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HealthLaw 03win

HealthLaw 03win

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Published by: flastergreenberg on Mar 05, 2008
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09/08/2010

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By Jacob L. Hafter andStephen M. Greenberg
 W
hile addressing what is consid-ered to be an inconsistency inthe law regarding the defini-tion of an employee in
ClackamasGastroenterology Assocs. v. Wells
, 123S. Ct. 1673 (April 2, 2003), the U.S.Supreme Court created a new consider-ation when looking at the advantagesand disadvantages of choosing a corpo-ration as a business entity for a physi-cian practice.Gone are the days when a doctorsimply hung out a shingle and providedhealth care services without first seek-ing business counsel. Today variousrisks and benefits — ranging from taxincentives to regulations regardingfraud and abuse — require that physi-cians choose an appropriate legal entityfor their practice.Originally, the choice of a businessentity was limited to the sole proprietor-ship and the general partnership. Suchentities had inherent disadvantages withrespect to personal liability and vicari-ous liability for partnersacts, as well ascertain tax advantages. With recognitionof these disadvantages, business plan-ners began to recommend the use of professional corporations. But eventhough professional corporations areadvantageous for liability purposes,they no longer have the tax advantagesthey once enjoyed.Recently, an amalgamation of thecorporation and the partnership hasemerged in the form of limited liabilityentities.Professional corporations remainthe most popular form of entity forexisting medical practices and still offersome advantages. In
Clackamas
,theSupreme Court negated one disadvan-tage, but its decision may have createduncertainties in other areas.
Clackamas 
The
Clackamas
lawsuit was initiat-ed by Deborah-Anne Wells, a book-keeper for Clackamas GastroenterologyAssociates, P.C. (“CGA”), after she wasfired following 11 years of service.Wells, who suffered from a mixed con-nective tissue disorder, alleged thatCGAdid not comply with her requestsfor reasonable accommodations in her job responsibilities that were necessarydue to her illness, and ultimately firedher.In addition to state and commonlaw causes of action, Wells filed suitalleging unlawful discrimination on thebasis of her disability under Title I of the Americans with Disabilities Act.CGAmoved for summary judg-ment, claiming that it was not liable forADAcompliance under a regulatoryexemption for businesses with less than15 employees for 20 weeks. See 42U.S.C. §12101, et seq. The issue that theU.S. District Court, the Ninth U.S.Circuit Court of Appeals and, ultimate-ly, the U.S. Supreme Court, addressedwas whether the four physician-share-holders of CGAwere employees for thepurposes of the ADAexemption.The Court first looked at the ADA’sdefinition of an employee. The Courtdescribed the ADA’s definition of employee as “nominal” and “circular.”The Court relied on the common lawdefinition of a master-servant relation-ship for guidance. This definitionhinges on whether the servant oremployee is controlled by the master oremployer. In this case, since CGAdidnot control the physicians, but rather,
VOL. CLXXIV NO. 11 INDEX 962DECEMBER 15, 2003ESTABLISHED 1878
Health Care Law
This article is reprinted with permission from the DECEMBER 15, 2003 issue of the
New Jersey Law Journal 
. ©2003 ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.
Professional Corporations Remain the MostPopular Form of Entity for Medical Practices
U.S. Supreme Court negates one disadvantage of professionalcorporations while creating uncertainties in other areas
 Hafter, an associate in the healthcare practice group at Flaster/Greenbergof Cherry Hill, is a New Jersey Mobile Intensive Care Paramedic, a certified CPR instructor and co-author of “
EMSand the Law
,” (Jones and Bartlett 2003).Greenberg, a partner in the firm, concen-trates his practice in tax and corporateservices, including health care law.
 
the physicians controlled CGA, asdirectors, the Court held that the physi-cians may not be employees.It should be noted that while theCourt used the
Clackamas
case to pro-vide guidance on how to define anemployee, the decision as to whetherthe Clackamas physician-shareholderswere ultimately employees was seen asan issue of fact that exceeded the scopeof review of the Court.The Equal EmploymentOpportunity Commission is the admin-istrative department responsible forenforcement of the ADA. Accordingly,the Court considered the EEOC’s defin-ition of an employee.In administrative reference docu-ments, the EEOC has suggested “if theshareholder-directors operate indepen-dently and manage the business, theyare proprietors and not employees; if they are subject to the firm’s control,they are employees.”In determining whether the physi-cian-shareholders operate independent-ly, the Court adopted six factors fromthe EEOC Compliance Manual. The sixfactors are:• whether the organization can hireor fire the individual or set the rules andregulations of the individual’s work;• whether and, if so, to what extent,the organization supervises the individ-ual’s work;• whether the individual reports tosomeone higher in the organization;• whether and, if so, to what extent,the individual is able to influence theorganization;• whether the parties intended thatthe individual be an employee, asexpressed in written agreements or con-tracts; and• whether the individual shares inthe profits, losses and liabilities of theorganization. 123 S. Ct. 1680.In determining the definition of anemployee, labels, as created by docu-ments such as employment agreements,no longer stand alone. The Courtadvised that the above six-factor testmust be used for such a determination.In doing so, all six factors should begiven equal consideration, and “no onefactor (should) be decisive.”Based on the records leading to theCourt’s review of 
Clackamas
, the Courtsuggested that under this inquiry, thephysician-shareholders are not likely tobe employees. However, because aproper inquiry would require fact find-ing, the Court remanded the issue to theNinth Circuit.
Six-Factor Test
On its face, the
Clackamas
holdingeliminates one disincentive for choosinga professional corporation as the form of entity for a professional practice.The six-factor test adopted by theCourt allows physicians, when they areshareholders of the professional corpo-ration, to be excluded from the employ-ee count for the purposes of ADAexemption.What is unknown, however, is theextent to which this holding will affectstatutes and regulations other than theADA.As of Oct. 16, 2003, theAdministrative SimplificationCompliance Act requires that allMedicare claims be submitted electron-ically. 42 U.S.C. 1305. The ASCAdoesallow small providers an exemptionfrom this requirement. Asmall provideris defined as a “physician, practitioner,facility or supplier (other than aprovider of services) with fewer than 10employees.”If a small provider elects to submitpaper claims and does not transmit anyprotected health information electroni-cally, the provider would not be consid-ered a covered entity under HealthInsurance Portability andAccountability Act. It is unclear as towhether the
Clackamas
holding appliesto the ASCA.Certain limitations already havebeen set on the
Clackamas
holding.Less than three months after
Clackamas
, the U.S. Tax Court distin-guished
Clackamas
in
Western Management v. Commissioner of IRS 
,T.C. Memo 2003-162 (June 3, 2003),suggesting that the
Clackamas
test forthe definition of an employee shouldnot be applied to tax issues.In
Western Management 
, a corpora-tion tried to argue that its sole share-holder/officer was not an employeeunder the
Clackamas
test and, hence,the corporation should not be requiredto pay federal employment taxes formonies received by the sole sharehold-er/officer. The U.S. Tax Court did notaccept this argument for defining anemployee.The
Clackmas
holding, implyingthat one must look past an entity’s labelto the substance of the entity, may haveserious negative implications that werenot fully realized by the Court.For example,
Clackamas
providesan incentive to a potential plaintiff topursue a claim that would otherwise bebarred by corporate immunity byattempting to pierce the corporate veil.One significant area where the corpo-rate veil may be pierced is that of minority shareholder rights.
The Corporate Veil
Traditionally, shareholders havebeen unable to bring federal discrimina-tion claims, like those under the ADAorTitle VII, against their fellow share-holders. In New Jersey, in corporationswith 25 or fewer shareholders, minorityshareholders are protected by statutefrom fraud, illegality, mismanagement,oppression or unfairness by those in
2
HEALTH CARE LAW
,
DECEMBER 15, 2003
174 N.J.L.J. 962
The six-factor test adopted in
Clackamas 
allows physi-cian-shareholders to be excluded from the employeecount for the purposes of ADA exemption.

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