Veterinary Team Brief photo
Dr. Lance Roasa is a veterinarian, lawyer and provider of continuing education.
The veterinary job market is white hot. Demand for veterinarians and their services has never been greater. Associates searching for jobs are being lured with jaw-dropping "signing" bonuses. Rumors of new graduates occasionally being offered $100,000 to sign are true. Bonuses in the $30,000 to $50,000 range for general practice associates are becoming commonplace. Emergency clinicians and specialists are regularly offered even more. It is certainly debatable whether a new graduate or associate will be able to produce enough income for their employer to justify their compensation, but this is the current job market for veterinarians in the United States.
Why? Simply put, in most areas, there are more jobs than available licensed veterinarians. This supply-and-demand mismatch has employers offering higher salaries, more benefits and bigger bonuses to entice prospective associates to sign.
Why offer bonuses rather than higher salaries?
Salaries have increased drastically, as well, but bonuses enable practices to pay more without committing to an unsustainable salary indefinitely. In addition, practice owners looking to flip or otherwise sell the business soon prefer to pay bonuses for accounting reasons: Bonuses can be excluded from earnings before interest, taxes, depreciation and amortization calculations (commonly referred to as EBITDA) as a one-time expense. The use of the bonus therefore increases the practice's profitability on paper and thus, the sale price of the practice, incentivizing an employer to pay more in one-time bonuses rather than regular salary.
Associates interested in a new position and independent practice owners looking to hire should understand the “why” behind big bonuses to maximize their competitiveness in the job market.
Just as there is no free lunch, as the saying goes, there is no free $50,000 bonus.
Firstly, although most practices call these "signing" bonuses, a more appropriate term is retention bonus because they typically require working at the practice for a specified period of time. A recipient who leaves early must repay some or all of the money. Retention periods commonly range from 18 months to three years.
As in most contractual matters, the devil is in the details. With retention bonuses, there are big differences in how a contract may be structured, especially if employment ceases for any reason before the retention period is completed. Some agreements require repayment of the entire bonus, and some offer a prorated repayment provision. This detail becomes incredibly important near the end of the retention period. For example, if the bonus is $24,000 and the repayment period is 24 months but the associate needs to terminate employment at 20 months, the difference between an entire-bonus repayment versus a prorated repayment is $20,000!
Some bonuses are structured as a separate "loan" from the practice to the associate, and the associate is asked to sign a formal promissory note. The loan is then forgiven if the associate works for the practice for a specified period of time — again, generally 18 to 36 months. Why create the structure of a loan? Because if the associate's employment ceases, it's generally much easier for the practice to seek legal action and obtain a judgment against the associate with a promissory note in hand rather than a small promise in an employment agreement to return a bonus. Lawyers prefer streamlined legal proceedings that benefit their client, and the practice's lawyers write the contract.
What about taxes?
An unwelcome surprise to most recent graduates is the amount of tax withheld from bonuses, which are considered supplemental income and as such, subject to a higher withholding percentage. This withholding is even more unpleasant if the bonus must be repaid, in total, in the pretax amount. Said another way, if the employment ceases, the associate must repay the bonus with close to 30% of money they never received because it went to taxes. Worse still is if the employer doesn't properly withhold taxes from the bonus, which will then come due on tax day.
How independent practice owners
can compete for employees
When a bonus is structured as a loan, there are some taxation differences. The proceeds of a loan are not taxable when received; however, when a loan is forgiven, "debt forgiveness income" must be reported. Remember, the essential structure of this agreement is that the practice plans to forgive the debt after continued employment. This can move the employee's taxation event to a future year, and therefore requires careful planning for the tax to come. Also, "loans" from the employer to employees at below market interest rates may be subject to imputed interest by the IRS, whereby the employer must pay income tax on interest they didn't receive. (Most employers don't realize this.)
Understanding term and at-will employment
There are generally two types of employment: 1) employment for term and 2) at-will employment. Most state laws set the default provision as at-will employment, but employers and employees are free to agree to a contract with different terms, and those more severe terms are usually enforceable. Some employers remove the at-will employment status of the associate while offering a large bonus. This creates another large legal barrier for an associate who needs to leave the practice's employment before their agreed-upon term ends. If the contract does not allow the employee to terminate employment at any time for any reason, the employee can unknowingly enter for-term employment, which creates the potential for a breach of contract lawsuit. Some practices offering large bonuses purposely put forth term employment agreements to lock in associates for the full term.
A close reading of the agreement with a sharp eye for the termination provision is absolutely required for associates considering large bonuses. Specifically, the contract should contain at-will language that allows both employer and employee to terminate at any time for any reason, subject to a notice period. Some practices are looking to set those legal traps for the unknowing or unwary, setting them up for a nasty repayment and a breach of contract lawsuit. Even without a lawsuit, the fear of being sued can force associates to stay in jobs they want to leave and suffer the damage to their mental health and well-being.
Any employment agreement also requires a close examination of restrictive covenants, and employment promising large bonuses often has more-onerous-than-average noncompete agreements and non-solicitation agreements. Much has been written about noncompete agreements, and I won't go into their fairness or enforceability in this article. At minimum, noncompete agreements should be understood and negotiated before they are signed. Receiving a large bonus really has no bearing on the amount of damage an associate can inflict on a practice should they choose to unfairly compete after leaving its employment.
What about student loans?
New and recent graduates commonly plan to accept a large bonus and apply it to their student loan balance. This is a seemingly logical strategy under conventional knowledge, but it doesn't make sense for those using a federal Income Driven Repayment (IDR) plan. Under IDR, borrowers' monthly loan payments are keyed to their income, no matter their total balance. After 20 to 25 years of payments, depending on the plan, any balance that remains will be forgiven. Therefore, making a one-time extra payment is contraindicated. Any veterinarian considering this arrangement should make some careful calculations rather than relying on gut feeling to make a decision.
Moreover, new veterinary graduates have a high rate of turnover in the first few years of practice, for a variety of reasons. A disastrous unintended consequence will occur if the associate doesn't complete the specified employment period and must pay back the bonus to the pretax level. If they have used the extra cash to pay down their student loan, it's unlikely they'll have enough money available to reimburse their employer. This can be a financially and mentally overwhelming situation for any recent graduate. So even for those not in a federal IDR plan, the unintended consequences can be great.
Generally speaking, extra money in a recent or new veterinarian's budget is best focused on items such as emergency funds or other, more expensive, debt such as credit cards or private loans. In any case, it's prudent to keep some funds available in the unhappy event that a bonus must be repaid.
Large group practices often give the impression that contractual terms are not negotiable, but that's far from true. Most practices offering a large bonus and hefty salary are signaling that they need to hire and are ready to negotiate.
What can be negotiated in a signing bonus? Firstly and most commonly, the monetary amount. The first offer is just that — an offer. Most practices are prepared to go higher if asked. Secondly, the retention term can be negotiated downward. And as discussed above, if the repayment provision is not prorated, it should be. This is a straightforward ask and, in my experience, is almost always accepted. If the bonus is structured as a promissory loan, it should and can be moved to a simple repayment agreement unless the employee's tax adviser says otherwise. Lastly, the terms of a noncompete should always be vigorously negotiated for reasonability.
My direct advice to an associate considering a hefty bonus is: Assume that things will not go as planned. Consider your options if you need an out, and be sure to review the termination provisions before signing anything.
Finally, remember that everything is negotiable!
Dr. Lance Roasa received a veterinary degree in 2008 from Texas A&M University and a law degree from University of Nebraska. He has owned and managed small animal, mixed animal and emergency practices in multiple states. Formerly, he operated a law practice that focused on contractual and business-related matters exclusively for veterinarians. Roasa teaches law, ethics, career development and business at 15 veterinary schools and is a national co-adviser to the Veterinary Business Management Association. Roasa co-founded drip.vet, which provides online continuing education for veterinarians and veterinary technicians. Drip.vet was acquired in 2021 by the Veterinary Information Network, an online community for the profession and parent of the VIN News Service. Roasa assists on VIN's regulatory and legal message board.