Aug 29, 2014

On August 20, 2014, in Kutty v. United States Department of Labor, Case Number 11-6120, the United States Court of Appeals for the Sixth Circuit held that the owner of several medical clinics in Tennessee and Florida was personally liable for back wages, cost of obtaining H-1B and J-1 waivers incurred by physicians hired by the clinics, failure to make the LCA for public inspection, and civil penalties.

Kutty and his wife jointly owned and served as the only officers and directors of the Center for Internal Medicine, Inc. in Florida, and also owned several medical clinics in rural areas of Tennessee and Florida. Kutty made all major decisions about the operation of the Tennessee medical clinics, including hiring, manner of employment, and the employees’ compensation. Seventeen of the foreign physicians hired by Kutty initially entered the US on J-1 foreign medical graduate visas. Id at 2.These visas allow foreign physicians to receive medical trainings in the US but require them to return and reside at their home countries for two years before they can return to the US, change to another nonimmigrant status, or apply for green cards. The two-year residency requirement for a foreign physiciancan be waived if an interested state or federal agency requests a J-1 waiver on behalf of the physician’s behalf.A J-1 waiver on this basis requires the foreign physician to submit a waiver application to the US Department of State (with a filing fee) that demonstrates that the physician has a contract to practice medicine for at least three years in an area designed by the Secretary of Health and Human Services as having a shortage of health-care professionals. See 8 U.S.C. Section 1184(l)(1); 8 C.F.R. Section 212.7(c)(9)(i). Once the J-1 waiver is obtained, the physician is immediately eligible to apply for an H-1B visa. Kutty v. United States Department of Labor, Case Number 11-6120 (6th Cir. 2014)at 3.

All seven physicians were hired by Kutty obtained J-1 waiver based on employment contracts with Kutty to practice in underserved areas. The employment contracts required that the physicians work 40 hours a week. As part of the H-1B applications for these physicians, Kutty signed the Labor Condition Applications (LCA), attesting that the information provided therein was “true and correct” and that he would pay the wage rate as required by law and comply with the LCA regulations. The wage rates listed on the LCAS ranged from $52,291 to $115,357. Id. In reality, Kutty paid his physicians far below the LCA wage rates. Kutty withheld the physicians’ salaries and accused them of failing to meet the hourly requirement as per the employment contracts. When eight of the seventeen physicians demanded immediate payment of back wages, being the difference between the amount paid and the LCA wage rate, and threatened to file a complaint with the Department of Labor (DOL) for Kutty’s violation of LCA regulations, Kutty stopped paying these eight physicians altogether, except for one partial payment. Id at 4-5. Consequently, these eight physicians filed a complaint with the DOL, which initiated an investigation, which uncovered numerous LCA requirements violations by Kutty and his medical clinics, including willful failure to pay the required wage rates to the physicians, failure to make the LCA available for public inspection, failure to maintain proper payroll records, and retaliation against the physicians who filed a complaint with the DOL. Id at 5. On appeal, the Administrative Law Judge (ALJ) assigned to Kutty’s case ordered Kutty and the medical clinics to pay back wages, including the costs of obtaining the J-1 waivers and H-1B visas, totaling $1,444,294 and assessed $108,800 in civil penalties. Id at 6.Under the Immigration and Nationality Act (INA), employer-sponsors of H-1B visas must shoulder the costs of H-1B applications and cannot pass the costs onto the Beneficiaries because the costs associated with H-1B applications, including attorney’s fees, are considered “business expenses” and cannot be deducted from the Beneficiaries’ wages.Id at 7-8.Similarly, in addressing the costs of obtaining the J-1 waivers, the ALJ reasoned that a deduction of the costs from the physicians’ wages is an unauthorized business deduction, reducing the wages below the required LCA wage rates. The ALJ further concluded that Kutty was personally liable for the violations because the violations were willful and that the corporation-employers named on the LCAs were his alter egos. The Administrative Review Board (ARB) confirmed the ALJ’s decision. Id at 6.

The US Court of Appeals for the Sixth Circuit affirmed the ARB’s decision. The Court found that the ARB’s finding that the J-1 waiver expenses are business expenses was warranted by the facts of this case. Specifically, the Court articulated,

“Kutty’s business plan contemplated the employment of nonimmigrant physicians under the H-1B program. It was not coincidence that all but one of the doctors, who happened to have a green card, were nonimmigrant physicians hired under contracts that made their employment contingent on their receipt of both an H-1B visa and a J-1 waiver. In addition, In addition, as the ARB observed, the record supports that in most cases, either Kutty or his in-house attorney pressured the physicians to hire HealthIMPACT, which apparently had some relationship to Kutty, to process their applications for the J1 waivers. Under these facts, the ARB’s conclusion that the Administrator did not err in including the physicians’ J-1 waiver application costs as a business expense is adequately supported.”

Id at 11.

Nevertheless, the Court limited the ALJ’s holding above to the specific facts of this case. Specifically, the Court stated, “We note that we understand the ARB’s decision on the J-1waiver expenses to be based on the facts of this case and the proprietary of the remedy based on those facts, and not a determination that the Administrator has the discretion to treat J1 waiver expenses as business expenses of the employer in every case, regardless of the facts.” Id at 10-11.

The Court further found that ARB’s decision to hold Kutty personally liable for the aforementioned violations was also not unreasonable, explaining that since the INA is silent on individual personal liability, it does not preclude piercing the corporate veil if supported by the common law. Id at 13. Under Tennessee’s common law, the corporate veil may be pierced “upon a showing that it is a sham or a dummy or where necessary to accomplish justice.” Id. The factors used in determining whether to pierce the corporate veil include:

1. Whether there was a failure to collect paid in capital;
2. Whether the corporation was grossly under capitalized;
3. The non-issuance of stock certificates;
4. The sole ownership of stock by one individual;
5. The use of the same office or business location;
6. The employment of the same employees or attorneys;
7. The use of corporation as an instrumentality or business conduit for an individual or another corporation;
8. The diversion of corporate assets by or to a stockholder or other entity to the detriment of creditors, or the manipulation of assets and liabilities in another;
9. The use of the corporation as a subterfuge in illegal transactions;
10. The formation and use of the corporation to transfer to it the existing liability of another person or entity; and
11. The failure to maintain arms-length relationships among related entities.

Id.
The Court found that most of these factors were present in this case: Kutty was the sole owner and investor of his corporations and medical clinics; he made all major employment decisions regarding his physicians from his office in Florida where he and his wife were the only directors; the corporations did not issue any stock certificate; the corporations appeared to be undercapitalized; multiple entities were listed as employers of a single physician on the LCA; and the physicians were often employed by one entity and paid by another. Id at 14.

While the outcome of the Kuttycase is fully warranted by its egregious facts, it reminds employers of the hefty penalties as a result of LCA and INA violations, whether they be willful or unintentional.