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Business Owners as Whistleblowers

Business Owners as Whistleblowers

Posted by Frank Steinberg | Jul 15, 2006 | 0 Comments

In our post of July 11 we promised you more on the New Jersey Supreme Court's decision in Feldman v. Hunterdon Radiological Associates. The case addresses the important question whether a physician shareholder and director of a medical group, is an “employee” and thus protected by CEPA, New Jersey's whistleblower law. The case is equally applicable to other professionals, like accountants, architects, and lawyers who practice in professional associations.

So what's the answer? “It depends.”

Imagine that.

Here are the facts.

Hunterdon Radiological Associates

is comprised of physicians who practice radiology and provide magnetic resonance imaging services to the Hunterdon Medical Center (HMC) in buildings annexed to the hospital. Plaintiff began working at HRA on a part-time basis in 1978 and became a shareholder-director in 1992. Dr. Mark S. Malzberg joined the group in 1993 and became managing partner in 2000. When the events underlying this appeal occurred, there were six shareholder-director physicians at HRA: Dr. Malzberg, Dr. Sophia Yeh, Dr. Alice Sprenger, Dr. Martha Nowell, Dr. Boggiano, and plaintiff.

Plaintiff shared equally with the other shareholder-directors in HRA's profits and losses and had an equal vote in significant business decisions. The managing partner and an office manager handled administrative matters pertaining to HRA's day-to-day operations.

The specific terms of plaintiff's working relationship with HRA were contained in a 1993 “Employment and Stock Purchase Agreement” (Agreement).

In the year 2000,

Dr. Feldman plaintiff became chairperson of medical imaging at HMC, at which point she began to receive complaints from other physicians about the quality of Dr. Yeh's reading of x-rays. According to plaintiff, the other shareholders of the firm were well aware of and discussed Dr. Yeh's deficiencies but were loath to take action against her. Plaintiff took action by way of her role in the re-credentialing process at HMC, requiring Dr. Yeh to attend remedial education courses. According to plaintiff, Dr. Yeh did not cooperate on her own and, at plaintiff's insistence, HRA formally asked Dr. Yeh to pursue further education to address limitations in her performance. Plaintiff also sent a letter to the President of HMC recommending that Dr. Yeh be placed on probation pending completion of that remedial education. However, no suitable formal educational programs could be located and the shareholder-directors split over what should be done next.

Plaintiff thought strong action was required but a majority of the others did not. According to plaintiff, the work environment at HRA then became very hostile and she was marginalized by the group.

In late 2001 Dr. Feldman gave notice of her withdrawal from HRA. She was unable to find comparable employment and took another job that paid about $245,000 less than she made with HRA.

The trial court dismissed Dr. Feldman's whistleblower claim, but the Appellate Division reversed and reinstated it. This was the posture in which the case was presented to the Supreme Court, with the sole issue being whether Dr. Feldman was an employee.

The Supreme Court looked first to CEPA's two-part definition of “employee”: “any individual who performs services for and under the control and direction of an employer for wages or other remuneration.” Half of the question was easily answered. “Plaintiff clearly satisfies part of that definition to the extent that she performed work as a radiologist for HRA in return for an annual salary, thus rendering services for remuneration.”

That left the crucial question: “whether, in light of her status as a shareholder-director, plaintiff was sufficiently subject to HRA's ‘control and direction' that she could reasonably be considered an employee rather than an employer.”

The court reviewed a number of alternative approaches to the issue that had been used by other courts in other kinds of civil rights cases. (We'll spare you the details.)

Ultimately, the court adopted the approach used by the United States Supreme Court to decide Clackamas Gasroenterology Associates v. Wells, an ADA case, in 2003. The court looked to a series of factors to determine “the party's true power and influence within the organization.” Each case is to be decided on its own merits, and no one factor is decisive, although the court hinted that the fourth Clackamas factor — the extent to which someone can influence the organization — is the critical one.

Applying the new test to Dr. Fledman's CEPA claim, the court found that she had equal influence with the other shareholder/directors, and by dint of her position as radiology department chairman, may have had more influence than the others. “Her power over the direction of HRA was at least as significant as that of any other member.” She simply was unable to convince her fellow shareholder/directors of her position about Dr. Yeh. That fact did not convert her into an employee for CEPA purposes. Thus, the court reversed the Appellate Division and dismissed the claim.

Feldman teaches us that labels are not the decisive factor to determine “employee” status. Like Dr. Feldman, one can have an “employment agreement” without being an employee.

And in the professions, where there is by definition a concern with exercising professional judgment in the interest of the public and a concomitant need to be concerned to be concerned with the competence of all members of an organization, the structure of the organization needs to be established with an eye towards possible CEPA liability.

About the Author

Frank Steinberg

Frank is the founder and principal of Steinberg Law, LLC. A Jersey boy born and bred, he focuses on employment litigation and counseling, business litigation,  and aviation law. Following law school and a clerkship in the federal district court Frank spent his early career with large litigation ...


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