Winter 2000 Presentation Summary:

According to Lisa Dugoni, a well-written contract for any associateship is key to preserving the value of your orthodontic practice. The contract should delineate details for the relationship—the greater the detail, the better the relationship. The contract should also plan for the termination of the relationship. While the positive elements of a relationship usually take care of themselves, a well-written contract will help you handle any negative occurrences more satisfactorily. Goodwill, the most valuable asset of your practice, will also be protected, specifically your ability to attract patients and keep them coming to your practice.

Independent Contractor versus Employee

There are major differences between an associate who is an independent contractor and one who is an employee. The IRS uses 20 factors to determine whether an employer-employee relationship exists. These include the requirement that the individual work on the employer’s premises according to a schedule set by the employer, the individual’s obligation to follow instructions, the amount of job-related training required, the degree of integration into the employer’s business, whether services are rendered personally, the existence of a continuing relationship, and whether the employee is subject to progressive discipline and can be fired except for cause. Additional criteria include the need to submit regular written reports to the employer: whether the individual furnishes his instruments and equipment, investment in the employer’s facilities, and whether the employee works for more than one practice and makes his services available to the general public. Generally, an employer-employee relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the work required, but also as to the details and means by which the results are accomplished.

If an individual is subject to the control or direction of another only as to the result required but not the means and methods, they are considered to be an independent contractor. Independent contractors can compete with you and are not part of an "at will" relationship (i.e., they cannot be discharged); they are not subject to wage and hour laws and do not have taxes withheld. The independent contractor shares the economic risk in profits and collections and is not paid on an hourly or salaried basis. The distinction is important because the risk of misclassifying an individual as an independent contractor can be considerable with respect to back federal and state taxes as well as disqualification in an otherwise qualified retirement plan.

Ms. Dugoni recommends clearly spelling out the responsibilities for an employee associate: work days and hours, compensation (generally per diem), and that there will be no financial participation in the practice’s production. An at will clause in an employment contract will help to avoid a potential wrongful termination suit.

Associate contracts should also address pay raises, guaranteed minimum salary, and who will pay malpractice insurance premiums, laboratory fees, continuing education, health insurance, dental assistants, pension plan, vacations, and holidays. An option to purchase the practice may be a part of an associateship contract. While restrictive covenants are illegal and void in the State of California, they may be recognized in other states within the Pacific Coast Society of Orthodontists and can be a valid option to purchase the practice. Dissolution of the associateship should terminate any right to purchase the practice. Finally, if legal in your state, you should include a non-competition agreement to protect the goodwill of your practice.

Ms. Dugoni warns against the use of form contracts, which can be very dangerous. Instead, seek the services of a qualified professional in developing a written agreement. Information related to an orthodontic practice can probably be considered confidential information under the Uniform Trade Secrets Act. In your written agreement, you should enclose stipulations of trade secret and other proprietary information, such as your appointment book, charts, and patient names and phone numbers. After the associateship terminates, solicitation of staff for outside employment should not be allowed for a reasonable length of time, and all property should be returned to the practice.

Office Sharing versus Partnership

There is a distinct difference between a partnership and an office-sharing contract. In a partnership, there is one practice, joint decisions, shared liabilities, profits going to the partnership, patient records belonging to the partnership, and a fiduciary relationship including tax returns. An office sharing agreement stipulates two separate practices, separate sole proprietorships, no sharing of profits, different work hours, preexisting competition, and generally, shared overhead only. This latter arrangement often works far better than a partnership. Some office sharing agreements are considered variable and involve sharing of staff and/or supplies. As in love and marriage, it is far easier getting into a relationship than getting out, so negotiate the difficult aspects of the contract during the honeymoon period while everyone is happy.

Termination of professional relationships can be voluntarily, such as through retirement; or involuntarily, such as through death, disability, bankruptcy, or judicial dissolution (to be avoided). Facility sharing agreements should include the level of financial interest in tangible assets of the practice, the purchase price and format, and how repair and maintenance will be shared. Determine whether each doctor keeps their own charts and records in the event of termination of the agreement. Termination within the first ten years, or whatever period of time decided upon, should involve automatic buyout of the buyer's interest, a non-competition agreement, and consideration of purchasing the seller's charts. Although referral fees are prohibited, determine the amount of a buyer's buy-in or rent as a factor in this substantial benefit and whether patients who are not referred to either member be shared by the two on an alternate basis. If one doctor wants to leave the premises after ten years, the remaining doctor might have a right of first refusal and an option to purchase to match a third party's offer for the facilities.

For involuntary termination, a buyout provision covered by life or disability insurance may apply, or merely an option to purchase the deceased or disabled doctor's practice. Generally fair market value of the practice would apply, particularly if there is a mandatory buyout with insurance coverage.

Selling the Practice

The seller of a practice who participates in the financing should always get a promissory note and security agreement, along with life and disability and office overhead insurance for the buyer. The advantages can be a higher purchase price, maintenance of control, and interest in the buyer's success. Disadvantages include the seller’s continued involvement in the practice, the seller's risk in becoming a banker, and the potential risk of foreclosure in the event of default (in which case the seller would have a less valuable practice back in his hands). When a practice is sold, accounts receivable are discounted and taxed as ordinary income.

Ms. Dugoni suggests that the seller terminate staff on paper, indicating the last day of official employment, and provide the opportunity for the purchaser to hire the existing staff anew. This can help avoid later employment claims to the seller. The seller should also make an effort to introduce the new orthodontist to the patients by sending a general letter to the patients of record and dentists in the community. The buyer should not raise treatment fees right away and should definitely try to retain/rehire existing staff.

A separate confidentiality agreement should be used when allowing a potential purchaser to evaluate your practice. The purchase price of the practice should be established on the basis of both the intangible element of goodwill and the tangible assets, including the premises lease and accounts receivable. Commonly, goodwill is valued as a percentage of one year's gross income from the practice and should reflect all factors related to the practice and its value. Each orthodontic practice involves its own distinct considerations and issues, but for every sale certain general areas must be analyzed by the buyer's and seller's attorneys involved in negotiating and drafting the purchase and sale agreement. Plan ahead carefully, put as much as possible in writing, and your associateship or sale of your practice will have the greatest chances for success.

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