Associate-Principal Relationships: Part 1 – The Associate Agreement

This is the first of a series of articles focused on the Associate-Principal relationship, which differs in many ways from other business relationships.

When I speak to dental students about preparing for their career as a dental professional, one of the most popular topics is the importance of a formal (written) Associate Agreement, or Dental Services Contract.  Similarly, some Principal Dentists wonder if the effort required is worth it… in other words – why should dentists have one?

People fear what they don’t understand, and fear is a powerful motivator.  Unfortunately, it usually motivates people to avoid or defer a decision or task, which is the passive form of taking action.  In my experience working within the dental profession, I’ve noted that the benefits of having a well-crafted, fair and reasonable written agreement far outweigh the risks and threats of not having one!

The subject of written agreements – Associate and otherwise – have been avoided by both practice Principals and Associates in favour of the “Gentlemen’s agreement” (a.k.a. the handshake). Unfortunately, from mt observation, the Gentlemen’s agreement is fraught with misunderstanding and clouded by personal perception and interpretation of the discussion, which leads to disappointment and mistrust.  The risks and threats referred to in a verbal agreement can be legal and financial to both parties – messy, messy, messy!

Now, if you’re going to do it, do it right.  The Agreement is usually between the Principal’s professional corporation (the Company) and the dentist contracting the services to the Company (the Contractor), rather than between the two doctors.  If the Contractor is professionally incorporated, usually there is an option to assign the benefits accrued by the Contractor to their professional corporation.

First and foremost, the intent of formalizing the business relationship between Principal and Associate with a properly drafted written agreement should be to protect the rights and confirm the responsibilities of both parties within their roles.   The language used in defining roles, terms and conditions should be clear and consistent as related to the Contractor’s independent business relationship with the Company.  For example – since the Contractor is not an employee, Employment Standards regulations do not generally apply to them, taxes payable on income earned and remittances required by law are the Contractor’s responsibility.  The Contractor does not qualify for vacation pay, so any personal time off is unpaid, and direct costs related to delivery of dental treatment is their responsibility.

Usually, the agreement consists of two parts – the general terms and conditions forming the main part, and one or more schedules that are used to cover specific details which are unique to the relationship.  In doing so, this format, content and language supports the independent contractor status of the Associate as different from an employment status.

The main body of the Agreement will be organized into sections with related clauses that set out the rights and responsibilities of the parties to the agreement – the Company/Primary Dentist and the Contractor.

You may hear the term, “consideration”, used in reference to the Associate Agreement.  This term simply means an exchange of value negotiated between the parties as stipulated in the Agreement.  It is another way in which employment agreements differ from the Associate Agreement.

Relative to the relationship between the dentists, the Consideration would be remuneration for services rendered benefiting the Company’s practice.  As such, details of what, how and when the Associate is paid would be customary to include in an attached schedule to the main body of the document.  It is customary for the Contractor to be remunerated based on a percentage of their collected billings minus any direct costs of third-party services, products or materials in delivery of patient treatment (i.e. lab).  The percentage split between the Company and Contractor should be reasonable and fair, and not based on uncollected or unearned billings.  The traditional 40/60 split was initially a rule of thumb based on the normalized operating costs of the practice – rent (or other facility cost), labour (wages and benefits), supplies and materials, repairs and maintenance, advertising and promotion, licenses and other fees, and insurance – being ~60% of revenue.  Today, it is still customary to find the 40/60 split in dentist-controlled practices, and some may offer a 45/55 split for more experienced practitioners or long-term associates.

Other clauses will generally pertain to legal obligations of the Contractor, confidentiality, indemnification, and non-solicitation.   The Company’s obligations to provide support services to the Contractor and reciprocal termination (with and without cause) clauses are customary.

Details contained in attached schedules, would generally include (but not limited to):  specifics for notice from one party to the other – where the notice is to be delivered, notice period for renewal or termination of the agreement, notice required for personal time off, etc. – operating schedule of the Contractor, term of the agreement as well as renewal or extension, opting in or out of the disability clause, description of any equipment or materials the Contractor brings into the clinic, warranty for retreatment and related holdback, penalty for breach of non-solicitation clause, list of patients the Contractor brings to the clinic for treatment (who would be excluded from the non-solicitation clause) and possibly right of first refusal (RFR) for the Contractor to invest in or acquire the Principal’s Company or practice assets.

This overview of an Associate Agreement relates only to those that one may encounter in a dentist-owned and operated practice.  The service contracts that dentists may be presented by a DSO vary based on the nature of the relationship with the DSO.  As such, one may see production-based remuneration and/or employment-style contracts that provide a salary (with or without performance bonus), non-compete clause as well as non-solicitation clause, lengthier contract terms, and more significant penalties for breach of conditions by the Contract Dentist.