Monthly Archives: December 2012

The Contracts Involved in the Transition of an Orthodontic Practice

Several different types of contracts are typically involved in a practice transition.  The specific number of contracts and the terms of those agreements will vary, depending on the nature and structure of the transition.  Some contracts typically utilized in a dental practice transition are as follows:

Asset Purchase Agreement/Stock Purchase Agreement

This document serves as the foundation of the transaction.  If the sale is structured as an asset purchase, an asset purchase agreement will be used, wherein the buyer purchases a portion or all of the practice owner’s tangible and intangible assets in the practice.  If the transaction is structured as a stock purchase, a stock purchase agreement will be used, wherein the buyer purchases a portion or all of the practice owner’s capital stock in the practice corporation.

Promissory Note

If the practice owner finances any portion of the purchase price for the buyer, a promissory note will be used to document the buyer’s repayment obligation.

Security Documents

These documents may take several forms, but each document provides the practice owner with security for the buyer’s promise to pay under the promissory note.  A security agreement is typically used in an asset purchase transaction, to allow the practice owner to obtain a security interest in the assets of the practice that have been purchased.  A stock pledge agreement is typically used in a stock purchase transaction, which grants the practice owner a first lien security interest on the shares of stock being acquired by the purchaser.

In addition to the security agreement or stock pledge agreement, the practice owner may require the buyer to assign a collateral interest in a life or disability insurance policy on the buyer to fund any remaining payments in the event of the buyer’s death or disability.  The practice owner may also require the buyer to assign his or her interest in any leased office space, so that the practice owner can resume possession of the premises if the buyer defaults on a loan payment.

Personal Guaranty

If the purchaser is a professional corporation, its stock owners typically would not be personally liable for corporate debts.  The personal guaranty is an agreement by which the stock-owner guarantees the company’s performance under the Promissory Note and makes his or her personal assets available to cover the debt in the event of a corporate default.

Assignment of Personal Goodwill and Covenant Not to Compete

In this contract, the practice owner conveys all of his or her personal goodwill to the buyer and agrees not to compete with the practice for an agreed upon period of time and an agreed upon distance from the practice.  This agreement is important for the security of the purchaser, as they do not want to lose their investment to future competition from the former practice owner.  Additionally, allocating a portion of the purchase price to goodwill provides both the buyer and practice owner with significant tax incentives.

Consulting Agreement or Deferred Compensation Agreement

In these contracts, a portion of the purchase price is allocated to a consulting fee arrangement or to a deferred compensation arrangement in favor of the practice owner.  This allows the buyer to expense the amounts paid to the practice owner at the time of payment.  It also allows the practice owner to spread his or her income over several tax years, as opposed to recognizing the entire purchase price as income in one year.           

Shareholders’ Agreement

If the buyer is buying only a portion of the seller’s existing practice, a shareholders’ agreement will set forth the parties’ rights, duties, and obligations with respect to one another, so that each party is protected if the other dies or withdraws from the practice during their joint ownership.

Employment Agreement

This Agreement sets forth the terms of employment, compensation, benefits and work schedules if the purchaser will enter the practice before the practice sale takes place, as well if there will be joint ownership, or if the practice owner will continue in the practice after its sale.

Bill of Sale

This contract is used in an asset purchase transaction to formally convey all of the practice owner’s assets to the buyer at the closing of the sale.

Managing Liability Exposure for Unpaid Overtime

Since the recent recession began, just before 2008, the dental employment market has changed dramatically.  Dental practices have been forced to maintain or increase production levels, while lowering costs.  Often, they have accomplished this task by decreasing the workforce while increasing the work load that each employee must bear.  To increase productivity, many dental practices have provided employees with computers, iphones, ipads, or other mobile devices that allow them to handle practice matters while away from the office.

While employees tolerated the increased work load and working hours for some time, they have begun to fight back in the court room.  Recently, many companies, and even some municipal governments, have faced lawsuits from current and former employees, alleging that they have been unpaid for overtime hours spent working from home on their employer-provided devices.  Several of these cases have resulted in settlements costing companies many millions of dollars.

While it may be tempting for practice owners small and large to increase production by relying on employees to respond to email and manage other tasks from home, practice owners that allow their employees to do so should be sure to have a plan for dealing with the time that those employees spend handling practice business.

Employee overtime pay is regulated by the federal government under the Fair Labor Standards Act of 1938 (the “FLSA”).  Under this Act, many employees are eligible for overtime pay.  While all workers paid on an hourly basis are eligible for overtime pay, some salaried employees qualify for overtime pay as well.  Distinguishing between those salaried employees who qualify for overtime pay and those who do not is a particularly challenging area for employers.

 In order to be exempted from qualification for overtime pay, a salaried employee must earn at least $455 per week, and, generally, the employee must be a key decision–maker.  Salaried employees such as office managers who manage, hire, and fire other employees; administrators who have decision-making authority; professionals with advanced degrees; and certain information technology workers, among others, are exempted from laws requiring the practice owner to provide overtime pay.  Because distinguishing between these groups of salaried employees is a tedious, fact-based assessment, dental practice owners should consult an attorney to ensure they are in compliance with federal and state law.

After determining which employees qualify for overtime pay, practice owners should determine the appropriate amount of pay.  Under the FLSA, overtime-eligible employees qualify for a pay rate of 150% of their regular pay for all time spent working in excess of forty hours per week.  These employees should be compensated for all actual time spent working in excess of forty hours per week.  This means that if the employee is deemed “on call” to respond to work-related matters, they likely qualify for overtime pay for the entire “on call” period.  However, if the employee is generally free to respond to work-related matters at will, they should only be compensated for the actual time spent working.

 Practice owners should remember that, under the FLSA, they are required to compensate employees for overtime if the practice “suffers or permits” the employee to work.  This means that if an employer requires or allows the employee to work, the employee’s time must be compensated.  Courts may find that a practice owner has implicitly required an employee to work by providing them with access to practice systems through a laptop, mobile device, or even computer programs linking their office computer and personally owned home computer (or cell phone, iphone, etc.).

In order to properly manage risk exposure, practice owners should implement one of several options for controlling employees’ work from home.  First, a practice owner may prohibit employees from working from home altogether.  This risk management method avoids the problem of unpaid overtime hours by eliminating the source. 

Another method for controlling the unpaid overtime risk, which has been implemented with some success, is reclassifying salaried employees who qualify for overtime pay as hourly employees.  Under this method, a practice owner may be able to attain the same overall rate of pay that the employees enjoyed while they received a salary.  However, the practice owner will need to pay those employees at an hourly rate that factors in expected weekly overtime utilized to complete assigned tasks.

This risk management method is convenient because of the maintained overhead-to-production ratio.  However, it may result in decreased employee morale, as many employees gain self-fulfillment from their attainment of a salary.  Some previously salaried employees may feel that the owner of the practice does not value their work as highly when they begin to receive an hourly wage.

 In any situation where an employee may work from home, the owner of the practice must have a system in place to accurately record the time that the employee spends on practice business.  A third method of risk management is implementation of computer software requiring the employee to clock in before accessing company computer systems or email.  This allows the practice owner to have accurate records when the practice owner is compensating the employee for overtime pay.  This overtime management system may, however, be cost prohibitive for small practice owners.

Finally, for practice owners who have a good and honest working relationship with their staff members, the most cost-effective manner of controlling over-time pay may be to rely on employee self-reporting.  Obviously, this poses the risk of employees over-reporting time worked from home; however, in a small practice environment, management staff should be in a position to adequately evaluate all reported overtime hours, and expected workload to ensure that employees are properly reporting hours worked.

By implementing a process for managing the hours that employees spend working away from the office, a practice owner can effectively manage his or her exposure to claims for unpaid employee overtime.