Document:

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                                                                   Exhibit 10.12

                              EMPLOYMENT AGREEMENT
                              --------------------

     THIS AGREEMENT is made and entered into this 21st day of December, 1999, by
and between REHABCLINICS, INC., a Delaware corporation ("Employer"), having an
address c/o Select Medical Corporation, P.O. Box 2034, 4718 Old Gettysburg Road,
Mechanicsburg, PA 17055, and EDWARD R. MIERSCH, an individual ("Employee"),
residing at 10 Jonathan Morris Circle, Media, PA 19063.

                                  BACKGROUND:
                                  ----------

     A       Employer is in the business of operating and managing outpatient
medical rehabilitation facilities and practices located throughout the United
States (the "Business").

     B.      Employer desires to employ Employee to provide management and
administrative services in connection with Employer's operation of the Business.

     C.      Employee desires to be employed by Employer to render such services
in connection with the Business, on the terms and conditions specified below.

     NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises and conditions set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Employee and Employer intending to be legally bound hereby, covenant and agree
as follows:

     1.      Employment. Employer hereby agrees to employ Employee, and Employee
             ----------
hereby accepts such employment and agrees to serve Employer, and upon and
subject to the terms and conditions set forth herein.

     2.      Employee's Representations and Warranties. (a) Employee represents
             -----------------------------------------
and warrants to Employer that Employee has disclosed, and at all times during
the Employment Term (as hereinafter defined) will disclose, to Employer the
following matters, whether occurring at any time prior to or during the
Employment Term:

     (i)     any criminal complaint, indictment or criminal proceeding
             (involving other than a misdemeanor offense) in which Employee is
             named as a defendant;

     (ii)    any investigation or proceeding, whether administrative, civil or
             criminal, relating to an allegation against Employee of filing
             false health care claims, violating anti-kickback laws, or engaging
             in other billing improprieties; or

     (iii)   any dependency on, habitual use or episodic abuse of, alcohol or
             controlled substances by Employee, or any participation by Employee
             in any alcohol or controlled substance detoxification, treatment,
             recovery, rehabilitation, counseling, screening or monitoring
             program.
<PAGE>

     (b)     Employee shall at all times render services hereunder in a
competent, professional and ethical manner, in accordance with all applicable
statutes, regulations, rules, orders and directives of any and all governmental
and regulatory bodies having competent jurisdiction.

     (c)     Employee further represents and warrants that Employee is not, and
has not been, excluded from participation in the Medicare or Medicaid programs
or otherwise found to be in violation of any of the rules or regulations of such
programs, nor has Employee been convicted, under federal or state law, of a
criminal offense related to (A) neglect or abuse of a patient, or (B) the
delivery of an item or service, including the performance of management or
administrative services, related to the Medicare or Medicaid programs.

     3.      Employee's Duties and Responsibilities.
             --------------------------------------

     3.1.    General.  During the Employment Term, Employee shall serve as the
             -------
President of the NovaCare division.  Employee shall report to either the Chief
Executive Officer or President of Employer's parent company.

     3.2.    Obligations and Duties of Employee. Employee shall devote a minimum
             ----------------------------------
of forty (40) hours a week to the performance of Employee's duties hereunder.
Subject to Employee's right to take vacation as permitted under Section 4.4
below, Employee's duties are to be carried out over a 52-week period. Employee
agrees to perform Employee's duties diligently and to the best of Employee's
abilities, and to perform such additional or different duties and services
appropriate to Employee's position which Employee from time to time may be
reasonably directed to perform by Employer.

     3.3.    Authority and Control of Employer. Employee shall at all times
             ---------------------------------
comply with, and be subject to, such reasonable policies, procedures, rules and
regulations as Employer or its parent company may establish from time to time,
and all work performed by Employee shall be subject to review and evaluation by
Employer.

     3.4.    Duty; Conflicts. Employee acknowledges and agrees that Employee
             ---------------
owes a duty of loyalty fidelity and allegiance to act at all times in the best
interests of Employer and to do no act which would injure Employer's business,
interests or reputation. Employee shall devote Employee's full business time,
energy and best efforts to the business and affairs of Employer and to the
fulfillment of Employee's obligations hereunder. Employee shall not, during the
Employment Term, without the prior written consent of Employer, engage in any
other business, investment or activity, directly or indirectly, whether or not
such activity is pursued for gain, profit, or other pecuniary advantage, which
interferes with the performance of Employee's duties hereunder or is contrary to
the interests of Employer. It is agreed that any direct or indirect interest in,
connection with, or benefit from any outside activities, particularly commercial
activities, which interest might in any way adversely affect Employer, involves
a possible conflict of interest. In keeping with Employee's fiduciary duties to
Employer, Employee agrees that Employee shall not knowingly become involved in a
conflict of interest with Employer, or upon discovery thereof, allow such a
conflict to continue. Employee shall disclose to Employer any facts which might
involve a conflict of interest. Employee shall request the written consent of
Employer prior to accepting a position as a trustee or director of any outside
organization.

                                      -2-
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     3.5.    Time Records. Employee shall submit to Employer such time records
             ------------
as Employer may require from time to time (for example, in order to allocate
Employee's time if such allocations are necessary to permit Employer or its
affiliates to file accurate Medicare cost reports) showing the nature of the
services performed by Employee and the time Employee actually spent performing
those services.

     4.      Financial Terms.
             ---------------

     4.1.    Base Salary.  In consideration of Employee's services hereunder,
             -----------
Employer agrees to pay Employee, during the Employment Term, the annual base
salary of Three Hundred Thousand Dollars ($300,000), payable in twenty six (26)
installments of $11,538.46.

     4.2.    Incentive Compensation.  Employee will be eligible for an annual
             ----------------------
incentive bonus in an amount equal to up to forty percent (40%) of Employee's
annual base salary. Payment of the annual incentive bonus will be based on
objectives and criteria determined by Employer from time to time.  The payment
of the annual incentive bonus will be subject to the approval of the boards of
directors of Employer and its parent company; provided, however, that Employee
                                              --------- -------
will be paid not less than one-half (1/2) of his maximum incentive bonus for his
performance during each of the first two years of employment under this
Agreement (each of such bonus payments is hereinafter referred to as a
"Guaranteed Bonus Payment").  The annual incentive bonus will be paid within
ninety (90) days after the end of each fiscal year of Employer.

     4.3.    Employee Benefits.  During the Employment Term, in addition to the
             -----------------
compensation paid to Employee pursuant to Sections 4.1 and 4.2 above, Employee
shall be entitled to any employment and fringe benefits under Employer's
employment policies and employee benefit plans, as they may exist from time to
time, and which are made available by Employer to all or substantially all of
Employer's employees.  Nothing in this Agreement shall be construed to obligate
Employer to institute, maintain, or refrain from changing, amending or
discontinuing any employee benefit program or plan, so long as such actions are
similarly applicable to covered employees generally.  Employer shall have no
obligation to secure or otherwise fund any of the aforesaid employee benefits,
and each shall instead constitute an unfunded and unsecured promise to pay money
in the future exclusively from the general assets of Employer

     4.4.    Paid Time Off.  During the Employment Term, Employee shall be
             -------------
entitled to paid time off in accordance with Employer's policy relating thereto
(amounting to not less than four full weeks of paid vacation each year).
Vacation schedules will be coordinated and approved by Employer so as to
facilitate the steady ongoing operation of the Business.

     4.5.    Income and Employment Taxes. Employee shall be an employee of
             ---------------------------
Employer for all purposes. Employer shall withhold amounts from Employee's
compensation in accordance with the requirements of applicable law for federal
and state income tax, FICA, FUTA, and other employment or payroll tax purposes.
It shall be Employee's responsibility to report and pay all federal, state, and
local taxes arising from Employee's receipt of compensation hereunder.

                                      -3-
<PAGE>

     4.6.    Reimbursement of Expenses. In addition to the compensation provided
             -------------------------
for under this Section 4, upon submission of proper vouchers and in accordance
with the policies and procedures established by Employer in effect from time to
time, Employer shall directly pay or reimburse Employee for all normal and
reasonable travel and lodging expenses incurred by Employee during the
Employment Term in connection with Employee's responsibilities to Employer.

     4.7.    Stock Options.  Employer's current parent company, Select Medical
             -------------
Corporation, a Delaware corporation ("Select"), will, effective on the date
hereof, grant to Employee options to purchase Four Hundred Twenty Thousand
(420,000) shares of Select's common stock at a strike price of $3.75 per share,
with vesting over five years.  Except as provided in Section 5(c) below,
Employee will have ninety (90) days after the termination of this Agreement to
exercise any options vested and outstanding on the date of termination.

     4.8.    Change of Control Agreement. Employee will be entitled to receive a
             ---------------------------
change of control agreement which protects Employee in the event of a change in
control of Select. The change of control agreement will contain terms and
conditions comparable to those contained in the change of control agreements
which Select is in the process of developing for its senior management employees
(the "Senior Agreements"). The change of control agreement will be offered to
Employee at the time the Senior Agreements are offered to Select's senior
management employees, and will be documented either in the form of an addendum
to this Agreement or a separate instrument.

     5.      Term and Termination. (a) This Agreement shall commence on January
             --------------------
3, 2000 and remain in effect, unless this Agreement is terminated by either
party hereto, or extended by the written agreement of both parties hereto, for a
period of three (3) years. Thereafter, this Agreement shall continue in effect
for additional periods of one (1) year each unless either party shall, at least
one hundred eighty (180) days prior to the end of the initial term or any such
renewal term, as the case may be, notify the other party of its decision to
terminate this Agreement effective at the end of the term in which such notice
is given. Notwithstanding anything to the contrary herein contained, Employer
may terminate this Agreement in accordance with the terms of subsections 5(b)
and (c) below.

     (b)     Employer shall be entitled to terminate this Agreement, for cause,
if any of the following events shall occur:

     (i)     Employee's death or upon Employee's becoming incapacitated due to
             accident, sickness or other circumstances which render Employee
             mentally or physically incapable of performing the duties and
             services required of Employee for a period of ninety (90)
             consecutive days, as determined by a physician mutually selected by
             Employer and Employee;

     (ii)    Employee engages in criminal, unethical, immoral or fraudulent
             conduct, in the good faith opinion of Employer, or Employee is
             found guilty of such conduct by any court or governmental agency of
             competent jurisdiction;

                                      -4-
<PAGE>

     (iii)   Breach by Employee of any material representation, warranty or
             other material term or provision in this Agreement, which breach
             has not been cured to the reasonable satisfaction of Employer
             within twenty (20) calendar days after notice of such breach;

     (iv)    Intentional refusal by Employee to perform any duty reasonably
             required of Employee hereunder for a continuous period of three (3)
             calendar days after delivery of written notice thereof to Employee
             by Employer (it being understood that if Employee is out-of-town
             for business or otherwise and unable to receive any such notice,
             such notice will not be effective until he returns to his home);

     (v)     The observed use of illegal drugs by Employee at any time or place
             or the abuse of alcohol or the appearance, in the good faith
             determination of Employer, of Employee being under the influence of
             drugs and/or alcohol on the premises of Employer or any client of
             Employer, during any time during which Employee is performing
             services for Employer or the good faith determination of Employer
             that Employee is addicted to drugs or alcohol and has refused any
             recognized rehabilitation procedures; or

     (vi)    Employee's gross negligence or willful misconduct in the
             performance of the duties and services required of Employee.

     (c)     Employer will be entitled to terminate this Agreement, without
cause, at any time. In the event of any such termination, then Employee shall be
entitled to receive severance payments in the form of (i) continuation of
Employee's base salary for a period of one (1) year after the effective date of
such termination, and (ii) payment, at the normal interval, of any Guaranteed
Bonus Payment which would have been due and payable to Employee in the absence
of such termination. In addition, if Employer elects to terminate this Agreement
without cause, then Employee's stock options will continue to vest until the
first anniversary of the effective date of termination of this Agreement (the
"Anniversary Date"), and Employee will have ninety (90) days after the
Anniversary Date to exercise any options vested and outstanding on the
Anniversary Date.

     (d)     Upon termination of employment hereunder, Employee shall be
entitled to receive such salary and fringe benefits, if any, accrued under the
terms of this Agreement, but unpaid, as of the date of such termination, and,
except as otherwise provided under subsection 5(c) above, all future
compensation and all future benefits shall cease and terminate as of the date of
termination. Employee shall be entitled pro rata salary through the date of such
termination, but Employee shall not be entitled to any incentive compensation
not yet paid as of the date of termination, except as otherwise provided under
subsection 5(c) above.

     6.      Non-Solicitation.  During the Employment Term, and for a period of
             ----------------
two (2) years after the expiration or earlier termination of this Agreement,
Employee shall not, directly or indirectly, without the express written consent
of Employer (which consent may be withheld in the Employer's sole discretion),
solicit or contact, cause others to solicit or contact, with a view to engaging
or employing, nor shall Employee actually engage or employ, any person who,

                                      -5-
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during the Employment Term, was an employee of Employer or any of its
subsidiaries or affiliates.

     7.   Non-Compete. (a) During the Employment Term, and for a period of two
          -----------
(2) years after the date of expiration or earlier termination of this Agreement,
Employee shall not, directly or indirectly, in whole or in part, without the
express written consent of Employer (which consent may be withheld in Employer's
sole discretion), operate, establish, manage, own, control, be employed by,
provide financial assistance to, or provide consulting or other services related
to the operation, establishment, management, ownership, or control of, any
occupational, physical or speech therapy facility, business, program or service
which is located within twenty (20) miles of any facility of the Business.

     (b)  If any part of Section 6 or this Section 7 shall be determined by a
court of competent jurisdiction to be unreasonable in duration, geographic area
or scope, then this Agreement is intended to and shall extend only for such
period of time, in such area and with respect to such activity, as is determined
by such court to be reasonable.

     8.   Ownership and Protection of Information Intellectual Property and
          -----------------------------------------------------------------
Goodwill.  (a) All records, files, reports and documents pertaining to services
--------
rendered by Employee hereunder or to the operations of the Business, or any
business hereafter operated by Employer, belong to and shall remain the property
of Employer.  Employee recognizes and acknowledges that the terms of this
Agreement, the names and addresses of the patients and clients of the Business,
as well as Employer's proprietary information and trade secrets as they may
exist from time to time, are valuable, special, and unique assets of Employer's
business. Employee also recognizes and acknowledges that the systems, protocols,
policies, procedures, manuals, reports, data bases, documents, instruments and
other materials used by Employer in connection with the Business are proprietary
to Employer, and are valuable, special and unique assets of Employer's business.
Employee shall not, during or after the term of Employee's employment hereunder
disclose either Employer's proprietary information or trade secrets to any other
person, or entity for any reason or purpose whatsoever, without the written
consent of Employer.  All written materials, records and other documents made
by, or coming into the possession of, Employee during the term hereof which
contain or disclose any of the foregoing shall be and remain the property of
Employer.  Upon the termination of this Agreement for any reason whatsoever,
Employee shall promptly deliver the same, and all copies thereof, to Employer

     (b)  All information, ideas, concepts, improvements, discoveries and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by Employee or which are disclosed or made known to Employee,
individually or in conjunction with others, during the Employment Term (whether
during business hours or otherwise and whether on Employer's premises or
elsewhere) which relate to Employer's past, present or anticipated business,
products or services (including, without limitation, all such information
relating to corporate opportunities, financial and sales data, pricing and
contractual terms, employee evaluations, opinions, interpretations, prospects,
the identity of patients or entities that refer patients to Employer, the
identity of key contacts within the entities that refer patients to Employer,
and marketing and merchandising information or techniques, prospective names,
and methods of doing business) shall be disclosed to Employer and are and shall
be the sole and

                                      -6-
<PAGE>

exclusive property of Employer. All memoranda, notes, records, files,
correspondence, drawings, manuals, models, specifications, computer programs,
maps and all other writings or materials of any type embodying any of such
information, ideas, concepts, improvements, discoveries and inventions are and
shall be the sole and exclusive property of Employer. Employee hereby
specifically sells, assigns, and transfers to Employer all of Employee's right,
title and interest in and to all such information, ideas, concepts,
improvements, discoveries or inventions, and any United States or foreign
applications for patents, inventor's certificates, or other industrial rights
that may be filed thereon, including divisions, continuations, continuations-in-
part, reissues and/or extensions thereof.

     9.     Equitable Relief. The parties hereto hereby acknowledge and agree
            ----------------
that the restrictions and obligations set forth herein, including but not
limited to the restrictions and obligations set forth in Sections 6,7 and 8
herein, are reasonable and necessary, and that any violation thereof would
result in substantial and irreparable injury to Employer, and that Employer may
not have an adequate remedy at law with respect to any such violation.
Accordingly, Employee agrees that, in the event of any actual or threatened
violation of any restriction or obligation set forth herein, Employer shall have
the right and privilege to obtain, in addition to any other remedies that may be
available, equitable relief, including temporary and permanent injunctive
relief, to cease or prevent any actual or threatened violation of any provision
hereof.

     10.    Miscellaneous.
            -------------

     10.1.  Governing Law.  This Agreement shall be governed and interpreted in
            -------------
accordance with, and the rights of the parties shall be determined by, the laws
of the Commonwealth of Pennsylvania.

     10.2.  Severability.  If any provision of this Agreement shall be declared
            ------------
invalid or illegal for any reason whatsoever, then notwithstanding such
invalidity or illegality, the remaining terms and provisions of this Agreement
shall remain in full force and effect in the same manner as if the invalid or
illegal provision had not been contained herein.

     10.3.  Amendment.  No alteration or modification of this Agreement shall be
            ---------
valid unless made in writing and executed by each of the parties hereto.

     10.4.  Counterparts.  This Agreement may be executed in more than one
            ------------
counterpart, and each executed counterpart shall be considered as the original.

     10.5.  Successors; Binding Agreement. This Agreement shall be binding upon,
            -----------------------------
and shall inure to the benefit of, the parties hereto and their respective
personal representatives, successors and permitted assigns.

                                      -7-
<PAGE>

     10.6.   Notices. Any notice or other communication by one party hereto to
             -------
the other shall be in writing and shall be given, and be deemed to have been
given, if either hand delivered or mailed, postage prepaid, certified mail
(return receipt requested), addressed as follows:

             If to Employer:  c/o Select Medical Corporation
                              4718 Old Gettysburg Road
                              Post Office Box 2034
                              Mechanicsburg, PA  17055
                              Attention:  CEO

             If to Employee:  Mr. Ed Miersch
                              10 Jonathan Morris Circle
                              Media, PA  19063

Either party hereto may change the address for notice by notifying the other
party in writing, of the new address.

     10.7.   Waiver.  A waiver of the breach of any term or condition of this
             ------
Agreement shall not be deemed to constitute a waiver of any subsequent breach of
the same or any other term or condition.

     10.8.   Assignment.  Employee shall have no right to assign this Agreement.
             ----------
Employer may assign its rights and obligations hereunder to an affiliate or
successor in ownership of the Business.

     10.9.   Entire Agreement. This Agreement contains the entire agreement of
             ----------------
the parties relating to the subject matter hereof and supersedes and merges all
previous agreements and discussions between Employer and Employee, and
constitutes the entire agreement of the parties with respect to Employee's
employment by Employer

     10.10.  Survival. The provisions contained in Sections 5, 6, 7, 8, 9 and 10
             --------
shall survive any termination or expiration of this Agreement.

                                      -8-
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of
the day and year first above written.

                              Employer:

                              REHABCLINICS, INC., a Delaware corporation

                              By: /s/ Robert A. Ortenzio
                                 ------------------------------
                                 Robert A. Ortenzio,
                                 President

                              Employee:

                               /s/ Edward R. Miersch
                              ---------------------------------
                              Ed Miersch

                                      -9-<PAGE>

                                                                   EXHIBIT 10.13

                          SELECT MEDICAL CORPORATION

                    4716 Old Gettysburg Road P.O. Box 2034
                       Mechanicsburg, Pennsylvania 17055

                                 March 1, 2000

Mr. Edward R. Miersch
Select Medical Corporation
4716 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, PA 17055

     Re:  Agreement in the Event of a Change of Control of SMC
          ----------------------------------------------------

Dear Mr. Miersch:

          The following will confirm the agreement of Select Medical
Corporation, a Delaware corporation (the "Company"), with you concerning the
consequences upon certain terminations of your employment in connection with a
change in control of the Company.

          In consideration of your past and continued service to the Company and
in consideration of the mutual covenants and agreements contained in this letter
(this "Letter Agreement"), the Company and you hereby agree, intending to be
legally bound hereby, as follows:

          1. Covered Termination. A "Covered Termination" shall be deemed to
             -------------------
occur if your employment with the Company terminates under any one of the
following circumstances: (i) within the two-year period immediately following a
Change of Control (as defined below), your employment with the Company (a) is
terminated by the Company without Cause (as defined below), (ii) within the six-
month period immediately following a Change of Control, you terminate your
employment with the Company for Good Reason (as defined below), or (iii) within
the six-month period preceding a Change of Control, your employment is
terminated by the Company other than for Cause, and you reasonably demonstrate
that such termination of employment was at the request of a third party who has
taken steps reasonably calculated to effect the Change of Control.

          2. Payments Upon a Covered Termination. If a Covered Termination
             -----------------------------------
occurs, then (i) the Company agrees that such termination is not a voluntary
termination or a termination "for cause" as contemplated by any of the Company's
stock option or other incentive plans and any stock option or other award
agreements entered into between you and the Company (including agreements that
may be entered into in the future in connection with additional awards granted
pursuant to any Company plan, the "Award Agreements") and the Company agrees
that all unvested, unexercised stock options held by you which were granted to
you by the Company shall become fully vested and exercisable as of the date of
the Covered Termination and you will
<PAGE>

have the right to exercise, at any time prior to the earlier of three months
after the date of termination or the expiration date of such option, all such
options to purchase the Company's stock notwithstanding any contrary vesting
schedule that may be contained in the applicable plan or Award Agreement, and
(ii) the Company will, on or before your last day as an employee of the Company,
pay to you, in lieu of any other rights to cash compensation other than the
payment of your salary for services performed before the date of termination and
as a severance benefit, a lump sum cash payment equal to your total base salary
plus bonus compensation from the Company for the preceding three years (or, if
you shall have been employed for less than three years, an amount equal to three
times your average total annual cash compensation for base salary and bonus for
your years of service to the Company).

          3.   Definitions.
               -----------

          (a)  Change of Control.
               -----------------

               (i)   Prior to a Public Offering (as defined below), a "Change of
Control" shall be deemed to have occurred, subject to Section 3(a)(iii) below,
upon (i) any sale, lease, exchange or other transfer of all or substantially all
of the property and assets of the Company (on a consolidated basis) to an
entity, other than an entity at least 75% of the combined voting power of the
voting securities of which are owned by persons in substantially the same
proportion as their ownership of the Company immediately prior to such sale or
other transfer, (ii) any merger or consolidation to which the Company is a party
and as a result of which the holders of the voting securities of the Company
immediately prior thereto own less than a majority of the outstanding voting
securities of the surviving entity immediately following such transaction, or
(iii) any person's (excluding WCAS, GTCR and Thoma Cressey Partners, the
financial sponsors of the Company as of the date hereof), including a group's,
becoming the beneficial owner of securities representing more than 50% of the
voting securities of the Company then outstanding.

               (ii)  Following a Public Offering, a "Change of Control" shall be
deemed to have occurred if, subject to Section 3(a)(iii) below, (i) any person
including a group, but excluding any stockholder of the Company who immediately
prior to the Public Offering beneficially owned 12% or more of the Company's
outstanding shares, becomes the beneficial owner of shares of the Company having
more than 50% of the total number of votes that may be cast for the election of
directors of the Company, (ii) any person including a group, other than you or
any group of which you are a party, increases its beneficial ownership of shares
of the Company beyond such person's ownership immediately after the Public
Offering by a number of shares equal to or greater than 33% of the total number
of votes that may be cast for the election of directors; (iii) the individuals
who serve on the Board of Directors of the Company as of the effective date
hereof (the "Incumbent Directors") cease for any reason to constitute at least a
majority of the Board of Directors of the Company; provided, however, any person
who becomes a director subsequent to the effective date hereof, whose election
or nomination for election was approved by a vote of at least a majority of the
directors then constituting the Incumbent Directors, shall for purposes of this
clause (iii) be considered an Incumbent Director; (iv) the consummation of a
merger or consolidation of the Company in which the stockholders of the Company
immediately prior to such merger or consolidation, would not, immediately after
the merger or consolidation, beneficially own, directly or indirectly, shares
representing in the

                                      -2-
<PAGE>

aggregate more than 50% of the combined voting power of the voting securities of
the corporation issuing cash or securities in the merger or consolidation (or of
its ultimate parent corporation, if any); or (v) there is consummated an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets (on a consolidated basis), other than a sale or
disposition by the Company of all or substantially all of the Company's assets
to an entity, at least 50% of the combined voting power of the voting securities
of which are owned by persons in substantially the same proportion as their
ownership of the Company immediately prior to such sale.

               (iii) Notwithstanding the foregoing, in no event shall a "Change
of Control" be deemed to occur for purposes of this Letter Agreement, whether
prior to or following a Public Offering, unless the total consideration for the
transaction or transactions which would, absent this clause (iii), constitute a
Change of Control, has a value that is equal to or greater than $3.75 per share
of common stock of the Company (the "Minimum Value"); provided that such Minimum
Value shall be adjusted to reflect changes to such common stock in the event of
a stock dividend, stock split, reverse stock split, stock combination,
reclassification, recapitalization, or other similar change in the structure or
capitalization of the Company, or any other event which in the discretion of the
Board of Directors of the Company necessitates such an adjustment.

               (iv)  For purposes of this Section 3(a), (A) the terms "person,"
"group," "beneficial owner," and "beneficially own" have the same meanings as
such terms under Section 13(d) of the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, (B) the term
"Public Offering" shall mean the consummation of the first public offering of
shares of common stock of the Company in a firm commitment underwritten offering
registered under the Securities Act of 1933, as amended, on Form S-1 or its
successor forms, and (C) the term "voting securities" shall mean securities, the
holders of which are ordinarily, in the absence of contingencies, entitled to
elect the corporate directors (or persons performing similar functions).

          (b)  Cause. For purposes of this Letter Agreement, "Cause" shall mean
               -----
(i) your willful and continued failure to substantially perform your duties
hereunder (other than any such failure resulting from incapacity due to physical
or mental illness); (ii) your engaging in willful or reckless misconduct which
is demonstrably and materially injurious to the Company, monetarily or
otherwise; or (iii) your conviction of a felony involving moral turpitude;
provided that an act, or failure to act, on your part shall be considered
"willful" or "reckless" only if done, or omitted to be done, by you not in good
faith and without a reasonable belief that his action or omission was in the
best interest of the Company. Your employment shall not be deemed to have been
terminated for Cause unless the Company shall have given or delivered to you (i)
reasonable notice setting forth the reasons for the Company's intention to
terminate your employment for Cause; (ii) an opportunity to cure any such breach
during the 30-day period after your receipt of such notice; (iii) a reasonable
opportunity, at any time during the 30-day period after your receipt of such
notice, together with your counsel, to be heard before the Board of Directors;
and (iv) a notice of termination stating that, in the good faith opinion of not
less than a majority of the entire membership of the Board of Directors of the
Company, you are guilty of the conduct set forth in any of clauses (i), (ii) or
(iii) of the definition of Cause above.

                                      -3-
<PAGE>

               (c)  Good Reason. For purposes of this Letter Agreement, you
                    -----------
shall have "Good Reason" to terminate your employment after a Change of Control
if you make good faith determination that, as a result of such Change of
Control, (x) you are unable to perform your services effectively or there is any
significant adverse change in your authority or responsibilities, as performed
immediately prior to such Change of Control, (y) there is a reduction by the
Company in your compensation from that in effect prior to such Change of
Control, or (z) you are required to be based anywhere other than the Company's
principal executive offices in (or within 25 miles of) King of Prussia,
Pennsylvania (except for required travel on the Company's business to an extent
substantially consistent with your business travel obligations prior to the
Change of Control).

               4.   Additional Payments.
                    -------------------

               (a)  If all, or any portion, of the payments or other benefits
provided under any section of this Agreement, either alone or together with
other payments and benefits that you receive or are entitled to receive from the
Company or its affiliates, (whether or not under an existing plan, arrangement
or other agreement) (collectively the "Payments") would constitute an excess
"parachute payment" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and would result in the imposition on you
of an excise tax under Section 4999 of the Code, (such excise tax, together with
any interest and penalties related thereto, are hereinafter collectively
referred to as the "Excise Tax") then, in addition to any other benefits to
which you are entitled under this Agreement, you will be entitled to receive an
additional payment (a "Gross-Up Payment") in cash, in an amount such that after
you pay all taxes including, without limitation, (i) any income taxes (and any
interest and penalties imposed with respect thereto) and (ii) any Excise Tax,
imposed upon the Gross-Up Payment, you will retain an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments. Unless you and the
Company otherwise agree in writing, any determination required under this
Section 4, including without limitation, the amount of payments under this
Article 6 (the "Parachute Gross-up") shall be computed and made in writing by
the Employer's then independent public accountants (the "Accountants"), whose
determination shall be, subject to the Employee's reasonable approval of the
calculations required under this Article 6, conclusive and binding upon the
Employee and the Employer for all purposes. For purposes of making the
calculations required by this Section 4, the Accountants may rely on reasonable,
good faith interpretations concerning the application of Section 280G and 4999
of the Code. You and the Company shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section 4. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 4.

               (b)  As a result of the uncertainty in the application of Section
4999 of the Code at the time of the initial determination by the Accountants
hereunder, it is possible that (i) Gross-Up Payments which will not have been
made by the Company should have been made (an "Underpayment"), consistent with
the calculations required to be made hereunder or that (ii) Gross-Up Payments
that have been made will be determined to have been in excess of the Gross-Up
Payments actually required (an "Overpayment"). In the event that you are
required to make a payment of any Excise Tax, the Accountants shall determine
the amount of the Underpayment that has occurred and any such Underpayment shall
be promptly paid by the Company to or for

                                      -4-
<PAGE>

your benefit. In the event that it is finally determined that an Overpayment has
occurred, you will promptly, and in any event within 30 days of such
determination, refund the amount of the Overpayment, plus any interest actually
paid to you with respect to the Overpayment, to the Company. The Company shall
have the right with respect to the determination of either an Underpayment or an
Overpayment to you to appeal the assertion of any Underpayment or to claim, and
sue for, a refund of any Excise Tax paid by you upon any Payment or Gross-Up
Payment, provided that the Company shall promptly reimburse you for all
expenses, including counsel and accounting fees, incurred in connection with any
such proceeding. Alternatively, the Company may undertake any such proceeding,
and you shall cooperate with the Company in any such proceeding.

               5.   Miscellaneous.
                    -------------

               (a)  The Company will require any purchaser of all or
substantially all of the assets of the Company, by agreement in form and
substance reasonably satisfactory to you, to expressly assume and agree to
perform this Letter Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such purchase had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Letter Agreement and shall entitle
you to compensation from the Company in the same amount and on the same terms as
you would be entitled hereunder if a Covered Termination had occurred. As used
in this Letter Agreement, "Company" shall mean the Company as hereinbefore
defined and any purchaser of its assets as aforesaid which executed and delivers
the agreement provided for herein.

               (b)  This Letter Agreement shall remain in effect for so long as
you are employed by the Company. This Letter Agreement may not be modified or
waived except in writing and agreed to by the Company and you. This Letter
Agreement shall be governed by the laws of the Commonwealth of Pennsylvania and
shall inure to the benefit of your heirs.

               (c)  The Company represents that this Letter Agreement has been
duly authorized and is binding on and enforceable against the Company. The
invalidity or unenforceability of any provision of this Letter Agreement shall
not affect the validity or enforceability of any other provision, which shall
remain in full force and effect.

               (d)  Upon payment of the amount required under paragraph 1
hereof, you shall deliver to the Company a general release of liability of the
Company and its officers and directors in a form reasonably satisfactory to the
Company.

               (e)  All payments made pursuant to this Letter Agreement shall be
subject to withholding of applicable deductions and income and employment taxes.

               (f)  Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, sent by
facsimile transmission or sent by certified, registered or express mail, postage
prepaid. Any such notice shall be deemed given when so delivered personally or
sent by facsimile transmission or, if mailed, five days after the date of
deposit in the United States mails to the following addresses:

                                      -5-
<PAGE>

          If to Employee:

          Edward R. Miersch
          10 Jonathan Morris Circle
          Media, PA 19063

          If to the Company:

          Select Medical Corporation
          4716 Old Gettysburg Road
          Mechanicsburg, PA 17055
          Attention: General Counsel

          6.  Entire Agreement. This writing represents the entire agreement and
              ----------------
understanding of the parties with respect to the subject matter hereof, and
supersedes all prior agreements, written or oral, with respect thereto. This
Agreement may not be altered or amended except by an agreement in writing.

          Please indicate your acceptance of the above agreement by signing
below in the space indicated.

                                      Very truly yours,

                                      SELECT MEDICAL CORPORATION, a
                                      Delaware corporation

                                      By: /s/ Robert A. Ortenzio
                                         -----------------------
                                         Robert A. Ortenzio
                                         President

Agreed to and accepted:

 /s/ Edward R. Miersch
-------------------------------
Edward R. Miersch

                                      -6-

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