March 1, 2004
by John McMillan, LL.B.
Regardless of the arrangement, it is critically important that there be a clear understanding between parties as to what their respective rights and obligations are and it is imperative to reduce the understanding to a comprehensive written agreement.
Key elements of an associate agreement
A properly drafted associate agreement should address, at minimum, the following points:
– Legal relationship (employee or an independent contractor).
– Facilities, staff and supplies provided by the principal.
– Facilities, staff and supplies provided by the associate, if any.
– Responsibility for the associate’s college and professional membership fees, professional development costs (such as seminars, reference materials, subscriptions etc.) and liability insurance.
– Practice management and administration.
– Required time commitment of the associate (hours per week).
– Trial period, if any.
– Term and renewals of the agreement.
– Collection of billings.
– Professional and trade creditor Indemnities.
– Ownership of the goodwill of the practice.
– Restrictive covenants.
The legal relationship
Almost invariably, associate agreements are framed to expressly provide that the associate is not an employee of the principal. While this is often the intention and desire, the express agreement of the parties to this effect does not necessarily make it so. The courts have at times found an employment relationship to exist if it displays the hallmarks of an employment relationship. In deciding this question, the courts have given weight to the following considerations:
– Does the associate exercise a degree of control over the treatment of patients?
– Who provides equipment and supplies?
– Does the associate have a reasonably unfettered ability work at other practices or have his or her own separate business?
– To what extent is the associate running his or her own practice? Is there a risk of financial loss for the associate?
– Does the associate cover any of his or her own expenses?
– Is the associate’s remuneration based on a salary or on a billings formula?
From the principal’s perspective, it may be important that a contractor’s relationship be established in order to prevent claims for wrongful dismissal by an associate under the Employment Standards Act in the event of termination of the associate. Towards this end, clear language should be contained in the agreement stating that the associate is not an employee, that he or she is not entitled to any employee benefits and that he or she must administer and pay all required government deductions.
The associate agreement should also provide for the associate to cover as many of his or her own exclusive expenses, such as license fees, memberships, insurance, subscriptions, professional development costs and travel expenses.
Of course, from the associate’s perspective, while there are advantages in being an independent contractor, including potential tax advantages, it is important to understand and appreciate the ramifications of a contractor relationship. Independent legal and accounting advice is strongly recommended.
Facilities — who supplies what?
The associate agreement should clearly set out what the parties are to contribute. Typically the principal is responsible for providing the premises, operatories, equipment, dental and office supplies, hygiene and support staff, office equipment and the like. The principal will usually also be required to maintain the premises and equipment.
The associate is usually not responsible for the provision of any facilities, staff or supplies and a strong rationale for this arrangement is that the remuneration formula provides for a sufficient contribution from the associate for these items. This also lends strength to the argument that an independent contractor arrangement exists.
The day-to-day management and administration usually falls on the principal dentist, who has both a familiarity with and a vested interest in the practice.
Time, timing, term and termination
Key questions that need to be addressed relate to the duration of the agreement, trial periods, and events of termination.
If it is the intention of the parties to characterize the associate as an independent contractor, it is recommended that the agreement have a predetermined and certain term, at which time the agreement may be renewed for further terms as agreed between the parties.
The principal will often ask for a trial period, during which time he or she may terminate the agreement without cause. As an associate, this may or may not constitute a risk. If you are leaving a long term and somewhat secure arrangement in order to enter into a new associate agreement, you may be exposed to more risk than you wish. If it is your first associate position, the downside is usually less. This is strictly a personal (and business) decision.
Another key question to address is how many hours is the associate expected to work at the practice and when? As well, is the associate free to work at other locations?
With respect to termination, associate agreements often provide for termination without cause (on agreement between the parties, or on a previously agreed notice period) or with cause by the principal (e.g. in the event of professional misconduct and/or suspension of the associate by the College).
Associates, as contractors, typically negotiate with the principal to be remunerated on a percentage of billings formula. The parties should be careful to clarify what “billings” include. Is the remuneration based on “collected billings?” If yes, does the associate return fees relating to defective work? Do the billings include lab fees? Hygiene inspections? On what frequency is the associate paid?
Both parties should ensure that their respective liabilities are defined.
With respect to professional liability, in addition to ensuring that both parties have adequate malpractice insurance, both parties should indemnify the other against all liabilities, which they may respectively suffer resulting from any act or omission in performing their professional services, whether it be deliberate or negligent. The parties should also make efforts to communicate to the patients that they are acting independently as professionals and not as a partnership.
The associate should also seek indemnity from the principal for any and all claims from trade creditors. The associate should also be careful not to give the impression that he or she has the authority to enter into business relations with trade suppliers on behalf of the practice.
Consideration should also be given to occupier’s liability. An associate may find him or herself subject to liability under the Occupier’s Liability Act and therefore sufficient liability insurance for personal injury (slip and fall etc.) should be arranged by the principal and verified by the associate.
Protecting the principal’s interests
Understandably, the principal of the practice will wish to protect his or her investment and the relationships that he or she has fostered over the years. For this reason, it is not unusual for the principal to seek restrictive covenants in the associate agreement, which may limit the associate’s ability to compete with the principal’s practice or otherwise use trade secrets.
In addition to confidentiality and non-disclosure provisions, the principal may wish to secure both a non-solicitation and a non-competition covenant from the associate. However, overly broad restrictive covenants can be (and have been) found to be unenforceable. Generally, the following questions should be considered:
1. Does the principal have a proprietary interest worthy of protection (such as business associations, patient lists, goodwill)?
2. Are the duration and / or geographic ambit and scope of the covenant too broad?
3. Is the covenant prohibitive of competition generally or is it limited to restrict
ing the solicitation of the principal’s clients or use of confidential information?
There has been a significant development in the common law relating to restrictive covenants in the case of Lyons v. Multari. This case, as chance would have it, involved two dentists, and the question put to the court (and then to the Court of Appeal) was whether a restrictive covenant limiting the ability of a departed associate to compete with the principal, was enforceable. The restrictive covenant simply read:
“Protective Covenant. 3 yrs — 5 mi.”
The Ontario Court of Appeal ultimately found that the (non-competition) clause was unenforceable due to it being overly broad. It was the court’s view that a simple non-solicitation covenant would have sufficiently protected the interests of the principal dentist. In light of the decision in Lyons v. Multari, the parties should consider the following before entering into an agreement with restrictive covenants:
1. Restrictive covenants should be reasonable and realistic in terms of time and geographic scope.
2. Generally, a non-competition covenant which has the effect of limiting one’s ability to make a living will be unenforceable.
3. Non-competition covenants will be upheld only in the most “exceptional circumstances.”
4. Non-solicitation covenants should be considered first and, if they do not provide adequate protection, non-competition provisions may then be considered.
5. Non-solicitation covenants should not be overly broad in terms of inclusiveness and should be for a reasonable period of time.
It is also important to point out that a non-competition covenant, while perhaps not enforceable in the context of a departing associate, is more likely to be enforced against a departing dentist in the sale of a dental practice, where the purchaser has paid a considerable sum of money with an reasonable expectation of patient retention.
There are many things to consider when entering into an associate agreement and the above examples, while covering the main points, are no substitute for legal advice. Like many areas of the law, much of the above is subject to change and you should always seek out the latest wisdom from your lawyer.
John McMillan, LL.B. is a Toronto corporate/commercial lawyer serving medical and dental professionals.