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Contract Drafting Terms

Employee versus Independent Contractor

There are two basic types of work arrangements an emergency physician may undertake – an employee hired by a hospital/group or an independent contractor secured by a hospital/group. This dichotomy has no bearing on whether the physician works for a hospital, a small local group or a national “mega-group.” There are pros and cons to each arrangement that should be considered, and an experienced attorney will provide the most favorable contractual terms when negotiating.

For physicians who are employed by a group that in turn is contracted with a hospital, the (usually pre-existing) contract between the group and the hospital also directly affects the physician. It is advised that (if allowed) this contract be reviewed before considering employment. If considered privileged information, inquire as to its strengths and weakness (e.g., length, criteria for termination). Perhaps more important than the contract is that the group has enjoyed a positive association with a hospital for many years and shows strength in the institution (e.g., autonomous department status, emergency physicians on all major committees and considered for medical staff officer positions).

Many physicians are content as employees, while others prefer more flexibility and are willing to take on the greater fiscal responsibility required of independent contractors. Employees generally receive valuable benefits from their employer including vacation time, medical coverage, disability insurance, education allowances and the option to participate in pension plans. An independent contractor can purchase insurance products to suit his or her exact needs though insurance rates for individuals are higher than for groups. The hospital/group regardless of the type of work arrangement usually provides professional liability insurance.

While, in 2010, employees can shelter $16,500 in tax-exempt retirement accounts (i.e., 401k or 403b plans), independent contractors can contribute 20% of their income (up to $42,000) in a Simplified Employment Pension (SEP) Plan. Further, independent contractors can deduct appropriate business expenses (e.g., car lease, education costs, equipment, etc.) while employees are allowed only a 2% deductible on adjusted gross income. Independent contractors are held completely accountable for income tax reporting and must do so on a quarterly basis. Independent contractors also have to pay the employer share of social security tax and Medicare tax. Those that shirk this responsibility often end up owing large amounts of money to the Internal Revenue Service (IRS) because of back taxes and penalties. Also, there is always a looming threat to one’s pension plan should the IRS declare that the individual should have been considered an employee all along. It is highly recommended that independent contractors consult a qualified accountant or tax attorney to set up their pension plans and tax payment schedules.

While employees may perceive greater job security than independent contractors, either arrangement is subject to the terms of a contract. For example, when a contract comes up for renewal, breaking the relationship may be as simple as issuing a letter of intent to terminate at the end of the contract period. Either type of work arrangement can also end suddenly. This generally requires that one party can demonstrate breach of the contract by the other party. In general, one’s long-term job security depends very little on a contract and a great deal on establishing positive relationships with others and providing excellent patient care.

The distinction between employee and independent contractor is critical, especially to the IRS. To this end, the IRS developed a “Twenty Factor Test” to clarify whether an individual should be defined as an employee or as an independent contractor. Perhaps because tax laws are more favorable to the independent contractor, these criteria favor the definition of an employee. The 20 criteria follow.

When reviewed point by point, it becomes clear that emergency physicians are challenged to comply with many of these IRS rules governing independent contractor status. If the IRS believes an employee-employer relationship exists, the physician may seek Section 530 relief for reconsideration as an independent contractor. This section of the IRS code allows independent contractor status to prevail as long as the hospital has treated all similar physicians the same way since 1978 or its inception.

Drafting Terms

Black’s Law Dictionary defines a contract as, “a promissory agreement between two or more persons that creates, modifies or destroys a legal relation.” In establishing a legal relationship between a physician and a hospital/group, there must be mutual acceptance of the terms of the contract. While contracts are essential, there is no substitute for excellent rapport between the parties. Maintaining a positive alliance with hospital administration and the medical staff equates to sustained job security since all contracts are time-limited. Other factors that enhance job security include adding integral services (e.g., an emergency department based observation unit) and becoming involved in the hospital’s strategic planning for the future.

To achieve a full legal understanding of the terms, it is strongly advised to have an attorney review the contract and explain or clarify the obligations of both the physician and of the hospital/group. The attorney should ensure that the contract clearly defines the job duties, compensation and benefits without ambiguity. “Fine print” should not be ignored as it may lead to serious long-term consequences. The next two chapters on business practices contain powerful tools to aid in negotiating a fair and equitable contract. Though beginning a job on “a handshake” allows medical staff bylaws and common law principles to prevail should termination be threatened, it is best to have a signed contract promoting due process and devoid of a non-competition clause.

Negotiation involves much more than the salary. For instance, full partnership should be attainable as long as no genuine problems arise during the trial period. Many books have been written on negotiation techniques. Getting to Yes (Fisher R, Ury W, Houghton Mifflin, 1981) explains why principled negotiation, with the goal of mutual understanding and creating a win-win endpoint, is a favored technique. Lawyers may assist in mediating between contractual parties when they are far apart on certain issues.

The typical elements or clauses that constitute the terms of a contract between a physician and a hospital/group are described below.

The above explanation of contract clauses is not all inclusive. It is highly recommended that you consult an attorney. Money spent up front for a contract review often saves far more should problems occur in the future. The cost for legal review of an uncomplicated emergency physician contract with a hospital/group is about $1,000. State medical societies and emergency medicine organizations can often steer you to a law firm expert in this area.

AAEM has put forth the following guidelines that list the essential components of a fair and equitable contract:

 

Excerpt from Rules of the Road EM for Residents 6th Edition | Tom Scaletta, MD FAAEM; Editor | Michael Ybarra, MD; Co-Editor | Published 2010. Purchase a full copy of the book in the AAEM Bookstore.