Wal-Mart and the Expansion of Hospital and Medical Group Liability
Might a medical group set up as a partnership of professional corporations or as a PLLC of professional associations be liable for wages owed to an employee of one of the constituent entities?
Might a national medical group operating through independent medical groups, each a separate legal entity, at disparate sites be liable for the obligations of those constituent groups?
Might a hospital be liable for an independent contractor medical group’s breach of contract claims, malpractice or even fraud?
The answer is becoming “yes.”
Recent developments illustrate the situation, the issues, and the risks. Although the cases are limited to wage and hour disputes, the concepts underlying their disregard for the sanctity of entity status might soon be applied in other contexts as well.
Wal-Mart contracted with Schneider to manage a warehouse and distribution facility. In turn, Schneider subcontracted with other companies (“Subcontractors”) to provide the actual labor.
A dispute arose over whether the Subcontractors properly paid their employees and whether they violated a number of labor laws. Individuals who were employed by the Subcontractors brought suit against the Subcontractors and against Schneider as so-called “joint employers.”
The plaintiffs alleged that Schneider controlled many of the terms of performance and therefore should be liable for the Subcontractors’ failure to comply with legal requirements, even though the contract between Subcontractors and Schneider shifts all responsibility for legal compliance to the Subcontractor, and declares Subcontractor to be “solely responsible” for and “the sole and exclusive employer” of the workers.
Then, after suit was filed, and over the objection of Wal-Mart, the court allowed the plaintiffs to add Wal-Mart as an additional defendant due to its “control” over Schneider.
AT&T, the telephony giant, had its bell rung in a recent decision by the United States Court of Appeals for the 2nd Circuit in a case involving security guards working at AT&T stores. AT&T didn’t employ the guards. Instead, they were employed by a separate company that sold security guard services to AT&T. The guard company went out of business and the guards, who claimed that they had been improperly paid, sued AT&T.
The court deemed the subcontractor guard company’s employees to be jointly employed by AT&T such that AT&T would be liable to them for the subcontractor’s violations.
Earlier this month, Doctor’s Associates, Inc., the company that owns and franchises the Subway sandwich concept (I’ll refer to that company as “Subway”) entered into a voluntary agreement with the U.S. Department of Labor pursuant to which Subway agreed to take efforts to make its franchisees “promote and achieve compliance with labor standards” and to “explore ways to use technology to support franchisee compliance, such as building alerts into a payroll and scheduling platform that Subway offers as a service to its franchisees.”
Subway did not agree that it is a joint employer. But by entering into the agreement it’s almost an admission by Subway that it has significant control over its franchisees — control being the factor that has led courts, such as the one in the AT&T case discussed above, to find joint liability. This will likely embolden plaintiffs’ attorneys who seek to impose liability on upstream entities.
Note: Not Alter Ego Theory
You may be familiar with what's known as "alter ego" theory or, more commonly as "piercing the corporate veil." That concept, commonly seen, for example, in situations where the separate legal existence of a medical corporation is disregarded such that it bears liability for its physician shareholder’s actions, is based on factors such as the failure to keep the corporation financially separate, failure to follow corporate formalities, and so on.
The theory in connection with the Wal-Mart, AT&T and Subway examples has nothing to do with any theory that seeks to attack the bona fides of the target defendant entity. Instead, it is based on factors such as the degree of control the defendant has over down-stream, legally separate entities.
In the Wal-Mart case, the court found significant the fact that the Schneider-managed operation was exclusively for Wal-Mart’s benefit. Schneider, in turn:
1. Required the Subcontractors to provide enough workers to satisfy Schneider’s fluctuating needs for the Wal-Mart warehouse.
2. Dictated material terms of plaintiffs’ employment, such as requiring each new worker to undergo detailed pre-employment screening, subjecting them to ongoing supervision, and requiring strict adherence to Schneider’s performance standards.
3. Reserved Schneider’s right to request that Subcontractor remove any worker from their assignment at the warehouse.
In the AT&T case, the court used a three-factor test:
1. Did the defendant exercise “formal control” over a worker?
2. Were the workers truly independent contractors themselves?
3. Last, a six-factor analysis to determine if the defendant exercised “functional control” over a subcontractor’s employees. No one factor is vital; it’s the gestalt that counts.
(a) Whether the defendant’s premises and equipment were used.
(b) Whether the subcontractor had a business that could or did shift as a unit from one principal to another.
(c) The extent to which the workers performed a discrete job that was integral to the defendant’s business.
(d) Whether responsibility under the contracts could pass from one subcontractor to another without material changes.
(e) The degree to which the defendant or its agents supervised the workers.
(f) Whether the workers worked exclusively or predominantly for the defendant.
Translation Into Your Business
So what’s all this have to do with hospitals or large medical groups? It’s simple. Let’s look at the hospital situation for an illustration.
Substitute “hospital” or “hospital department” for warehouse and you’ve got the relationship between most hospitals and physician services contract management companies. Look at the three numbered control factors set out above in connection with the Wal-Mart example and compare them with their hospital contact equivalents.
For example, the average exclusive anesthesia contract:
1. Requires the contract holder to provide enough anesthesiologists/CRNAs to satisfy the hospital’s fluctuating needs.
2. Dictates nearly every material term of the anesthesiologists’/CRNAs’ employment, such as requiring each new worker to undergo detailed pre-employment screening (that is, the hospital can reject potential hires), periodic performance evaluations (that is, the providers must meet certain satisfaction and performance indicator criteria), and strict adherence to the hospital’s performance standards (compliance with the hospital’s policies and procedures, etc.).
3. Reserves the hospital’s right to request that the contract holder remove an anesthesiologist or CRNA from the roster.
Similar control issues exist in respect of the relationship between large physician groups and the physicians doing the actual patient care on behalf of intermediary owned or managed entities.
As mentioned, this relatively new theory of liability has arisen in the employment law context. It’s not difficult to use the same theory to impose other types of liability on the upstream entity.
Will this result in liability for breach of contract claims, malpractice claims and fraud, or even for False Claims Act violations, at the hospital level as a result of the hospital’s contacts with a contract management company or even with a local medical group? Maybe.
Will this result in employment law claims by physicians employed by sub-group X which is controlled by national group Y? Almost assuredly.
Note that local groups set up as combinations of physician-owned entities (e.g., a partnership of professional corporations) are potentially targets no different from AT&T.
There are, of course, transactional, structuring actions that upstream entities can take to mitigate their risk. They go well beyond concepts such as normal indemnification provisions.