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Associate Agreements – 5 Things Associates Need To Watch Out For

By February 20, 2015November 16th, 2022Employment Law, Practice Management

4th-year dental students are just a few more months away from graduating. It’s been a long journey. And if they haven’t already received them, they will soon receive draft associate agreements to sign. Yes, I wrote “draft” because they’re only final when both parties agree. Unfortunately, lately, associate agreements seem to be between 5-15 pages long, full of legal mumbo jumbo that dentists may not understand or appreciate. So this blog talks about five key things associates need to watch out for.

1. Who are the parties?

Be mindful of whether you are entering the associate agreement personally or through a professional corporation. In your first year as an associate, you’ll likely need all the money you can get to repay your loans and live. But keep in mind: once you have taken care of your student debts, and you don’t need ALL the money you make to live off of, and you’d like to pay less overall tax, you may want to incorporate a dentistry professional corporation. If that’s the case, you’ll likely want the associate agreement to say that, at some point, you can assign it personally to your professional corporation (so your professional corporation now gets the cheques, and you would be an employee/officer/director of your corporation).

2. Employee vs. Independent Contractor?

Most, if not all, associate agreements will indicate that they are creating an independent contractor relationship between the principal and the associate. This means that the parties are independent businesses. This differs from an employment relationship, whereby the associate basically gets a cheque every week for working at the principal’s office according to the principal’s schedule, using their tools, and treating the principal’s patients for an undefined period of time. Independent contractors don’t typically work indefinitely but for a set term. They control their own business: how the work is done, their schedule. They own their tools and have their own patients. They might work for multiple “clients” (i.e. dental practices).    And they would take care of their own income taxes.

The thing to remember is this: employees have the protection of the common law (judge-made law) and the Employment Standards Act, 2000, when it comes to things like minimum notice for termination, benefits, etc. Independent contractors only get what they’re entitled to under the contract.

The other thing to keep in mind is this: the REALITY of the relationship is much more important and indicative of what a court/tribunal will say about that relationship. Something that looks, feels, and smells like a duck is a DUCK! You can’t call it a chicken on paper. Just be mindful of that!

3. Termination

Pay attention to how the agreement can be terminated. If the contract is for a fixed term and there’s nothing else about how it can be terminated, neither party can simply walk away (unless they die or become disabled, etc.). If a party were to unilaterally walk away from, let’s say, a 3-year contract with no termination clause, then the other party could sue for breach of contract; that party would be entitled to damages that amounted to what they expected to receive had the contract been fulfilled (e.g. how much the principal would have received if the associate had stayed OR how much the associate would have received if they kept working the whole time).

Ways in which a contract can be terminated include: by mutual agreement, by one or both parties giving notice (a set period of time after which the agreement expires), upon the death or disability of a party, or for JUST CAUSE. Just cause termination means that a party has done something wrong (e.g. serious misconduct like being accused of committing a crime, losing their license, being disparaging to patients or staff, being accused of negligence, etc.). In the case of just cause terminations, a party would be terminated immediately without any notice or further compensation. The parties would typically part ways and owe each other money up to the date of the effective termination.

4. Restrictive Covenants

There are many articles and blog posts on this website about the enforceability and legality of non-competes and non-solicits. Make sure to read them.

5. Penalty Clauses

Penalties for breaching the agreement, competing, soliciting, etc., may come with penalty clauses – e.g. a $50,000 immediate payment to the principal, etc. Courts don’t typically enforce pure penalty clauses. These so-called penalties are described as “genuine pre-estimate of damages”. In other words, the parties agree in the contract (and they can do so legally, and the courts will enforce it) that, in case the associate violates the agreement, the damages suffered by the principal will be $X, and the associate agrees to pay. Now, here’s the thing: will the principal actually suffer those damages? Does it even matter? If the parties agree and sign on the dotted line, the associate is committing themselves to pay those amounts. Just be mindful!