Overpaid Long Term Staff

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Following up from my last article, A Potential Pitfall of Selling Shares in Professional Advisory #46, there are other situations that can be very detrimental to your expectations of the net realizable value of your practice. This next potential problem is overpaid long term staff.

You have seen the effect. It is review time and your long term staff member gets her raise of let us say, $1.50 per hour. Sounds innocent enough? So now she is getting $38.00 per hour. She is your assistant, is 55 years old, and has been with you for 30 years and works 40 hours per week and your billings are about $800,000. You are now anticipating selling your dental practice. Do you think that a purchaser would want to hire this person if they were to purchase your practice? I am afraid not!!

So the purchaser wants to purchase your practice but not hire the assistant. She now becomes your problem to terminate. How bad can that be? Statutory law would be one weeks pay per year of employment to a maximum of eight weeks. This would be $12,160. High enough but it could be worse. The common law could require you much greater termination pay than the Statutory minimum. Generally speaking such termination pay could equal one month of pay per year of service, although there is typically a cap of about one year total termination pay but not always.

If she sues for wrongful dismissal, under common law it becomes a legal matter. Capped at one year, it would cost about $78,000. Uncapped it could cost $196,000. This is for only one employee. If your entire team is paid well over the standard remuneration for your dental community, your practice may not be salable.

How to avoid this problem?
1) Become informed about the standards of pay in your community.
2) Let your staff know this pay range.
3) Remuneration can take different forms, i.e., gifts, outside training (team trips)

Once you have the problem you can:
1) Negotiate to pay the employee a lump sum payment to reduce their salary. But even this has its problems. Negotiation without compensation to the employee would probably not stand up in court. Negotiation without the employee being given an opportunity to consult a lawyer would probably not stand up in court either.
2) A reduction in pay could be construed constructive dismissal and this again could become a legal situation.
3) Give the employee a years working notice. The employee is put on notice that at the end of the one year period, her salary is being reduced, and if she does not agree then her employment is terminated at the end of the one year period. This should reduce your exposure but then you could lose that employee if they find another job and it would put off the sale for the year.
This is a tricky area. Consult your labour lawyer before you make any attempt to solve your problem.

The sale could go forward if the Vendor agrees in the sale agreement that the Vendor remains liable for her termination pay for an extended time period if the Purchaser terminates her after closing. Another remedy could be that the Purchaser puts into the sale agreement that the deal is conditional upon the employee agreeing to reduced pay, failing which the Vendor must terminate her at the Vendor’s cost.

As you can see, overpaying staff limits your net income on a year over year basis and even the net value of your practice when you sell it.

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