The Pitfalls of Unsigned Agreements
Knoxville Academy of Medicine Bulletin – August 2008
By Jennifer Pearson Taylor and Ian P. Hennessey

Physicians should be aware of the dangers of failing to execute written agreements regarding their employment and ownership in their professional corporations.  The reasons for having written agreements, primarily an employment agreement and a shareholder agreement, differ from the perspective of the corporation and the physician employee/shareholder, but the need to have signed agreements is equally important for both.

On the corporate side, a signed employment agreement is vital in the event of discipline or termination.  Such an agreement might address the course of any discipline and the process of termination, including whether a particular event triggers automatic termination, what payments are due upon termination, and the continuation of malpractice insurance coverage after termination. 

When a physician is also a shareholder of the corporation, generally a shareholder agreement governs the relationship between the shareholder physicians and the corporation.  Among other things, such an agreement usually addresses the voting rights of the shareholders, termination of a shareholder’s employment and the terms of any buyout.  In the absence of a signed shareholder agreement, Tennessee law governs.  Under such circumstances, unwanted results may occur because the statutes governing professional corporations dictate the valuation method, purchase price calculation, and method of payment for the departing shareholder’s interest in the corporation.

For the physician employee, a signed employment agreement can provide the employee protection from being considered an employee-at-will and being subject to termination without cause and without notice.  Such an agreement allows the employee to attempt to negotiate the process of discipline or the events resulting in termination. The employee can also attempt to ensure that upon termination he or she receives adequate notice of the termination and all compensation and benefits due upon termination.

Although no one can anticipate all possible issues, having signed agreements that control the relationships between physicians and their corporations provides the parties with the opportunity to outline their various arrangements and to avoid potential misunderstandings.

Disclaimer: The information contained herein is strictly informational; it is not to be construed as legal advice.