of production or a base salary with a bonus based upon a percentage of veterinary services produced. Many owners frequently pay their associates based upon a percentage of collections for services rendered by that associate. Does the associate's entitlement to a percentage of collections end upon the associate's termination of employment? We have encountered numerous owners of health care practices who feel that the associate’s percentage should end upon termination of employment or, at the very best, continue for only a limited period of time (e.g., 90 days after termination of employment).

A partial answer to this question may be based upon what form of compensation the associate received at the time that the associate first became employed and rendered services. For example, if the associate were compensated only upon the basis of collections during the first 60 or 90 days of employment, as opposed to being paid a base salary, then the owner would have a more difficult argument to assert that the owner was entitled to all of the collections.

What rights does the associate retain subsequent to the termination of employment to examine the owner’s financial books and records relative to the associate’s production of veterinary services? If the associate is being paid a percentage of the accounts receivable collected by the owner, does the associate have a broad or limited right to examine and corroborate the owner’s representations that only certain accounts receivable have been collected on behalf of the associate?

What rights does the associate have to collect accounts receivable, especially in those circumstances where the client may have followed the associate to a new office location and the client is making his or her payments to the associate? 

If the associate is being paid a daily salary with a bonus based upon production in excess of a certain amount, does the bonus apply based upon the production being reached that particular day or the production being reached on an average for all days worked by the associate during that month? 

What rights does the owner retain regarding who performs the more lucrative services (e.g., medical surgeries) as opposed to the less expensive procedures (e.g., exams)?  What rights does the owner retain regarding hiring more associates to perform services and, consequently, preventing the associate from reaching a bonus level of production?

Should the associate be paid a greater salary if the associate is spending more time managing the practice as opposed to rendering services?

We have discovered that the involved parties rarely address, let alone resolve, the above issues by themselves. A properly drafted written agreement would specifically raise these issues and resolve them!

2. Some people lie and try to take advantage.

If you are in a business relationship with a dishonest individual who is attempting to take advantage of you, a written agreement that can be reviewed by your legal counsel, or by the presiding judge in the event of trial, gives you far greater leverage than merely alleging the existence of a verbal agreement. With verbal agreements, the presiding judge is forced to determine which of the parties is more credible and to choose which party is telling the truth. A written agreement, on the other hand, helps preclude such guesswork by the court and gives you or your attorney leverage to threaten litigation with a successful conclusion if the other party breaches the associate agreement. Written associate agreements therefore can forestall litigation which would otherwise occur in the absence of an agreement documenting the parties’ intentions.

3. Written agreements resolve ambiguity and eliminate confusion.

Spelling out clearly the terms of any business relationship will eliminate ambiguity, and this is especially true if the attorney drafting the document is intimately familiar with the nuances of that particular profession. For example, many owners initially employ associates with the hope for a long-term relationship that produces an associate patient base that parallels the growth of the practice. During the early months of the associate relationship, the owner may not be making a profit on the services rendered by the associate, particularly if the associate is a recent veterinary school graduate and works slowly. The associate’s liability to the owner upon termination of the relationship will vary depending upon whether the associate’s compensation has been designated as a "salary" or a "draw."

What if the compensation to the associate is designated as "salary"? The associate has no duty to refund any compensation to the owner regardless of the amount of the associate’s production. 

What if the compensation to the associate is defined as an "advance" or "draw"? There may be a liability by the associate to reimburse the owner for money paid to him or her if the compensation is greater than the fees generated from the services rendered by the associate.

What happens if part of the associate’s compensation is being held back by the owner (with the associate’s consent) to be applied as a partial payment for a purchase or a buy-in of the veterinary practice? Who is taxed as having earned the income and what happens to the money if the associate relationship terminates prematurely? Clearly and accurately defining in a written agreement the nature of the associate’s compensation and any forfeiture of the associate’s earnings upon an aborted buy-in would obviate these and other problems.  

Many associates in California are also paid as employees based upon a per-day basis and, therefore, may arguably be treated similarly to the owner’s other employees. On numerous occasions our law offices have had to defend the owner or assert the associate’s rights after the parties have disputed the associate’s claim to certain employee fringe benefits such as paid vacations, paid holidays, paid sick leave, paid health insurance, paid malpractice insurance, additional compensation for night or weekend emergencies, etc. If these issues and concerns had been addressed in a written agreement, rather than the parties having to recall their prior discussions, there would have been far less acrimony and fewer legal costs incurred.

4. People forget.

Most doctors are too busy taking care of their patients and maintaining their professional skills to remember the intricate details of every business transaction or business relationship they enter. A busy veterinary office with associates, assistants, and front office staff may have unique and different terms characterizing each of these employment relationships. For this reason, "legally organized" offices will have up-to-date employee manuals or handbooks and employee agreements setting forth the terms of their staff’s employment. For example, employee manuals set forth the veterinary office’s practice regarding sexual harassment, pregnancy leave, paid holidays, sick leave, vacation, staff absenteeism, tardiness and termination. 

Both parties to a verbal associate agreement frequently recall differently many of the integral points previously negotiated between the parties, and such differences in recall unfortunately often lead to subsequent litigation. For example, our offices represented a dental associate before the Labor Commissioner for the State of California. The owner had held back part of the associate’s compensation to pay for (i) redo of allegedly defective dentistry, and (ii) completion of cases by the successor associate. The owner and associate did not similarly recall the provisions they had verbally agreed to regarding the holdback of the associate’s compensation and his liability for dentistry completed by the successor associate. The Labor Commissioner finally ruled in favor of the associate for unfairness shown by the owner in holding back part of the associate’s salary to pay for allegedly defective dentistry. However, this result was only after a substantial expenditure of time and money by the associate to vindicate his rights. All of this could have been avoided had the parties initially placed in writing the terms of their verbal agreement.

To understand the 12 key points that should be included in every associate-doctor written agreement, see Part 2 of this series, 12 Critical Issues to be Addressed in Every Associate-Doctor Contract.

_{Law Offices of Barry H. Josselson, A Professional Law Corporation, 2009.  Republished with permission from Law Offices of Barry H. Josselson.}

_{Statements of opinion not necessarily endorsed by the American Animal Hospital Association or any of its subsidiaries, counsels, commissions, or agencies.}

A. Lee Maddox, DDS, Attorney at Law, advises dentists throughout California on dental legal and business matters. Dr. Maddox received his DDS degree and certificate in endodontics from the University of Southern California, and his J.D. degree from Whittier College of Law, Costa Mesa, California. Dr. Maddox has lectured internationally on major innovations in the field of endodontics during the last ten years. He currently authors articles for professional journals such as the California Dental Association Journal and Dental Economics. Dr. Maddox can be reached at Lmaddox@cadentallaw.com or 888-685-8100.