9 Factors to Consider before Hiring an Associate into your Dental Practice
There are many considerations that need to be taken into account before you bring an associate into your dental practice. Can you get along with the associate, do you trust the them to work with your patients, do you have an associate agreement in place that governs the relationship. Bringing in an associate could make
or break your dental practice so we’ve compiled a few factors you may want to consider prior to bringing one on.
Associate Agreement for Dentists
We highly recommend you have an associate agreement in place prior to them beginning to work for you. The associate agreement will cover items such as term of the associate relationship, percentage sharing amount of collected billings, a non-competition/non-solicitation covenant, what the associate will be provided in terms of tools by the principal of the practice and what the their responsibilities will be.Sale of your Dental Practice
On the sale of a dental practice many buyers want the sellers to associate following closing to ensure a smooth transition between the patients, the staff and the buyer. We recommend to our clients to pay the seller a higher amount to ensure that he/she is content following closing and will assist you in the transition. It is also important to consider having a right to terminate the buyer should the association not work out as intended.
A Non-Competition/Non-Solicitation covenant is perhaps the most important clause you will have in your associate agreement. The covenant will often be for a period of years and within a radius of the practice (the “Restricted Area”). There are mainly two (2) instances where you will want an associate agreement:
a) When bringing a seller into the practice as an associate; or
b) When you purchase a practice and the Vendor associates with you following closing
Are these Non-Competition/Non-Solicitation Covenants upheld by the Courts?
Retaining an Associate who is not a Vendor
If you are retaining an associate who subsequently leaves and sets up practice in the Restricted Area the courts will most likely not uphold the principal dentist’s rights against the associate as the courts do not want to prohibit a person from earning his or her livelihood. We have had one case where our client, the associate, left and purchased a practice within the Restricted Area and was sued by the principal dentist.
The associate won the case but legal costs were in excess of $50,000.00 – in this case the principal dentist, knowing that his chance of success was not great, was sending a message to his associates (he had multiple practices) that he would be suing in any event. One method of dealing with this problem is to charge the associate a fee for each patient that leaves the practice to follow the associate.
Retaining the Vendor as an Associate when purchasing a Practice
If you are purchasing a practice and the Vendor stays on as an associate (or signs a non-competition/non-solicitation covenant without staying on as an associate) to provide for a transition, the courts will enforce the non-competition/non-solicitation covenant signed by the Vendor. We have had one Vendor dentist who signed a non-competition/non-solicitation covenant and then breached it – my client, the Purchasing dentist, took legal action against the Vendor (including obtaining an injunction) and was successful in court.
The courts have held that the term and radius of the non-competition covenants have to be reasonable. Discussion with a lawyer knowledgeable in dental law may be helpful as to what is reasonable.
Is there HST eligible on Associate Fees?
It is extremely important that the associate agreement is properly drafted. If the agreement states that the principal dentist is supplying premises and equipment and staff to the associate Canada Revenue Agency may take the position that the principal dentist is supplying a taxable supply and HST would have to be charged – it is very important to avoid this problem by ensuring that the associate is only being compensated for dental services being rendered to the principal dentist by the associate. You may have heard that Canada Revenue Agency has changed its policies in this regard but it is actually Canada Revenue Agency being more aggressive when it comes to auditing dentists.
The amount of the collected billings (normally billings of the associate less laboratory fees and less unusual expenses) received by the associate needs to be taken into consideration in the associate agreement. As it stands now the industry standard for collected billings is between 40% to 50%.
Employee or Independent Contractor
Prior to bringing an associate on you need to consider the relationship between yourself and the associate. Is the associate an employee or an independent contractor? The classification of your associate will have tax implications if Canada Revenue Agency deems your associate an employee resulting in you having had to pay source deductions. The associate agreement and the associate’s relationship with the practice must be clear so that the associate is an independent contractor and not an employee.
You will want to ensure that your associate is bound by a confidentiality and non-disclosure covenant. The associate will likely encounter information during his/her time working at the practice that you deem valuable and don’t want the associate to disclose. You also want to ensure that is agreed that any proprietary information (i.e. patient records, charts etc.) remains your property.
These are just a few of the important considerations you need to think about prior to having an associate join your dental practice. Should you have any questions please do not hesitate to contact us. The information above is for informational purposes only and you should discuss any legal issues with your dental lawyer.
If you are interested in receiving a draft associate agreement or have any other questions regarding dental law please contact us.