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Banking Law

Interagency Guidance on Risks Associated with Third-Party Relationships

By Rachael L. Aspery and Robert W. Savoie, McGlinchey Stafford, PLLC

On June 6, 2023, the Board of the Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, “Agencies”) issued final joint guidance designed to help banking organizations manage risks associated with third-party relationships, including relationships with financial technology companies or “FinTechs” (“Interagency Guidance”). The Interagency Guidance replaces prior guidance issued by each Agency individually in order to promote consistency in the Agencies’ third-party risk management guidance and to clearly articulate risk-based principles for third party management.

The Interagency Guidance acknowledges that the Agencies have observed an increased number and type of third-party relationships and the benefits that third-party relationships can provide for banking organizations and consumers. To support the increase in such relationships, the Interagency Guidance describes principles and considerations for banking organizations’ sound risk management of third-party relationships, and covers risk management practices for the stages in the life cycle of third-party relationships including: planning, due diligence and third-party selection, contract negotiation, ongoing monitoring, and termination. The Interagency Guidance provided that banking organizations are tasked with identifying their critical activities and third party relationships that support these critical activities. Characteristics of critical activities include those that cause a banking organization to face significant risk if the third party fails to meet expectations, has significant customer impacts, or has significant impact on a banking organization’s financial condition or operations.

While acknowledging that not all relationships present the same level of risk and require the same level of oversight, the Interagency Guidance emphasizes that banks need to ensure their risk management programs provide strategies in managing third-party relationships, including bank partnerships with FinTechs, and such programs must be rightsized to the complexity, nature, and size of the institution. To do so, banks may prescribe certain requirements on the FinTech or other third party by contract in order to mitigate the bank’s risk of noncompliance with applicable law. These can include but are not limited to: independent reviews of the third party’s business and operations, testing and auditing of the third party, requiring notification of significant strategic operational changes, specifying reports to be received by the third party, and escalation of issues and remediation of such issues.

We note that the Interagency Guidance did not directly address true lender issues or bank partnership programs, continuing a pattern of not taking an explicit position on state true lender arguments. Nevertheless, the Interagency Guidance suggests that the Agencies are not opposed to bank partner programs in principle. Therefore, FinTechs and other businesses engaged in third-party relationships with financial institutions should be aware of the Agencies’ emphasis on risk management programs, the role that third parties play, and the compliance obligations banks have as they pursue bank partnership programs. The Interagency Guidance reaffirms that the use of third-party relationships does not absolve a banking organization of its obligation to operate in a safe and sound manner and comply with all applicable laws and regulations.

Consumer Finance Law

Eleventh Circuit Calls Out CFPB’s Conduct

By Jim Sandy, McGlinchey Stafford, PLLC

In an unusually blunt decision, the 11th Circuit Court of Appeals affirmed a district court’s decision to dismiss various claims brought by the Consumer Financial Protection Bureau (“CFPB”) for “violating the district court’s clear orders and derailing multiple depositions… .”

The case began as an action by the CFPB against eighteen defendants for engaging in or assisting a purported fraudulent debt collection scheme in violation of the Consumer Financial Protection Act (“CFPA”) and the Fair Debt Collection Practices Act (“FDCPA”). As the 11th Circuit noted, the CFPB’s “problematic” conduct began when various defendants attempted to depose a representative of the Bureau. As the 11th Circuit noted, this “problematic” conduct that ultimately led the district court to dismiss the lawsuit against various defendants as a discovery sanction included:

  • objecting to a deposition altogether on the basis that the CFPB had already provided responses to interrogatories;
  • lodging over seventy work product objections during the first deposition, even objecting to fact-based questions the district court had ordered answered;
  • utilizing “memory aids” from which the CFPB’s witness read verbatim (this included reading one such memory aid for fifty-eight minutes and then advising the parties that there were another ninety-three pages to go); and
  • refusing to identify or admit any “exculpatory facts” existed whatsoever.

Following these actions, a hearing was held with the district court, which reiterated guidance on how the deposition(s) should proceed and what type of questions the Bureau was expected to respond to in further depositions. Despite this, the CFPB continued to engage in the same “problematic” conduct at subsequent depositions. Upon motion by various defendants, the district court agreed to strike the CFPB’s claims against them as a discovery sanction and dismissed the case. The CFPB appealed, and the 11th Circuit ultimately affirmed the district court’s decision, finding that its instructions on deposition-related conduct were definite and clear, they were conveyed to the Bureau on multiple occasions, and the Bureau disregarded the same repeatedly, which, the 11th Circuit found, was sufficient egregious conduct to warrant the severe sanction of dismissal and not second-guess the district court’s decision.

CFPB Files Brief in Appeal of District Court Ruling that ECOA Does Not Apply to Prospective Applicants for Credit

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On June 14, 2023, the CFPB filed its brief as appellant in Consumer Financial Protection Bureau v. Townstone Financial, Inc., which is pending in the Seventh Circuit. The Bureau’s appeal arose from the February 3 dismissal of its lawsuit against Townstone and Townstone’s owner by the U.S. District Court for the Northern District of Illinois. In that lawsuit, the Bureau alleged that the defendants violated the Equal Credit Opportunity Act (“ECOA”) and its implementing Regulation B by engaging in unlawful racial discrimination, including redlining, through marketing practices that the Bureau alleged would serve to discourage prospective Black applicants from applying for mortgage loans with Townstone. In dismissing the lawsuit, the district court held that the text of ECOA, which prohibits discrimination “against any applicant” for credit, 15 U.S.C. § 1691(a), did not permit an interpretation that the prohibition includes discrimination against prospective applicants.

In its Seventh Circuit brief, the Bureau emphasizes that Regulation B has prohibited statements that would discourage prospective applicants from applying for credit on a discriminatory basis since it was first issued by the Federal Reserve in 1975, and that Congress has repeatedly amended ECOA without expressing disagreement with this interpretation. The Bureau also argues that the Regulation B approach is consistent with, and authorized by, language in ECOA directing its implementing agency to issue regulations that “in the judgment of the [agency] are necessary or proper to effectuate the purposes” of the act. 15 U.S.C. § 1691b.

On June 22, the Federal Trade Commission announced that it had filed an amicus brief in the case in support of the Bureau’s position. 

CFPB Submits Comment in Response to Request for Information on Automated Worker Surveillance

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On June 20, 2023, the CFPB submitted a comment in response to the White House Office of Science and Technology Policy’s request for information on the ways in which automated tools are being used to surveil and manage workers. The request for information broadly sought comments about the prevalence, purposes, deployment, and impacts of these automated tools, as well as opportunities for federal agencies to ensure that the tools do not undermine worker welfare.

In its comment letter, the Bureau outlined the protections for consumer data contained in the Fair Credit Reporting Act (“FCRA”), and expressed concern about “increasingly invasive worker surveillance products.” In particular, the Bureau explained its position that, because the FCRA applies whenever a consumer report, broadly defined, is used for “employment purposes,” 15 U.S.C. § 1681a(d)(1), the statute could apply to information that is used to evaluate employees on an ongoing basis, and not just to information that is used to make initial hiring decisions. The Bureau also noted a growing number of complaints regarding companies that provide information to prospective employers, which “raises significant questions about the pervasiveness of legal noncompliance by companies that focus on providing information to employers.”

Bureau Issues Semi-Annual Report to Congress as Director Chopra Testifies before Senate and House

By Eric Mogilnicki and B. Graves Lee, Covington & Burling LLP

On June 8, 2023, the CFPB issued its Semi-Annual Report to Congress covering Bureau activities for the period beginning April 1, 2022, and ending September 30, 2022. In the Report, the Bureau describes significant rules and orders, analyzes trends from its consumer complaint database, lists public supervisory and enforcement actions, assesses significant actions by state authorities relating to federal consumer financial law, describes the Bureau’s fair lending efforts, analyzes Bureau workforce and contracting diversity, and provides an overview of the Bureau’s budget.

On June 13 and 14, 2023, CFPB Director Rohit Chopra testified before the Senate Banking Committee and the House Financial Services Committee. In his written testimony, Director Chopra promoted the Bureau’s promulgation of rules, guidance, and advisory opinions; supervision of nonbank financial firms; enforcement efforts directed at repeat offenders; handling of consumer complaints; and work regarding technology and artificial intelligence in the financial services sector. In his oral testimony, Director Chopra fielded lawmakers’ questions on the Bureau’s credit card late fee proposal and other “junk fee” initiatives (see the CFPB’s “Junk fees” page), the Bureau’s April 2023 acknowledgment of an employee data breach, and the role of artificial intelligence in the financial sector.

Rulemaking Agenda Forecasts CFPB Activity on Fees, Registries, Nonbank Supervision, and Regulation V Reform

By Eric Mogilnicki and B. Graves Lee, Covington & Burling LLP

The Bureau has issued its Spring 2023 Rulemaking Agenda, which covers rulemakings the Bureau expects to enter the pre-rule, proposed rule, and final rule stages during the period from June 1, 2023, through May 31, 2024. Among the rulemakings on the agenda is a rule titled “Supervision of Larger Participants in Consumer Payment Markets,” for which the Bureau states it “is considering issuing additional regulations to define further the scope of the CFPB’s nonbank supervision program” and will propose a rule on the topic next month. The Agenda also states that the Bureau is contemplating new rules surrounding insufficient funds fees and overdraft fees as well as amendments to the regulations implementing the Fair Credit Reporting Act. Furthermore, the Agenda forecasts an October 2023 final rule for the Bureau’s credit card late fee proposal, an October 2023 proposed rule to implement Dodd-Frank section 1033’s mandate surrounding consumer access to financial records, and November 2023 final rules for its two proposed registry rules (one regarding nonbanks subject to consumer financial enforcement orders, and the other for nonbanks regarding certain form contract language).

U.S. Supreme Court Declines to Weigh in on ALJ Issue

By Eric Mogilnicki and B. Graves Lee, Covington & Burling LLP

On June 12, 2023, the U.S. Supreme Court denied a petition for certiorari in Integrity Advance, LLC et al. v. CFPB. The case arose out of a 2015 Bureau enforcement action against a payday lender and its owner regarding alleged violations of the Truth in Lending Act, Electronic Fund Transfer Act, and Consumer Financial Protection Act. In a 2016 administrative proceeding, an administrative law judge borrowed by the CFPB from the U.S. Coast Guard ruled that the company and the owner must pay $38 million in restitution and a combined $13.5 million in penalties. In 2018, the U.S. Supreme Court held in Lucia v. SEC that administrative law judges must be properly appointed under the Appointments Clause. In response, the Bureau held a second hearing, in which a properly appointed administrative law judge again ruled in favor of the Bureau based on a review of the record of the initial proceeding. This proceeding prompted an order from the CFPB Director imposing $38.5 million in restitution and $12.5 million in penalties. The company and owner appealed the order to the U.S. Court of Appeals for the Tenth Circuit, which sided with the Bureau in holding that the second proceeding provided adequate due process. As is customary, the Supreme Court did not explain its reasoning in this week’s order denying the certiorari petition.

Director Chopra Discusses Use of Bank AI Chatbots in Interview

By Eric Mogilnicki and B. Graves Lee, Covington & Burling LLP

In a June 13, 2023, interview with Fox News, CFPB Director Rohit Chopra discussed banks’ use of artificial-intelligence-based chatbots in customer service contexts. Echoing a CFPB Issue Spotlight earlier in the month, Director Chopra warned of potential risks to consumers who encounter these chatbots, stating, “I really worry that we’re shifting away from relationship banking into this algorithmic banking, where maybe there’s no access to a human at all.” He also cited risks surrounding the protection of consumers’ financial data they divulge to chatbots.

CFPB Orders Medical Debt Collection Company to Cease Certain Collection Practices and Pay $1.675 Million Penalty

By Mark Rooney and Rob Tilley, Hudson Cook, LLP

On June 8, 2023, the CFPB filed an administrative consent order against a medical debt collection company headquartered in Indianapolis, Indiana. In the order, the CFPB detailed several alleged violations of the Fair Credit Reporting Act (“FCRA”) and its implementing regulations, the Fair Debt Collection Practices Act (“FDCPA”), and the Consumer Financial Protection Act of 2010 (“CFPA”). The order rested on three main allegations by the CFPB.

First, the CFPB found that the Company did not obtain sufficient information to investigate disputes from consumers about the validity of the debts that the Company collected. Rather, the Company’s written policies and procedures instructed employees only to compare the consumer’s identifying information—including their name, date of birth, and Social Security Number—to the data in the Company’s records, regardless of the nature of the consumer’s dispute. As a result, the Company did not have any procedures to determine whether the information that it received from its clients was accurate. Further, the Company did not have any procedures for investigating the specific allegations in a consumer’s dispute, beyond confirming the consumer’s personally identifiable information matched the information in the Company’s records.

Second, the Company “used an automated dispute-resolution program” to handle approximately 30% of its indirect disputes without any human involvement. This automated program similarly compared the information that the Company furnished to consumer reporting agencies to the Company’s internal records, without conducting any additional investigation. The Company failed to perform random reviews or audits of the automated processes, as required by its written policies.

Third, the Company sent debt collection letters after receiving consumer disputes “about the validity or accuracy of the purported debt,” without receiving any substantiation for the debt. The Company’s written policies and procedures provided in many cases that debt collection activities should continue “while [the Company] waits for documentation sufficient to substantiate the debt.”

In order to resolve the case, the Company agreed to the following remedial measures:

  • The Company will refund any amounts consumers paid on an unverified debt after receiving an allegedly unlawful collection letter.
  • The Company will pay $1.675 million in penalties to the CFPB.
  • The Company will voluntarily be subject to the CFPB’s supervisory authority.
  • The Company will establish and implement written policies and procedures to “ensure that it conducts reasonable investigations of disputes about information furnished to” consumer reporting agencies.
  • The company will establish and implement internal controls to identify practices that compromise the accuracy or integrity of information furnished to consumer reporting agencies.

Ninth Circuit Upholds Nevada S.B. 248 Limiting Medical Debt Collection Practices

By Olivia (Liv) Lawless, Pilgrim Christakis LLP

On June 15, 2023, the Ninth Circuit in Aargon Agency, Inc., v. O’Laughlin affirmed the denial of a preliminary injunction sought by several debt collection companies to block Nevada’s Senate Bill 248 (“S.B. 248”). The debt collection companies argued S.B. 248 is unconstitutionally vague, violates the First Amendment, and is preempted by the FCRA and the FDCPA. Nevada enacted S.B. 248 in response to the COVID-19 pandemic and it requires debt collectors to send debtors a written notification 60 days before attempting to collect medical debt.

The court first addressed the debt collectors’ argument that S.B. 248 is unconstitutionally vague because it does not define the phrase “any action to collect a medical debt.” However, the Ninth Circuit agreed with the district court that the phrase is not vague and, if there were any doubt, S.B. 248’s implementing regulations specifically define the term and provide examples of acts that constitute “actions to collect a medical debt.” The Ninth Circuit also rejected the debt collectors’ argument that S.B. 248 violates the First Amendment. The court determined that S.B. 248 regulates protected “commercial speech,” but it does not violate the First Amendment because Nevada has a substantial interest in protecting medical debtors, S.B. 248 directly advances that interest, and S.B. 248 does not regulate more than necessary. Finally, the court found that S.B. 248 is not preempted by the FCRA nor the FDCPA. Regarding the FCRA, the court found that S.B. 248 is not preempted because it only restricts the timing of when medical debt information can be reported and does not “concern” the FCRA’s requirements to furnish accurate information or investigate disputes. The court also found that S.B. 248 is not preempted by the FDCPA because it provides greater protection than the federal statute and “the notification contemplated in … S.B. 248 is not an attempt to collect a debt” that is regulated by the FDCPA.

SCOTUS Resolves Circuit Split on Stays Pending Appeal of Arbitration Decision

By Jim Sandy, McGlinchey Stafford, PLLC

Resolving a circuit split, the Supreme Court ruled that litigation, including discovery, is automatically stayed when a party appeals the denial of a motion to compel arbitration under the Federal Arbitration Act (FAA).

Coinbase, Inc. v. Bielski was a putative class action brought against an online currency platform for allegedly failing to replace funds fraudulently taken from users’ accounts. Coinbase, under the underlying user agreements, sought to compel arbitration of the putative class action. The district court denied the motion, and so Coinbase appealed. At the same time, it sought a stay of all litigation, including discovery, pending its interlocutory appeal. The district court denied the stay request, and the Ninth Circuit affirmed that decision. The Supreme Court agreed to hear Coinbase’s appeal.

In a 5–4 decision, Justice Kavanaugh, writing for the majority, found that while §16 of the FAA (which permits interlocutory appeals of a denial of an arbitration motion) does not explicitly say district court proceedings must be stayed pending appeal, the history and background of the FAA, along with Supreme Court precedent, mandate such an outcome. As Justice Kavanaugh noted:

The common practice of staying district court proceedings during the pendency of an interlocutory appeal taken under §16(a) reflects common sense. If the district court could move forward with pre-trial and trial proceedings while the appeal on arbitrability was ongoing, then many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost—even if the court of appeals later concluded that the case actually had belonged in arbitration all along. Absent a stay, parties also could be forced to settle to avoid the district court proceedings (including discovery and trial) that they contracted to avoid through arbitration.

Justice Kavanaugh also noted that this common-sense approach comports with Congress’s common practice. When Congress wants to authorize an interlocutory appeal and automatically stay litigation, the Justice noted, it need not say anything specific about a stay. Conversely, when Congress intends not to permit an automatic stay pending an interlocutory appeal, it specifically says as much.

The Court likewise rejected the arguments to the contrary raised by the appellee. For instance, Justice Kavanaugh noted that automatically staying litigation pending appeal would not result in unwarranted delay or encourage frivolous appeals as courts of appeals possess numerous tools to prevent such gamesmanship. He also rejected the claim that such a ruling created a “special” arbitration rule, noting that it “simply subjects arbitrability appeals to the same stay principles that courts apply in other analogous contexts where an interlocutory appeal is authorized.”

Justice Jackson led the dissent and noted that the majority approach impedes the discretionary decision-making conferred upon a district court to determine whether a stay pending an interlocutory appeal is proper. Justice Jackson further contended that the majority opinion also “invents” a new rule specifically for arbitration-related litigation, which, she argued, “has such significant implications for federal litigation that the majority itself shies away from the Pandora’s box it may have opened.”

Bielski has significant implications for defendants seeking to compel arbitration of putative class actions. Now, if a defendant is unsuccessful in compelling arbitration, it can seek interlocutory review of that decision without having to worry about handling expensive (and all-encompassing) discovery during the pendency of the appeal.

Eleventh Circuit Confirms Creditor Conducted Reasonable Investigation into Dispute Involving Identity Theft

By Gregg D. Stevens and Alyssa Weiss, McGlinchey Stafford, PLLC

On June 8, 2023, the Eleventh Circuit affirmed summary judgment for Chase on a Fair Credit Reporting Act (“FCRA”) claim arising from a credit dispute involving alleged identity theft.

In Milgram v. Chase Bank USA, N.A., plaintiff Shelly Milgram sued Chase under the FCRA for its alleged failure to conduct a reasonable investigation into whether she was responsible for the debt incurred on a Chase credit card. The crux of Milgram’s dispute is that her employee opened a Chase credit card in Milgram’s name, incurred substantial debt on the card, and used Milgram’s bank accounts to make payments. Milgram reported the fraud to Chase and provided proof that her employee had been adjudicated guilty, but Chase declined to characterize the charges as illegitimate because it determined that Milgram had vested apparent authority in her employee to use the credit card.

The district court granted summary judgment for Chase based upon its finding that Chase’s investigation into Milgram’s dispute was reasonable. On appeal, the Eleventh Circuit agreed that no genuine issue of material fact existed regarding whether Chase’s investigation was unreasonable as a matter of law. The court reasoned that although the criminal judgment showed the employee lacked actual authority to incur charges on Milgram’s behalf, it did not impact Chase’s conclusion that the employee had apparent authority because the automatic monthly payments that paid off the card came from Milgram’s account. The court further concluded that Milgram failed to explain what Chase should have done differently to affect its finding of apparent authority. Accordingly, the district court’s entry of summary judgment in favor of Chase was affirmed.

Environmental Law

EPA Pushes Back PFAS Hazardous Substance Designation

By Michael R. Blumenthal, McGlinchey Stafford, PLLC

On June 13, 2023, the Environmental Protection Agency (EPA) released its Spring 2023 Unified Agenda, which pushes back the estimated publication of a final rule designating certain per- and polyfluoroalkyl substances (PFAS) as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Specifically, the final rule on PFAS CERCLA designation for perfluorooctanoic acid (PFOA) and perfluorooctane sulfonic acid (PFOS) has been delayed from August 2023 to February 2024.

The EPA’s Spring 2023 Unified Agenda also delayed the addition of PFAS to the Toxics Release Inventory (TRI). The EPA is now targeting to publish its proposed rule adding PFAS to the TRI in December 2023 and finalize the rule in November 2024, a delay of seven and nine months, respectively.

The designation of PFAS as a hazardous substances under CERCLA would establish liability for current and former owners and operators of facilities where hazardous wastes were released or disposed, as well as generators and arrangers of disposal or transportation of hazardous substances and transporters of hazardous substances. This means that any entity handling designated PFAS could become liable for the recovery and remediation costs of PFAS releases or threatened releases and would need to comply with federal law on transportation and disposal of hazardous waste. The delay in the CERCLA designation presents several implications, including the potential for broader hazardous substances designations and more time for congressional action.

The delay also gives Congress more time to respond to the proposed designation and offer statutory protections for water and wastewater utilities and other passive receivers such as solid waste disposal facilities and composting facilities. The delay may also indicate that EPA is taking time to further develop its CERCLA Enforcement Discretion Policy. In the event that Congress does not provide a statutory exemption for water systems and other passive receivers, the policy would clarify EPA’s intention to focus enforcement of the new CERCLA designations on PFAS manufacturers and those whose conduct releases significant amounts of PFAS into the environment. The policy is expected to recommend non-enforcement against passive receivers.

While the delay could spell relief for passive receivers, it is an unwelcome extension for some landowners and prospective purchasers of land that potentially contains PFAS. In the interim, environmental site assessments will likely increasingly evaluate PFAS, and site cleanup decisions may be informed by EPA’s list of risk-based regional screening values.

Other upcoming PFAS regulations on track include the PFAS National Primary Drinking Water Regulation rulemaking; an anticipated proposed rulemaking to add PFOA, PFOS, perfluorobutane sulfonate (PFBS), and GenX (a subset of PFAS chemicals) to the Resources Conservation and Recovery Act (RCRA) list of hazardous constituents; and a significant new use rule under the Toxic Substances Control Act (TSCA) that would require PFAS manufacturers and importers to notify EPA before resuming the manufacturing or import of any PFAS for a significant new use. All of these upcoming PFAS regulations will create far-reaching effects once finalized.

Labor and Employment Law

In Atlanta Opera Decision, NLRB Reinstates Earlier Standard for Determining Whether Workers Are Employees or Independent Contractors

By Kimberly Lowe

On June 13, 2023, the National Labor Relations Board issued its Decision on Review and Order of The Atlanta Opera, Inc. and Make-Up Artists and Hair Stylists Union, Local 798, IATSE. Case 10-RC-276292 (“Atlanta Opera”) clarifies the approach the NLRB takes when assessing whether workers are employees or independent contractors for purposes of determining if the worker is covered under Section 2(3) of the National Labor Relations Act. While the penultimate question in The Atlanta Opera case—are makeup artists, wig artists, and hairstylists who work for the Atlanta Opera on its productions employees or independent contractors—is answered on page 2 of the decision (they are employees), the bulk of the decision focuses on the NLRB’s decision to overrule the standard for decision-making articulated in SuperShuttle DFW, Inc., 367 NLRB No. 75 (2019) (“SuperShuttle”) and to reinstate the NLRB’s standard articulated in FedEx Home Delivery, 361 NLRB 610 (2014) (“FedEx II”).

With Atlanta Opera the NLRB confirms that the following multi-factors articulated in the Section 220 of the Restatement (Second) of Agency to determine if a worker is a “servant’ or independent contractor are the factors used by the NLRB to make a determination:

(a) the extent of control which, by the agreement, the master may exercise over the details of the work;

(b) whether or not the one employed is engaged in a distinct occupation or business;

(c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;

(d) the skill required in the particular occupation;

(e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;

(f) the length of time for which the person is employed;

(g) the method of payment, whether by the time or by the job;

(h) whether or not the work is a part of the regular business of the employer;

(i) whether or not the parties believe they are creating the relation of master and servant; and

(j) whether the principal is or is not in business.

This is plus additional NLRB’s historic considerations of whether a putative contractor has: (i) a “significant entrepreneurial opportunity of gain or loss” as articulated in Dial-A-Mattress Operating Corp., 326 NLRB 884, 891 (1998); (ii) had the ability to work for other companies; (iii) could hire their own employees; and (iv) had a proprietary interest in their work, with all of the factors of the relationship to be weighed and assessed equally, with no one factor being decisive. In the 2014 FedEx II decision, the then-NLRB affirmed that all of the factors are equal. In the 2019 SuperShuttle decision, meanwhile, the then-NLRB indicated that the “entrepreneurial opportunity” was an important “animating principle by which to evaluate” the factors, thus adding more weight to this factor than the others. With Atlanta Opera, the now-NLRB provides an exhaustive discussion on why it was overturning precedence—basically that the SuperShuttle decision cannot be squared with precedent and therefore its decision in Atlanta Opera is following precedent. The examination of the factors with respect the workers in question in the Atlanta Opera decision becomes secondary to the struggle to return to precedent from a prior administration.

Tax Law

IRS Provides Relief for Additions to Tax for Underpayment of Estimated Corporate Alternative Minimum Tax

By Timothy M. Todd, Ph.D., Associate Dean for Faculty Development & Scholarship and Professor of Law, Liberty University School of Law

In Notice 2023-42, the IRS provided relief for addition to tax under § 6655 for the new corporate alternative minimum tax (CAMT). The Inflation Reduction Act (IRA) amended § 55 to provide for a corporate alternative minimum tax based on adjusted financial statement income; this new tax starts for an applicable corporation for tax years that begin after December 31, 2022.

For its part, § 6655 provides that corporations generally need to pay estimated income taxes over four installments. Under § 6655(a), there is also an addition to tax for failure to make sufficient and timely estimated payments.

In the Notice, the Service announced that “the IRS will waive the addition to tax under § 6655 with respect to a corporation’s CAMT liability under § 55 for any Covered CAMT Year.” A Covered CAMT Year is defined as “a taxable year that begins after December 31, 2022, and before January 1, 2024.” Consequently, for a Covered CAMT Year, “the corporation’s required installments of estimated tax need not include amounts attributable to its CAMT liability under § 55 to prevent the imposition of an addition to tax under § 6655.” However, the Service did caution that other sections may apply if the § 55 payment is not made when due (e.g., § 6651).

IRS Provides Guidance on Wellness Payments under § 125 Cafeteria Plans

By Timothy M. Todd, Ph.D., Associate Dean for Faculty Development & Scholarship and Professor of Law, Liberty University School of Law

A recent Chief Counsel Advice addressed the tax consequences of wellness indemnity payments. The facts were that an employer provided comprehensive health coverage for its employees through a group health insurance policy. In addition, the employer also provided a fixed-indemnity health insurance policy. This policy was paid through employee contributions under a § 125 cafeteria plan and offered employees several benefits. One of the benefits was a fixed payment ($1,000 per month) if the employee participated in certain wellness and health activities (the “wellness indemnity benefit”).

The CCA advised that the wellness indemnity benefit was includible in the gross income of the employee if the employee had no unreimbursed medical expenses related to the payment, even though the premium was paid through a cafeteria plan salary reduction. This is based, in part, on § 105(b), which does not exclude amounts that the taxpayer is entitled to receive regardless of incurring medical care expenses.

For Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) purposes, moreover, because the payment is made in connection with the employee’s employment, it also constitutes “wages” for employment tax purposes.

Relatedly, because the payments are “wages,” it also triggers federal income tax withholding for the payments.



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