Put It In Writing: Best Practices for Associate Contracts

MICHAIL PETROV / STOCK.ADOBE.COM

Drafting, negotiating, and understanding an associate contract can be a daunting task, but the first step is simple: Put it all down on paper.

“Get it in writing,” says Bruce Bryen, CPA, CVA, a dental practice valuation analyst at Baratz & Associates, P.A. “A handshake agreement or a contract written on the back of a napkin is going to cause so many more problems down the road. Get it in writing, and make sure it covers everything. This will benefit both the associate and the owner.”

It’s a logical first step—and the American Dental Association (ADA) agrees. In a 2014 guide to employment contracts, the ADA described oral agreements as “subject to indefiniteness, incompleteness and selective memory of the parties, and disputes over oral agreements may lead to litigation that can be extremely expensive and time consuming.”¹ On the flip side, the ADA says, written agreements can clearly set out the expectations and respective rights and obligations of both parties, which can protect both sides from legal issues down the road.

So, what needs to be in writing? There are several areas that both associates and owners should focus on.

Independent Contractor Versus Employee
While salary and compensation are probably the first thing on both parties’ minds (“how much will I make,” or “how much will bringing on an associate cost me”) the first step should be establishing the type of employment. The 2 primary options are independent contractor or employee.

While either role will have the associate doing work in the owner’s practice, the difference can have major tax liability and benefits implications. Independent contractors work on a 1099 tax form rather than a W-2, and generally do not receive perks such as paid time off, retirement packages, liability insurance or other benefits.

While independent contractors do generally have more control and autonomy over their hours, fees, work schedule, and treatment planning (which may be attractive to some associates), they are solely responsible for filing and paying taxes (incoming, employment and social security) with the IRS and state. They are also not covered under some federal protection laws, such as minimum wage, overtime, antidiscrimination regulations, and unemployment and Social Security credit.

Owners may be tempted to go the independent contractor route to cut down on labor costs and not have to pay benefits or worker’s compensation. However, Bryen advises associates against entering into this type of agreement.

“Sometimes the owner is trying to get away with essentially paying the associate less by going with a 1099,” he explains. “I would be really careful with going to work there, because if that happens, there will probably be other corners cut down the road.”
Bryen also stresses the potential financial repercussions for an associate of going the independent contractor route.

“If you are an independent contractor, you lose all kinds of benefits,” he explains. “You’re paying double Social Security tax, double Medicare tax, if you’re a contractor instead of an employee. You won’t be part of a retirement plan. It deprives the associate of everything that an employee would get. You really get nothing; you get to go to work, and you get an amount of money, and that’s it.”

Salary
Once employment type has been established, it’s time to hash out compensation. Owners and associates alike should familiarize themselves with the average salaries for their area. Dental salaries are notably more convoluted than the straight annual salary of your typical office employee, and the salary section of a contract should detail how the associate will receive compensation.

“Dental employment contracts can frequently be more complicated than a straight salary arrangement,” confirms the ADA. “Details about pay models, deductions and other seemingly complicated compensation-related terms can be easily overlooked in the negotiation and language of an employment agreement, but these fine points can significantly impact the employee dentist’s income.”

Some critical questions include: what will the pay model look like? What sort of deductions should the associate anticipate? Is it a base salary, or percentage-based commission? Associates should pay careful attention to whether salary will be straight commission, (where the associate’s pay is a flat percentage of revenue generated or the number of procedures performed) or salary plus commission (where the associate’s pay is a combination of commission and base salary.)

The next big question is whether the commission will be based on collection or production. Production-based commission is calculated by the total amount billed for the work an associate performs. Collection-based commission stems from the gross amount collected from an associate’s work.

This collection versus production question can be a tricky one. Bryen says that most of the contracts he’s seen give the associate a pay percentage of collection, not production. This can be misleading for associates, who may say see that they are producing high quantities—none of which matters if it’s paid on collection.

“This is something an associate should be really careful about,” Bryen says. “Associates need to understand if they are paid by collection or production. If an associate is getting paid by collection, they will get a higher percentage of pay, whereas if they are paid by production, they will get a lower percentage. That to me would be a mistake; the associate will get a lower percentage than if they were paid on collection.”

While compensation from a percentage of collections is fairly common, there are benefits to going with a percentage of production. An associate has control over their production, but little control over the collection practices of the practice.

Whichever road an agreement goes however, both production and collection will be slow in the associate’s first few months. As such, it’s not a bad idea to consider a monthly base salary for the first 3 to 6 months. While it may seem like a sunk cost to an owner, it’s an investment in the employee in the long term.

“The owner knows how long it takes for production and collection to start to happen,” Bryen says. “And they should think about the associate—don’t make it hard for the associate, because the associate is stressed about the lack of money they’re making, it could affect their clinical work. With a guarantee, an associate can go to work knowing that they are going to get paid enough to cover the rent and groceries and student loans.”

Essentially, owners should guarantee the associate an amount of money until they reach a point where they can produce and collect that amount of money—all of which will keep associates around longer.

“You want the person to stick with you for a while, because you’re spending a lot of money training that person, especially in the first 6 months,” Bryen summarizes. “In the grand scheme, you’re investing very little compared to the expenses of training time and things like that.”

Ultimately, no matter which route an owner and associate agree on, it should be carefully spelled out and understandable. The ADA recommends that the owner and associate each run example numbers to see what the outcome would be.

“Run a few sample numbers through the compensation model to be certain that each can use the formula to calculate how much the employee will earn based on his/her work during a given pay period,” the ADA recommends, while also cautioning, “While pay is important, it is not the only incentive employers provide to employees. The various benefits offered should be carefully considered.”

Benefits
As the ADA states, a big part of the compensation package comes in the form of benefits. While salary may be the knee-jerk priority, not establishing a solid, clearly spelled out benefits package can be a huge financial mistake. A lower offer may not always be a bad thing, if the offer provides higher financial compensation through a solid benefits package.

Benefits packages include a lot of critical components, including health and life insurance, paid vacation and sick days, retirement and 401K contributions, tuition reimbursement and continuing education coverage, profit sharing, bonuses, and professional liability insurance. All in all, a lot to consider.

“There are a lot of things associates should look for, particularly items that are pre-tax,” Bryen says. “This includes holidays, sick pay, vacation pay, and things like that.”

Time-off provisions should be carefully spelled out for a 12-month period, including the number of days off, and any restrictions such as providing 30-day notice, or not interfering with the owner’s time off. Time off for continuing education or other educational time should also be detailed, as applicable. Owners should consider factors such as whether they want time off to be cumulative, whether or not it will be forfeited if not used within a particular period, and other considerations that could affect how time off is accrued and used.

Other pre-tax deductions such as health and life insurance are also things to review closely, along with retirement fund options.

“There should definitely be a retirement plan,” Bryen says. “The associate should look at the vesting schedule—how fast is it? What about forfeitures if they leave early? That kind of thing should be in the contract.”

Vesting (when the employee has a right to a benefit) extends beyond just retirement. For example, while paid sick leave may be a part of the benefits package, an associate may not be eligible until a certain term of employment has been served. The ADA recommends closely examining any limitation, restrictions, or waiting periods that could affect benefits.

Another component of the compensation package that associates should review closely is liability and malpractice insurance. The contract should establish which party is responsible for covering this insurance. Generally, full-time associates should look to the practice to cover the cost of liability insurance.

Noncompete Clauses
A noncompete is a fairly standard addition to an associate employment contract. Typically, a noncompete prevents an associate from practicing within a certain geographical area for a specified amount of time after leaving a practice. This protects the owner’s business interests if an associate decides to set up shop elsewhere.

“Any owner who understands anything about administration is going to put a noncompete agreement into the contract,” Bryen says. “I don't know how an associate can get away with not agreeing to that if the associate wants that job. So that's one thing to look at, but there's not much you can do about it.”

The only thing an associate can do is ensure that the noncompete isn’t overly restrictive. For example, if an associate is joining a dental support organization (DSO), they should review whether the noncompete limits the area around the practice where the associate works, or if it extends to mileage around every location in the DSO. In smaller markets, this can become incredibly prohibitive for the associate. Employers should also keep in mind that making a noncompete too restrictive may repel prospective associates.

Not every state will enforce noncompete agreements, so it’s good for both owners and associates to review the regulations in their state. Employers may also include a non-solicitation agreement, that prevents the associate from soliciting the business of the practice’s current patients for a set period of time. The associate is free to move practices or set up their own, but they cannot treat patients from the prior practice.

“Some states don’t allow noncompete clauses, and some states that do don’t really enforce them,” Bryen says. “Really, enforcement will only come in situations where the associate received money not to compete. Otherwise, the state probably won’t even look at it.”

While noncompete agreements may not be enforceable, it’s better for both parties to address the scope or provisions of the agreement at the outset, rather than potentially be tied up in expensive litigation—that ultimately might not benefit either party—down the road.

Terms of Employment
This portion of the contract is really the framework for the entire associate contract. The terms and termination section outlines how long the agreement will last, and how either party can terminate it. In most states, employment is generally on an at-will basis, meaning that either party can terminate the employment at any time (as long as the termination isn’t unlawful under a state or federal law, such as an antidiscrimination law) with or without warning. Employment agreements, however, can change this arrangement. While some agreements are for indefinite time periods and have no set end date, other contracts have a stated duration.

A set-term agreement can have multiple implications. For an owner, this ensures that the associate stays on for a set period of time, which can offset the training time and costs that the owner invests in the associate. From an associate standpoint, a term agreement guarantees employment and can reduce concerns about job stability. This can be extremely reassuring if an associate is relocating for the position.

The termination section outlines the parameters of how and why a party can end the agreement. Termination without cause and termination with cause are both aspects that should be addressed in this section. Termination without cause allows either party to end the associate agreement for any (or no) reason. Notice is sometimes given, but not always required. Termination with cause outlines reasons why the agreement may be terminated, such as an employee failing to perform their duties, engaging in a crime, or losing their license.

This section protects both the owner and the associate.

“The employer will want to establish its right to terminate the agreement if the employee-dentist acts in a manner detrimental to the practice, such as loss/suspension of license, failure to follow the practice’s procedures, misuse of the practice’s information, etc.,” the ADA says. “The employee may be concerned if there is not a notice period that would give the employee income from the date of notice until the effective termination date … [or] if the specified ‘causes’ are too general (such as ‘failure to follow practice procedures’).”

In summary, these provisions are important because it outlines answers to 3 important contract questions: The length of the contract, how the parties can break the contract, and what happens if 1 of the parties invokes a termination right.

Consult the Experts
Since an associate employment contract can have many far-reaching implications, it’s never a bad idea to bring in the experts to review the terms.

“It is sometimes difficult for persons unfamiliar with contracts to anticipate their various pitfalls,” the ADA says. “If you think that the cost of speaking to a lawyer concerning your employment contract is unnecessary, you should consider the possible serious consequences that may result from an unfair, unreasonable, or burdensome contract. … We urge you to have the contract reviewed by a competent lawyer in your jurisdiction who is aware of the specific circumstances of your situation.”

While the cost of engaging with a dental lawyer may seem prohibitive, particularly to associates fresh out of school that are juggling the expenses of student loans, spending the money now can save an associate money down the road.

“It really is worth paying an advisor that understands this sort of thing,” Bryen says. “It’s not that expensive usually; maybe $1,000 to review the contract. This thousand may seem overwhelming at an early point in an associate’s career, but it’s probably the best money you could ever spend.”

References
1. Dentist Employment Agreements: A guide to key legal provisions. American Dental Association. https://ebusiness.ada.org/assets/docs/2502.pdf?orderid=400878. Published 2014. Accessed February 8, 2023.