In a legal case that has been ongoing for more than 12 years, a physician employer has lost again – this time at the district court level – on immigration issues. The case involves an owner/director of a medical corporation with more than 10 wholly-owned subsidiaries in which he employed 18 physicians. The owner/director (Mohan Kutty, M.D.) was a physician himself. Of the 18 physicians that he employed, all but one were originally in J-1 status as foreign-medical graduates and subsequently obtained a J-1 waiver and H-1b for employment with Dr. Kutty’s companies.

The case began in 2001 when eight of the physicians filed a complaint with the Department of Labor, stating that Kutty had failed to pay them the required wages. Two other physicians soon followed with complaints alleging wage violations also. Kutty quickly fired seven of the ten physicians who filed complaints. The Department of Labor investigated the matter and determined that Kutty and his medical clinics had violated various immigration provisions including failing to pay the required wage, failing to maintain public inspection files on the H-1b’s, failing to maintain payroll records, and retaliating in terminating the physicians after they filed a complaint with the Department of Labor. The ALJ agreed with the Department of Labor, and ordered Kutty to pay back wages, H-1b costs and J-1 costs totaling more than $1 million and over $100,000 in civil penalties. The ALJ also assessed a two-year bar on Kutty employing foreign nationals.

Kutty kept appealing the decision, choosing to represent himself after his attorney withdrew from the case. He lost again in 2005 when the Administrative Review Board (ARB) of the Department of Labor affirmed the decision and then again in 2011 when the district court dismissed Kutty’s petition, thereby affirming the ARB decision. Kutty took it to the next level by appealing to the United States Court of Appeals. In another loss for Kutty, the US Court of Appeals issued a decision in August 2014 agreeing with the previous decisions.

This decision is limited to the parties in the case. That is, it is not a decision that is binding or precedential on anyone else. That is not to say the case is not relevant. Here is what healthcare companies need to learn from the court decision:

Wages: the core violation of Kutty was a failure to pay the wages stated in the H-1b petition. There are three key points on wages. First, the employer must start paying the employee’s wage no later than 60 days of H-1b approval if the beneficiary is in the U.S. or 30 days upon entry in the U.S. In fact, if the employee makes himself available for work sooner than the 30 day or 60 day time-frame, the employer must begin payment as soon as the employee is available. Second, lack of a medical license, credentials or insurance is not a justifiable basis for the employer to delay placing the employee on the payroll. Third, the employer must continue to pay the wages as stated in the H-1b petition for the duration of the petition even while in non-productive status, otherwise the employer needs to file an H-1b amendment for a change of hours/wages or withdraw the H-1b and terminate the employee. The only permissible non-productive status without pay is if the employee is outside of the U.S. or the non-productive status is the employee’s genuine choice such as maternity leave, etc.

Retaliation: the regulations prohibit an employer from retaliating against an employee for filing a complaint with the Department of Labor or otherwise disclosing potentially damaging information about the employer. As a practical matter, if an employer is unable to meet the wage requirement of the H-1b petition, the employer should amend the H-1b to reduce the hours (and wage obligation) or terminate the individual. Once the employer fails to meet the wage requirement and the employee complains to the Department of Labor, it is difficult to do a termination at that point because it can be viewed as termination because of the Department of Labor complaint.

H-1b Costs: The Department of Labor regulations provide that the preparation and filing of the LCA and H-1b petition are employer business expenses that cannot be charged to the H-1b worker. There is another DOL regulation that states business expenses cannot be passed on to the H-1b worker IF those costs would reduce the wages below the required wage. In practice, an employer almost always has to pay the H-1b costs since it is rare that the wage for the H-1b worker, minus the H-1b costs, would be higher than both the prevailing wage and the actual wage that the employer pays to its other workers in the same position with similar skills.

J-1 Costs: While the decision-maker in each stage of the Kutty case determined that the employer was responsible for the J-1 wavier costs for the physicians, the decision is limited to that employer. The recent decision notes that “the statute and regulations are silent on whether the employer must bear the expenses of obtaining a J-1 waiver”. The court decided it was reasonable to impose those costs on Kutty but was clear to add that it was “not a determination that the Administrator has the discretion to treat J-1 waiver expenses as business expenses of the employer in every case, regardless of the facts.” Two factors were relevant in the court ordering Kutty to pay the J-1 expenses: (1) “Kutty or his in-house attorney pressured the physicians to hire” the particular company that handled the J-1 waiver cases; and (2) the company that handled the J-1 waiver cases “apparently had some relationship with Kutty.” Thus, the court presumably felt Kutty was benefiting personally from the J-1 waiver processing and not providing the physicians a choice.

Personal Liability: The court decided to “pierce the corporate veil” and hold Kutty personally liable for the violations. While Kutty argued that the violations pertain to “employer” and don’t mention personal liability, the court found it relevant that Kutty had set up various subsidiaries of which he and his spouse were sole owners and investors and the companies were undercapitalized to cover any liability.

The case of Kutty v. United States Department of Labor is an important reminder to healthcare companies throughout the U.S. to adhere to the regulations pertaining to H-1b petitions.