Productivity and Termination: What Physicians Need to Know When Reviewing Contracts
Compensation formulas based on productivity can become a major source of friction between physician and employer when termination occurs. When reviewing a physician contract (or drafting it), the following are some issues to take into account as it relates the relationship between productivity compensation and termination. Many physicians are compensated based on pure production, while others may have combination of a base salary plus some type of bonus based on production.
Risks During the Notice Period
Recently, I worked with two different physicians who faced termination scenarios. In both instances, my clients were terminated without cause while being compensated based on production and were not permitted to work during the notice period. Although we like to think that both physician and employer will continue to meet their obligations during a notice period, some employers may not want a physician to work, perhaps because they wish to reallocate patients, resources, etc. or perhaps for other less business-related issues.
However, it is important to understand that during a notice period, the physician is still employed and his or her compensation formula and/or productivity bonus formula is dependent on production. As a result, not allowing a physician to work during a notice period can cause significant financial harm to the physician. Moreover, during a notice period, the physician also likely cannot work elsewhere due to exclusivity, non-compete and similar provisions.
Identifying Sloppy Contract Drafting
Unfortunately, sometimes contract drafting can be rather sloppy. Indicating the physician will “continue to receive compensation” does not address the issue. Similarly, stating the physician will continue to be paid “draw” during the notice period is also not ideal. Often, a physician’s contract sets a fixed amount called a “draw” which is then reconciled against actual productivity, quarterly or annually, resulting in bonus being paid to the physician when they exceed the “draw”.
Most physicians set their draw fairly low so as not to “overdraw” and be in a deficit situation. When a contract only allows a physician to be paid “draw” during a notice period, this can substantially reduce the compensation which the physician could have earned. No matter what approach is used, some mutually agreeable and fair compromise is appropriate.
Fair Compensation Alternatives
To address this issue, some contracts will properly include language that states the physician will be paid based on previous performance. The following table summarizes appropriate alternatives for calculating compensation:
| Method | Description of Calculation |
|---|---|
| 90-Day Average | The same average compensation that the physician was paid in the 90 day period prior to the date the notice period started to run. |
| 12-Month Average | An average of monthly compensation over the past 12 months. |
| Per Diem Rate | A per diem rate based on the physician’s average production. |