March 19, 2018

Dental practice sale/purchase key issues – associate agreements

Key issues to consider include the employment status of associates, the extent to which associates should transfer to the purchaser, and whether the practice is adequately protected if an associate decides to leave.

Self-employed status

While associates may be described by the practice as self-employed, and enjoy self-employed status for tax purposes, this does not prevent them being deemed employees or workers for employment law purposes.

There have been a number of high profile recent cases (e.g. against Uber and Pimlico Plumbers) where persons labelled as self-employed have successfully argued that they are workers or employees, with the result that they were entitled to additional employment rights such as holiday pay, sick pay and protection against unlawful discrimination (and in the case of employees only, the right to claim unfair dismissal). Wrongly identifying the status of associates can give rise to Employment Tribunal claims and create significant financial liability. Principals, whether selling or buying, need to be alive to this risk.

A diligent and well advised purchaser of a dental practice will want to properly assess the status of associates during the due diligence process to determine the risk of potential liabilities arising from a challenge to their self-employed status. The risk of potential liabilities can then be minimised through appropriate warranty and indemnity cover in the sale and purchase agreement.

Sellers should ensure that, before the sale process is started, they have properly drafted associate agreements in place which accurately reflect how the relationship operates in practice. This will minimise the risk of a challenge and reduce the need to give onerous indemnity cover.

Do associates transfer to the purchaser?

On an asset sale of a dental practice, the Transfer of Undertakings (Protection of Employment) Regulations (‘TUPE’) applies to automatically transfer employees and some workers from the seller to the purchaser on their existing terms and conditions.

Genuinely self-employed associates are not caught by TUPE and would not automatically transfer to the purchaser. If as a purchaser you want to retain associates, you should start discussions early in the sale process to agree the terms on which they will be engaged and to ensure that appropriate protections are put in place (see below). If they are not being retained, the seller will need to give proper contractual notice to terminate the agreement.

Protecting the practice if an associate departs

If an associate leaves the practice as part of the sale process, there is a risk that the goodwill in the practice could be damaged. In particular, an associate may assert that they have generated some of the goodwill and are entitled to be paid for a share of it, or they may leave and set up in competition with knowledge of, and contact with, the seller’s patients.

As a seller, you should ensure that these risks have been addressed in the associate agreement. The agreement should state that the goodwill belongs to the principal, and the seller should have the benefit of restrictive covenants to prevent the associate working in competition. Careful drafting of the restrictive covenants is essential to ensure that they are enforceable.

The agreement between the seller and associate will not be directly enforceable by the purchaser, as it is not a party to that contract. However, the purchaser will want to see that the appropriate restrictions are in place to protect the goodwill that they have just paid for. If associates are staying on after the sale, the purchaser will also need to ensure that these protections are included in its contract with the associates.

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