Business Owner Personally Liable for LCA Wage Violations under the INA: Sixth Circuit

Practical Law Legal Update 4-578-9845 (Approx. 6 pages)

Business Owner Personally Liable for LCA Wage Violations under the INA: Sixth Circuit

by Practical Law Labor & Employment

Background

Dr. Mohan Kutty operated medical clinics in Tennessee and Florida under numerous different corporate entities. Between February and March 2001, ten of the physicians employed by Kutty filed a complaint with the DOL claiming Labor Condition Application (LCA) wage violations under the INA. The Administrator of the DOL Wage and Hour Division found that Kutty and the medical clinics operated by Kutty had violated numerous provisions of the INA by:

Wilfully failing to pay required physician wages.
Failing to make LCAs available for public examination.
Failing to maintain payroll records.
Retaliating against the physicians for engaging in protected activity under the INA.

Kutty appealed the DOL Administrator's decision. The ALJ assigned to the case conducted hearings in 2001. The ALJ:

Determined that Kutty and the medical clinics violated the INA by:
- failing to pay required wages to seventeen physicians employed by Kutty;
- retaliating against nine of the physicians for engaging in protected activity under the INA;
- failing to make LCAs available for public examination; and
- failing to maintain payroll records.
Ordered Kutty and the medical clinics to pay back wages, including the costs of obtaining J-1 visa waivers and H-1B visas, reasoning that the expenses are an unauthorized business deduction, reducing the wages below the required LCA rates.
Concluded that Kutty should be held personally liable for the violations because:
- his violation of the INA was willful; and
- he acted as the alter ego of the corporations named on the LCAs.
Barred Kutty from employing aliens for two years under INA § 212(n)(2)(C)(ii) (8 U.S.C. § 1182(n)(2)(C)(ii)).

In 2005, the Administrative Review Board (ARB) affirmed the ALJ's decision, specifically noting that the regulations provide that attorneys' fees and costs associated with filing the H-1B petition are considered business expenses of the employer that may not be deducted. Kutty petitioned for review.

In 2011, the district court issued an order dismissing Kutty's petition for review and affirming the ARB's decision. Kutty appealed to the Sixth Circuit.

Outcome

The Sixth Circuit held that:

The determination that the costs, including attorneys' fees, of obtaining H-1B visas are business expenses within the meaning of 20 C.F.R. § 655.731(c)(9)(iii)(C) is neither arbitrary nor an abuse of discretion.
The determination that the DOL administrator did not abuse its discretion or act arbitrarily in ordering Kutty to reimburse the physicians for costs incurred in obtaining J-1 waivers is supported by substantial evidence and is not contrary to law.
The ALJ did not err in deciding to pierce the corporate veil and hold Kutty personally liable because the record supports that nearly all of the Tennessee factors for piercing the corporate veil were present and the entities were used to commit a "wrong." The piercing of the corporate veil was warranted to hold Kutty personally liable for back wages and penalties.

The Sixth Circuit found that:

Under the INA, employers must pay a fee to file an H-1B petition on behalf of an employee and may not be reimbursed by that employee for "part or all of the cost" (INA §§ 212(n)(2)(C)(iv)(II) and 214(c)(9) (8 U.S.C. §§ 1182(n)(2)(C)(vi)(II) and 1184(c)(9)). The regulations clarify that employers may not deduct these costs or other business expenses from the employees' wages if the deduction reduces the wage below the required level specified in the LCA (20 C.F.R. § 655.731(c)(1)).
Kutty's argument, that the H-1B visa costs are not business expenses because the physicians were already in the US, eligible to change their status from J-1 to H-1B, and therefore did not need H-1B visas and would only have needed to obtain H-1B visas if they intended to travel outside of the US, misstates the law because:
- the physicians needed an approved H-1B petition because a nonimmigrant foreign medical graduate on a J-1 visa seeking a waiver of the two-year home return requirement (as the plaintiff physicians were) may only satisfy the requisite three-year employment contract as an H-1B nonimmigrant (8 C.F.R. § 212.7(c)(9)(iii)); and
- the business expense regulation prohibits employers from passing on the costs of business expenses such as H-1B fees to their employees where those costs would reduce wages below the required rates. Nothing in the regulations suggests that employers are exempted from this requirement if they hire nonimmigrants who are already in the US on a separate visa.
The ARB's determination that the DOL Administrator did not abuse its discretion or act arbitrarily in ordering reimbursement of the J-1 waiver costs is supported by substantial evidence and is not contrary to law because:
- Kutty's business plan contemplated the employment of nonimmigrant physicians under the H-1B program;
- the nonimmigrant physicians were hired under contracts that made their employment contingent on their receipt of both an H-1B visa and a J-1 waiver; and
- the record supports that in most cases, either Kutty or his in-house attorney pressured the physicians to hire a business to assist them in applying for a J-1 waiver.
The INA is silent on the question of personal liability for an employer's violation. Where a statute is silent as to personal liability, US v. Bestfoods permits a court to impose liability on the principal to the extent common law principles permit (524 U.S. 51 (1998)).
The ALJ, ARB and district court did not err in concluding that a majority of the factors necessary to pierce the corporate veil in Tennessee are present because:
- Kutty set up and was the sole owner and investor in a web of corporate entities established to hire the nonimmigrant physicians;
- Kutty made all of the companies' major decisions regarding salaries and staffing from a single office and he and his wife were the only officers and directors;
- there is no evidence that any of the corporations issued stock certificates and Kutty did not know whether they issued financial statements;
- Kutty treated the corporations as an extension of himself;
- the corporations appear to have been undercapitalized, as Kutty could not state how much money was used to start the clinics or whether money was contributed as capital or loans;
- the corporations were interchangeable and did not deal at arms length with each other;
- on various documents, multiple entities were represented as the employer of the same physician, and physicians that were employed by one corporation were often paid by another; and
- the documents signed by Kutty showed significant confusion with respect to which corporate entities were acting as the H-1B physicians' employers.
Kutty's argument that the corporate veil may not be pierced because the record does not support a finding of fraud fails because Kutty committed the following wrongs:
- failure to pay the H-1B physicians the wages promised and required under the INA, including during periods in which the physicians were awaiting their credentials, in violation of the INA's no benching provision;
- retaliation against the physicians for engaging in protected conduct under the INA; and
- admitting that he knew he was not going to pay the physicians the amounts listed in the LCAs despite having signed a declaration that the information on the LCAs was correct, and despite having signed an agreement to abide by the terms of the LCAs when he signed the H-1B petitions.
Although Kutty contends that the ALJ did not take into account that the physicians violated their employment contract by not working the requisite number of hours, the INA is clear that Kutty was not permitted to withhold funds from the physicians except in limited circumstances, none of which were present here (20 C.F.R. § 655.731).

Practical Implications

Employers that employ aliens should be aware that they may not be reimbursed by their foreign national employees in H-1B status for part or all of the fees, including attorneys' fees, of obtaining H-1B visas and J–1 waivers, as these fees are business expenses. Further, employers should be aware that under certain circumstances, a court may pierce the corporate veil and hold individual officers of the employer personally liable for back wages and penalties if certain factors for piercing the corporate veil are present and the corporate entities were used to commit a "wrong."

Business Owner Personally Liable for LCA Wage Violations under the INA: Sixth Circuit | Practical Law