The Executive Suite: Proper termination of an existing contract

A common question I am asked by physicians is how to properly terminate an existing contract. This is an important question because improper termination, or failure to understand the termination provisions, can lead to legal and financial consequences.

First, most physicians who are simply leaving a job will terminate a contract “without cause.” To do this, the physician must review the contract and find out how much notice is required. In a physician employment agreement, this is typically around 90 days but could be longer or shorter. Sometimes the notice provisions can change over time or not kick in until after a certain time period. For example, a provision might read: “Physician must provide 90 days’ notice of termination after the Initial Term.” This means that during the “Initial Term” (i.e. usually 1-3 years in most physician deals), the physician is locked in and cannot leave the contract without cause. Many physicians are disappointed when they find out they agreed to be locked in by such a provision if they did not understand the terminology in the contract they signed. On the other hand, some physicians use a lock-in period as a means of assuring job security for both parties. For example, an orthopedic surgeon collecting cases for her Boards might want to be assured that no termination without cause can occur for the first two (2) years while the cases are collected.

The time to negotiate the “without cause” termination time frame is before the contract is signed; if a physician needs to leave sooner that the provision allows, this can usually be negotiated by the parties if the employer is willing. Without the employer’s exception, it is important that physicians provide the amount of notice required by the agreement. Failure to do so can be treated as a breach of contract by the employer, which can have significant financial consequences for a physician if the employer pursues damages. Some contracts build in a per diem rate or other type of liquidated damage that must be paid by the physician if the notice is not properly provided or honored. Other repercussions for failure to abide by a notice provision can include a requirement for the physician to pay for a tail insurance policy (where the employer might otherwise have covered it) or the loss of a bonus that would otherwise have been paid.

Many notice provisions in physician contracts can allow an employer to accelerate the last day of employment. This means that even if proper 90 days’ notice is provided, the employer can decide when the physician’s last day will be. This can leave an unprepared physician without a job or source of income. Physicians need to be aware if such an acceleration is permitted in their agreements and again, the time to fight this language is before the contract is signed.

Additionally, some employers can elect to not have a physician work even after they provide proper notice. If a physician is salaried, this is usually not an issue. However, a physician who is permitted to work during a notice period who is paid based on productivity may face a real concern. Employers generally start to reallocate resources and patients once notice is provided, which can greatly impact physician compensation during a notice period despite the physician being willing and able to work. I like to try to work out a compensation approach for the notice period when possible but again, this needs to be addressed when the contract is negotiated.

Another form of “without cause” termination is a non-renewal provision which may sometimes be the only way to terminate a contract. Physicians need to be very careful to provide the notice required by the notice date under such a provision. For example, the provision might state: “Physician may terminate this Agreement by providing notice of non-renewal 90 days prior to the anniversary date of the Agreement each year.” In addition to correctly determining the anniversary date of the agreement, the physician cannot miss the date on which notice must be provided or the contract will renew, and the physician will be locked in until the next opportunity to provide notice arises. This can be a very frustrating experience for a physician who did not understand the provision to which they agreed.

A physician who wants to terminate a contract for cause will need to review the “for cause” provisions in the contract, if any, to see if they fit the bill. Usually, there is at least a standard breach provisions which requires the physician to provide written notice of the breach to the employer and provide the employer an opportunity to cure. This means that the physician cannot assume the contract will end once the notice has been provided and should plan to stay for the entire cure period (and possibly beyond). Terminating a contract for cause can often free a physician from a non-compete or tail obligation, so it is not unusual for an employer to fight the accusation of a breach or try to cure it promptly.

Finally, whether notice is for cause or without cause, it is important to provide the required notice specifically as required by the notice provision in the contract. There is a paragraph in almost every contract that is called “Notice” and describes how and to whom the notice of termination must be provided. Many physicians like to email a termination notice, but if the notice provision requires it be mailed or fedexed instead, the clock on the notice period will not technically start to run until proper notice is offered. This can create timing issues for a physician’s new contract commitments and impact other parts of the contract where timing is key.

Physicians must carefully review their contracts before providing notice of termination and should be prepared for possible consequence if they choose a non-compliant route. The best time to negotiate agreeable termination provisions is before the contract is signed.