January 2019, Volume XXXII, No 10
Physician employment agreements
Understanding assignment provisions
s legislators debate the politics of the single-payer system (or a version of that), the free market continues down the path of consolidation, oblivious to the political discussion. Health systems and payers are purchasing physician practices, and larger health systems are purchasing smaller health systems.
If you are a physician with an equity stake in the group that is being acquired, you are in a pretty good spot. You will likely be compensated for the sale of that equity consistent with a fair market value analysis, and you will likely receive an employment contract as the new owner attempts to establish continuity for the clinic operations.
But what if you are an employed physician? What if you are a contracted physician? You will not be choosing the acquiring organization and you will not be receiving a payout upon the sale. The acquiring organization will have new policies and procedures, which may not be consistent with those you signed up for. Below are a few of the common issues physicians face when their employer is acquired by a new organization:
Acquisitions are generally accomplished through either asset sales or equity sales. An asset sale involves the sale of specific assets and operations from one legal entity to another legal entity (e.g., Party A sells its widget factory to Party B). An equity sale involves the purchase of ownership interest in one entity by another entity (e.g., Party B purchases 100 percent of the voting stock in Party A). This distinction can be important because the type of transaction at issue may affect your rights as described below.
Being clear and specific is a good practice for any contract,
Prior to transaction: review assignment and change of control provisions
Most employment agreements include an assignment provision, which specifies conditions under which contract provisions may be assigned to the acquiring entity. This provision will indicate whether an assignment is allowed and whether consent is required. The distinction between an equity sale and an asset sale is important in this situation, as an asset sale will require the practice to assign your contract to the acquirer, and an equity sale will usually not require an assignment.
If the sale is an equity sale, then the change of control provision would usually be the relevant provision (as opposed to assignment). If there is a change of control provision defining certain rights, such as consent, payment, or termination, the other party will usually have to provide notice of any change that involves a change in ownership of greater than 50 percent, and sometimes the consent of the other party will be required. Change of control provisions are uncommon in physician employment agreements.
If your employment agreement requires you to consent to a change in control or assignment, then you will have some options. If you refuse to consent to the assignment or change in control, you will usually have the option to terminate the contract if the sale proceeds without your consent. Depending on how critical your individual practice is to the overall sale, this may place you in a position to negotiate a retention bonus from your current employer or a better deal from your future employer (subject to the Stark Law governing physician self-referral and fair market value requirements).
Responding to unwelcome change
After the transaction is complete, you will get your first glimpse into the operations of the new administration. Assuming that your employment contract was not amended as part of the transaction (which should require your consent), your rights as a physician shouldn’t change from what they were previously. However, even though your rights have not changed, a lot of changes will be implemented. The question of whether you need to accept these changes depends on the language of your employment agreement. If your agreement specifies a certain number of days off or a specific bonus structure, then the new employer will need to adhere to those requirements. However, if those issues are not specifically addressed, then it will be difficult to require that the new employer treat situations in a particular way. That is why it is important to be specific when discussing rights and obligations. If an employer promises you something, they shouldn’t object to including it in the agreement (see detailed discussion below). The same logic applies with respect to after-hours work, time limits during patient consults, etc. If your prior employer had authority to enforce certain requirements or to establish new requirements during the course of the agreement, then the new employer will have that same level of authority.
Another common issue and question is whether a noncompete provision in the employee’s agreement can be assigned as part of an asset sale. Minnesota generally holds that agreements with noncompete provisions are assignable if the agreement allows for assignment. However, if you find that the noncompete provision becomes more onerous as a result of the sale, then you may have a good argument that the scope should be reduced. In order for a restrictive covenant to be enforceable, it must protect a legitimate business interest of the employer and be reasonable in scope, duration, and geographic region. In some jurisdictions, courts will completely invalidate unreasonable noncompete provisions, but Minnesota courts are not required to rule in an “all or nothing” fashion and can effectively rewrite the provisions so that they are equitable. An example that often comes up as it relates to sales or acquisitions is that an employer restricts the employee’s ability to work within a certain radius of an employer-owned clinic. If there is a sale that increases the number of clinics, that would effectively increase the geographic scope of the restrictive covenant in such a way that it would be inequitable to uphold the restrictive covenant.
Most physicians aren’t thinking about their employer getting acquired when they start their employment
During the negotiation process, lawyers spend a large chunk of their time negotiating noncompete, indemnification, and termination provisions. In my experience, there usually isn’t a lot of negotiation on the assignment or change of control language. Most physicians aren’t thinking about their employer getting acquired when they start their employment, and this usually isn’t high on the employer’s list either. A typical assignment provision will not allow either party to assign the agreement without the consent of the other, except if there is an asset sale of the employer, in which case the agreement can be assigned without the physician’s consent.
In the employment agreement context, an employer will never agree to a clause allowing an individual physician to assign the agreement. With that being the case, if a physician were to argue that any assignment rights should be equal, the likely compromise would be that any assignment requires the other party to consent (without exceptions). The assignment right is certainly more important for the employer than the physician, but with the tendency to “meet in the middle” during the negotiation process, some employers may agree to allow a mutual consent requirement for assignments. With a mutual consent requirement for assignments, the physician can opt to terminate an employment agreement upon the sale of the group practice.
While obtaining a mutual consent requirement might give a physician some leverage during an asset sale, drafting a specific employment agreement that includes the detailed rights and obligations of both parties is really the best way to ensure a successful employment relationship. If the rights and obligations between employer and physician are clear, then the changes implemented by a new operator should not affect those rights. Being clear and specific is a good practice for any contract, though, and admittedly sometimes it is easier said than done as specificity needs to be balanced against the need for a contract that is flexible enough to be operationalized. At a minimum, the primary obligations of the physician should be spelled out and the physician should have a chance to review any employer policies that they will be bound to.