The Importance of Associate Contracts
Do you have an Associate?
If the answer is yes, then the next question is do you have an Associate Agreement? In most cases, the answer to that question will be Yes, however far too often the answer will be No. Some will make the argument that you and your Associate have a “Verbal Contract” and in some eyes, you may. If you think you have a verbal contract, then have both parties independently tell a neutral third party all the details of their contractual arrangement. Chances are that both parties will share quite different understandings of the relationship and if this is so then you don’t really have a workable “Verbal Contract”.
However, this is not a blog about contract law – but rather what can happen when you have an Associate but no associate contract.
When you are in the process of selling a dental practice, you run into many toxic situations, like demolition clauses in a lease, that can make it very hard or impossible to sell any practice.
Associates without associate contracts are one of those toxic situations. Associate contracts set out the working relationship between associates and principals. Included in the contract are agreements related to non-competition, non-solicitation, and restrictive covenants. These restrictive clauses set out the rules governing what Associates can and cannot do in terms of competing with their previous principal once their engagement with that practice is terminated.
Without these restrictive agreements, Associates would be free to take “their” patients with them when they leave. Many offices refer to the patients for whom the associate is the dentist of record as the “associate’s” patients. This creates an unclear and false sense of ownership for the associate, his or her staff, and very likely the patients. If everyone in the office and beyond thinks those patients are the associate’s patients and if there is no contract stating otherwise, then for all intents and purposes they are the associate’s patients. This is not good, but we still haven’t gotten to the worst yet.
There is of course the esoteric CRA problem. Without a contract, you run the risk of CRA deeming your Associates to be employees. If they do then you have a big problem. You are required to deduct a certain amount for an employee’s pay and send those amounts to the government. If CRA deems your Associates to be employees, they will come looking for those “source deductions” and will require that you remit the same to them. This will include income tax, EI, CPP, and in certain cases the Ontario Health Premium.
Let us assume you have an Associate that makes $240,000 a year. The income tax alone that you should have deducted and remitted to CRA is approximately $90,000 per year. If CRA goes back three years, that is $270,000 ($90,000 X 3). Add to that a penalty which could be another $270,000 and now you owe CRA $540,000 plus interest. To add insult to injury there is no mandated way for you to recover those payments from your “Associate”. That ends up being a lot of money, especially if you have more than one Associate and none of them have contracts. Some advisors will suggest that CRA would never pursue such an issue, yet they do the same for Hygienists claiming to be independent contractors.
Are you willing to bet against the CRA?
Let us assume for a minute that CRA does agree that your Associates are independent contractors without contracts. If your Associates are providing you with a service, or if you are providing them with a service, then that service could be subject to HST in either the Associate’s hands or your hands. This is an issue that CRA has pressed. A properly drafted associate contract can stop this stance by CRA however with no contract you are at the CRA’s whim.
The bad news is we have still not gotten to the really bad news yet.
The worst scenario happens when you try to sell your practice and you have an Associate without a contract. Purchasers are not inclined to pay full price for a practice if there is an associate without an associate contract for all the reasons noted above. In fact, most potential purchasers will not even consider an offer, and when they do it can be at a huge discount. The discount will depend on two things, first, on how long the Associate has been with the practice and second on how many patients the Associate could take if they left the practice. A 50% discount on the value of the practice is not at all unreasonable. If you do the math a 30% reduction on gross revenue will easily cut the net profit and the practice value in half. Believe me, this has actually happened.
If a practice is for sale as the result of a death, Associates without contacts can evaporate the value of a practice almost overnight. When a Dentist passes away their practice needs to be sold quickly to preserve the patient base and goodwill. Associates without contracts present a great risk to any purchasers other than the associates and can slow down the sale process. This can result in a dramatic reduction in practice value. This is not a matter of chance; this is a certainty and does happen.
There is no reason not to have professionally prepared associate agreements created by a lawyer who is familiar with associate contracts. All Associates should have associate contracts.
If you would like a list of lawyers familiar with preparing associate contracts call Alison at 905-984-5816.
For more information on this blog or any blog topic, contact Derek Hill (firstname.lastname@example.org) or call the office (905-984-5816) and ask Alison to set up a conference call.