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Terminating the Associate Agreement: Options!

By October 2, 2012January 19th, 2022Employment Law

Ok, you probably haven’t thought about this one. You thought everything would be honky-dory. And the associate you hired looked ideal for the position. So why are we talking about terminating the associate agreement? Three words: worst-case scenario. You see, people only resort to legal contracts in the “worst-case scenario”. The rest of the time, lawyers get involved, something is negotiated, and you forget about what you bargained for. But there’s always that remote chance that you and your associate will need to part ways, and it may not always be pleasant. That’s why it’s important to think about these things ahead of time and try to nail down the various options that would be available to the principal and associate dentists in case either want to leave. So let’s discuss those options, shall we?

Parties Agree to Terminate

This is the least used option, but we put it out there anyways. It’s basically going to say that the parties can agree to terminate at some time in the future, so long as they agree in writing. The problem is that the parties may not be on such good terms at that time and they may not be communicating or even dealing with each other. So if you haven’t already agreed at some point in the future about how you’re going to terminate the relationship – it’s going to be hard to figure it out at that time!

Just Cause Termination

This basically says that the principal can terminate the associate on the basis that they have done something wrong. This is called “just cause” termination. In these situations, the principal doesn’t owe the associate notice or payment in lieu of notice; the associate is basically terminated and paid up to the point of the occurrence that constitutes “just cause”. So what constitutes “just cause”? Well, some things include: lying, stealing, disobeying the principal, saying bad things about the principal to staff or patients, not being a qualified dentist, being charged or convicted with certain types of offences (e.g. criminal or dental related), etc. Sometimes – though rarely – the associate will insist on the same thing, namely, that they can terminate the agreement on the basis that the principal has done something wrong.

Termination Due to Incapacity or Death

This is an interesting one. Basically, if the associate becomes mentally or physically incapacitated, then the deal is over—no more obligations on the associate or their legal representative (a guardian or attorney). The same thing applies if the associate dies. However, if the principal becomes mentally or physically incapacitated, the story is different: the agreement is not terminated, and the associate will continue to work under the direction of the principal or their legal representative (guardian or attorney). And, in the case of death, the associate will need to cooperate with the legal representative of the principal (called an “Executor” if they had a Will or an “Administrator” if they didn’t have one) to help sell the practice as soon as possible. This helps protect the goodwill of the practice and promote the interests of the dentist’s heirs and beneficiaries.

Termination Based on Notice

This is where things get interesting – particularly when it comes to time periods and calculating damages (if that’s to be done at all).

First, the principal can give notice to the associate that their days are numbered. Fine. But what happens if the associate leaves before then? Well, the principal can accept the associate quitting and only pay them up to the time that they leave. Ok, but what happens if the principal wants the associate to leave before the end of the notice period? Well, often times, associate agreements are silent on this issue. But something that associates (or perhaps better put, their lawyers) will insist upon is to be paid a certain amount of money in order to be terminated before the notice period expires. That amount of money could simply be a pre-determined lump sum of money (e.g. $5,000) or could be based on the time that’s left in the notice and based on past production levels. For example, if there were two (2) weeks left of notice and the principal wanted to terminate the associate then and there, then they could calculate what the associate was entitled to (e.g. 40% of production) for the previous two (2) week period and then pay them that amount to get rid of them. Clear, comprehensive, and certain. I like it!

Second, and this is the more challenging part: what happens if the associate wants to leave. Typically, if the contract is ongoing (i.e. indefinite), then they would need to provide some time period of notice. OK, the principal can waive the remainder of the notice and pay the associate nothing, and they’re done (that’s one possibility). But what happens if the associate simply gives notice and leaves that same day – even though they were supposed to give like 2 or 3 months worth of prior written notice under the contract? Well, in that case, the principal may have a couple of options. First, the principal could accept it and move on. Second, the principal could have a holdback provision in the contract saying that if they do that, they’re going to forfeit some pre-determined lump sum of money. The principal could also sue based on a breach of contract and take the associate to court (this is the most expensive and time-consuming option).

Finally, the principal could put something in the contract that says, “the parties agree that, if the associate fails to give adequate notice, then they will pay $[x] amount, which will be reduced the longer the associate stays with the principal”. In other words, the longer the associate has stayed working with the principal, the less money they will agree to pay in case of providing inadequate notice. Here’s an example: if the associate has a one-year contract and generates about $20k a month for the principal, and then the associate leaves after six months, they could be required to pay $20k x 6 months left on the contract, which equates to $120k. Get it? Now, the figure you arrive at can be justified any which way, but it has to be accepted by both sides. And also, just keep in mind that this pre-estimate of damages section is not a penalty clause (which is illegal) but rather a genuine pre-estimate of what the principal would suffer as damages if the associate left early. Is it real? Who knows. Maybe the principal just gets a new and better associate the next week and doesn’t actually incur those damages. But the point is that, if the parties agree in the associate contract that those would be the damages, then, regardless of what the damages ACTUALLY ARE, the principal would have a breach of contract claim and be entitled to those damages (because the associate agreed that those were the damages in the agreement). Without this pre-estimate of damages, things would be left up to a court to decide what the actual damages are (this would require proof). So by having the parties agree on this ahead of time, you don’t actually need to prove anything. So we’re just dealing with proof of the quantum of damages. Now I realize this may be a highly technical point and perhaps even hard to negotiate, but we have (representing principals) put it in our contracts and have had associates agree to them as part of the overall deal. When we’re representing associates, however, it’s a different story 😉

The Content of this post is provided for informational purposes only. It is not intended to be legal, financial, tax, or other professional advice of any kind. You are advised to contact DMC (or other counsel) to seek specific legal advice concerning your individual situation.