Courts Split on When Companies Are Liable for False Claims by Employees

A growing legal debate over when companies can be held responsible for their employees’ false claims has created uncertainty for healthcare organizations and government contractors. Legal experts are highlighting the significant split among federal courts on how vicarious liability applies under the False Claims Act (FCA), a powerful anti-fraud statute that can result in substantial financial penalties.

The issue centers on whether organizations should face punishment for the actions of lower-level employees even when management had no knowledge of wrongdoing. This question has taken on greater importance as FCA penalties have escalated, with companies potentially facing triple damages and penalties of thousands of dollars per claim.

“The courts are deeply divided on this fundamental question,” explains Lorinda Holloway, a partner at law firm Husch Blackwell who specializes in healthcare compliance. “The difference in approach can mean millions of dollars in liability for organizations caught in FCA investigations.”

Traditionally, vicarious liability—the legal principle that holds employers responsible for employee actions during employment—applies broadly in civil cases. However, courts have been reluctant to apply this standard uniformly to punitive laws like the False Claims Act, which is designed not just to recover losses but to punish wrongdoers.

The Eleventh Circuit Court of Appeals established a particularly strict precedent in the Grand Union case, holding a company liable for isolated improper acts committed by low-level employees, despite management being completely unaware that false claims were being submitted to the government.

The rationale behind this approach, according to Holloway, is to create powerful incentives for organizations to implement robust compliance systems. “The Grand Union standard essentially tells companies they need prevention mechanisms at every level because they can’t hide behind management’s ignorance,” she notes.

However, several other circuit courts have explicitly rejected the Grand Union approach, creating a significant split in how the law is applied nationwide. These courts have ruled that when the government seeks to recover an amount substantially greater than its actual losses—as is common in FCA cases with treble damages and penalties—employers cannot be held vicariously liable for non-managerial employees’ wrongful actions unless the employer was aware of the conduct, approved it, or acted recklessly in hiring or supervising the employee.

This more restrictive approach acknowledges the punitive nature of FCA penalties and limits organizational liability to situations where there was some level of corporate knowledge or negligence involved.

The legal distinction has significant implications for healthcare organizations, defense contractors, and other businesses that regularly bill the federal government. Healthcare providers are particularly vulnerable given the volume of Medicare and Medicaid claims they submit and the complexity of billing regulations.

“Companies are caught in a difficult position,” Holloway points out. “They need to design compliance programs that would satisfy even the most stringent interpretation of liability, while operating in an environment where the rules aren’t consistently applied.”

Organizations seeking to mitigate potential liability are increasingly implementing multi-layered compliance programs that include regular audits, anonymous reporting mechanisms, and detailed documentation of oversight activities. Many are also investing in advanced data analytics to identify unusual billing patterns before they become problematic.

The split among circuit courts creates the possibility that the Supreme Court may eventually need to resolve the conflict, providing clarity on exactly when organizations can be held liable for the actions of employees who submit false claims without management knowledge.

Until then, organizations face different liability standards depending on which jurisdiction they operate in—a situation that compliance officers and legal departments must carefully navigate when designing risk management strategies.