Category: Administrative & Regulatory

DOL Announces New Independent Contractor Rule

On January 9, 2024, the United States Department of Labor (“DOL”) announced a new rule, effective March 11, 2024, that could impact countless businesses that use independent contractors. The new rule establishes a six-factor analysis to determine whether independent contractors are deemed to be “employees” of those businesses, and thus imposes obligations on those businesses relating to those workers including:  maintaining detailed records of their compensation and hours worked; paying them regular and overtime wages; and addressing payroll withholdings and payments, such as those mandated by the Federal Insurance Contributions Act (“FICA” for Social Security and Medicare), the Federal Unemployment Tax Act (“FUTA”), and federal income tax laws. Further, workers claiming employee status under this rule may claim entitlement to coverage under the businesses’ group health insurance, 401(k), and other benefits programs.

The DOL’s new rule applies to the federal Fair Labor Standards Act (“FLSA”) which sets forth federally established standards for the protection of workers with respect to minimum wage, overtime pay, recordkeeping, and child labor. In its prefatory statement that accompanied the new rule’s publication in the Federal Register, the DOL noted that because the FLSA applies only to “employees” and not to “independent contractors,” employees misclassified as independent contractors are denied the FLSA’s “basic protections.”

Accordingly, when the new rule goes into effect on March 11, 2024, the DOL will use its new, multi-factor test to determine whether, as a matter of “economic reality,” a worker is truly in business for themself (and is, therefore, an independent contractor), or whether the worker is economically dependent on the employer for work (and is, therefore, an employee).

While the DOL advises that additional factors may be considered under appropriate circumstances, it states that the rule’s six, primary factors are: (1) whether the work performed provides the worker with an opportunity to earn profits or suffer losses depending on the worker’s managerial skill; (2) the relative investments made by the worker and the potential employer and whether those made by the worker are to grow and expand their own business; (3) the degree of permanence of the work relationship between the worker and the potential employer; (4) the nature and degree of control by the potential employer; (5) the extent to which the work performed is an integral part of the potential employer’s business; and (6) whether the worker uses specialized skills and initiative to perform the work.

In its announcement, the DOL emphasized that, unlike its earlier independent contractor test which accorded extra weight to certain factors, the new rule’s six primary factors are to be assessed equally. Nevertheless, the breadth and impreciseness of the factors’ wording, along with the fact that each factor is itself assessed through numerous sub-factors, make the rule’s application very fact-specific. For example, through a Fact Sheet the DOL recently issued for the new rule, it explains that the first factor – opportunity for profit or loss depending on managerial skill – primarily looks at whether a worker can earn profits or suffer losses through their own independent effort and decision making, which will be influenced by the presence of such factors as whether the worker: (i) determines or meaningfully negotiates their compensation; (ii) decides whether to accept or decline work or has power over work scheduling; (iii) advertises their business, or engages in other efforts to expand business or secure more work; and (iv) makes decisions as to hiring their own workers, purchasing materials, or renting space. Similar sub-factors exist with respect to the rule’s other primary factors and are explained in the DOL’s Fact Sheet.

The rule will likely face legal challenges by business groups. Further, according to the online newsletter of the U.S. Senate Health, Education, Labor and Pensions Committee, its ranking member, Senator Bill Cassidy, has indicated that he will seek to repeal the rule. Also, in the coming months, the United States Supreme Court is expected to decide two cases that could significantly weaken the regulations issued by federal agencies like the DOL’s new independent contractor rule, Loper Bright Enterprises v. Raimondo and Relentless Inc. v. U.S. Dept. of Commerce. We will continue to monitor these developments.1

In the meantime, we recommend that businesses engaging or about to engage independent contractors take heed. Incorrect worker classification exposes employers to the FLSA’s significant statutory liabilities, including back pay, liquidated damages, attorneys’ fees to prevailing plaintiffs, and in some case, fines and criminal penalties. Moreover, a finding that an independent contractor has “employee” status under the FLSA may be considered persuasive evidence of employee status under other laws, such as discrimination laws. Additionally, existing state law tests for determining employee versus independent contractor status must also be considered.

1 The DOL’s independent contractor rule is not the only new federal agency rule being challenged. On January 12, 2024, the U.S. House of Representatives voted to repeal the NLRB’s recently announced joint-employer rule, which we discussed in our Client Alert of November 10, 2023.

Eric Moreno contributed to this article.

© Copyright 2024 Sills Cummis & Gross P.C.
For more on the Independent Contractor Rule, visit the NLR Labor & Employment section.

OSHA and NLRB Set Forth MOU to Strengthen Protections for the Health and Safety of Workers: A 2024 Outlook

On October 31, 2023, the National Labor Relations Board (NLRB) and Occupational Safety and Health Administration (OSHA) entered into a Memorandum of Understanding (MOU) to strengthen their interagency partnership. The purpose of this partnership is to establish a process for information sharing, referrals, training, and outreach between the agencies. Additionally, the agencies wish to address certain anti-retaliation and whistleblowing issues through this collaboration.

Since 1975, the NLRB and OSHA have engaged in cooperative efforts during investigations. According to NLRB General Counsel Jennifer Abruzzo and OSHA Assistant Secretary Doug Parker, the MOU seeks to strengthen this interoffice coordination in an effort to provide greater protection for workers to speak out on unsafe working conditions without fear of punishment or termination.

Exchange of Information

According to the MOU, the NLRB and OSHA “may share, either upon request or upon the respective agency’s own initiative, any information or data that supports each agency’s enforcement mandates, whether obtained during an investigation or through any other sources.” This information may include complaint referrals and information in complaint or investigative files. The MOU notes that this information will be shared only if it is relevant or necessary to the recipient agency’s enforcement responsibilities and ensures that the sharing of information is compatible with the purposes of the agency that is collecting the records.

For example, if OSHA learns during an investigation that there are potential victims of unfair labor practices who have not filed a complaint with the NLRB, OSHA will explain the employees’ rights and provide them with the NLRB’s phone number and web address. Additionally, if an employee files with OSHA an untimely complaint of retaliation, OSHA may then advise the employee to file a complaint with the NLRB, because the NLRB has a six-month time limit for filing such complaints whereas OSHA’s time limit is only 30 days. As a result, employers may be facing both agencies during an investigation.

Coordinated Investigations and Enforcement

The NLRB and OSHA will determine whether to conduct coordinated investigations and inspections in order to facilitate appropriate enforcement actions. If coordinated investigations occur and there are overlapping statutory violations, each agency may take relevant enforcement actions. In practice, employers should assume that if either agency is conducting an investigation into alleged retaliation, that agency will consider involving the other.

Takeaways for Employers

Heading into 2024, employers can expect to see more interagency coordination between the NLRB and OSHA during investigations. While the two agencies remain separate, there is a clear entanglement of enforcement action as the NLRB seeks to increase federal agency collaboration. As such, employers may presume that information collected by one agency will be provided to the other. As the agencies seek to increase worker protection across the board, employers will want to ensure that their management personnel are trained and up-to-date on the anti-retaliation and whistleblowing provisions of the Occupational Safety and Health Act and the National Labor Relations Act.

© 2023 Jones Walker LLP
For more news on the Partnership between OSHA and NLRB, visit the NLR Labor & Employment section.

United States | Roundup: Immigration Policies Update in Final Weeks of 2023

Federal agencies announced several important changes to immigration programs in the last two weeks of 2023, including the details of a new domestic visa renewal program, the extension of interview waiver authorities and premium processing fee hikes. For those who missed any of the announcements, here’s a roundup of key developments:

  • Domestic visa renewal: The State Department will allow a limited number of H-1B holders to renew their visas in the United States under a new pilot program, the details of which were published Dec. 21, 2023. The pilot will begin Jan. 29 and will be open to 20,000 H-1B visa holders whose previous visas were approved in certain time frames by U.S. visa processing posts in Canada and India. Read BAL’s full news alert here.
  • Interview waiver authorities: On Dec. 21, 2023, the State Department announced that it would extend interview waiver authorities for certain nonimmigrant visa applicants. Under the updated policy, which took effect Jan. 1, consular officers will have the authority to waive interviews for (1) first-time H-2 visa applicants and (2) other nonimmigrant visa applicants who were previously issued a nonimmigrant visa in any classification (other than a B visa) and are applying within 48 months of their most recent nonimmigrant visa’s expiration date. Applicants renewing a nonimmigrant visa in the same classification within 48 months of the prior visa’s expiration date continue to be eligible for an interview waiver as well. Read BAL’s full news alert here.
  • Premium processing fees: U.S. Citizenship and Immigration Services will increase premium processing fees on Feb. 26. Under a regulation published Dec. 28, 2023, premium processing fees will increase by about 12% to account for inflation. Read BAL’s full news alert here.
  • Schedule A input: On Dec. 20, 2023, the Department of Labor asked for public input on whether to revise its list of Schedule A job classifications that do not require permanent labor certification. Read BAL’s news alert here.
  • F and M student nonimmigrant classifications: USCIS issued policy guidance Dec. 20, 2023, regarding the F and M student nonimmigrant classifications, including the agency’s role in adjudicating applications for employment authorization, change of status, extension of stay and reinstatement of status for these students and their dependents in the United States. Find USCIS’ updated policy guidance here. Read BAL’s news alert here.

Additional Information: The Biden administration’s top regulatory priorities on employment-based immigration in 2024 include H-1B and H-2 modernization, fee hikes and changes to the green card process, according to the Department of Homeland Security’s regulatory agenda published in December.

©2023 Berry Appleman & Leiden. All Rights Reserved.
For more news on Immigration Policies Updated in 2023, visit the NLR Immigration section.

State-Side H-1B Visa Renewal to Begin Jan. 29, 2024

The Department of State (“DOS”)’s pilot program for domestic H-1B visa renewals will begin on January 29, 2024, and run through April 1, 2024. As H-1B visa applicants accepted into the pilot program will no longer need to incur the time and expense of applying to renew their visas through a U.S. Consulate abroad, this is a much anticipated and welcomed advancement. This is the first time since 2004 that the DOS is revisiting stateside visa renewal, as the domestic visa renewal process was discontinued, forcing applicants to apply for visa renewals abroad.

The new pilot program is limited to individuals who have previously submitted fingerprints in connection with a prior visa application, and who are eligible for a waiver of the in-person visa interview. Applicants who want to participate in the pilot program will be subject to the eligibility requirements, timeline for implementation, and procedural requirements outlined below.

Eligibility requirements:

  1. The applicant must be seeking to renew an H-1B visa. The DOS will not process applications for other visa classifications including H-4 visas for spouses and dependent children.
  2. The applicant’s prior H-1B visa must have been issued either by a U.S. Consulate in Canada between January 1, 2020, and April 1, 2023, or by a U.S. Consulate in India, between February 1, 2021, and September 3, 2021.
  3. The applicant must not be subject to a non-immigrant visa issuance fee (i.e., a reciprocity fee).
  4. The applicant must be eligible for a waiver of the in-person interview.
  5. The applicant must have been previously ten-fingerprinted by the DOS in connection with a prior visa application.
  6. Any prior visa issued to the applicant must not have a “clearance received” annotation.
  7. The applicant must not be subject to any grounds for a visa ineligibility that would require a waiver prior to visa issuance.
  8. The applicant must have an approved and unexpired H-1B petition from U.S. Citizenship and Immigration Services (“USCIS”).
  9. The applicant must have been recently admitted to the United States in H-1B status with an admission period that has not expired at the time of application, and be currently maintaining H-1B status in the United States; and
  10. The applicant must intend to re-enter the United States in H-1B status after any temporary travel outside the United States.

Timeline for Implementation:

The pilot program will accept applications from January 29, 2024, through April 1, 2024, subject to the following timelines:

  1. Approximately 2,000 slots for applicants whose H-1B visas were issued by a U.S. Consulate in Canada, and approximately 2,000 slots for those whose H-1B visas were issued by a U.S. Consulate in India, will be released on a weekly basis.
  2. Visa slots will be released on January 29, 2024, February 5, 2024, February 12, 2024, February 19, 2024, and February 26, 2024.
  3. Once all slots are filled in a given week, the DOS will not accept additional applications until the next release date.

Applicants who apply, but are determined to be ineligible, will have their applications returned unadjudicated, but will not be refunded the visa application fee.

Application Procedures and Processing Times:

Applicants must follow the procedures below to apply under the pilot program:

  1. Online application required. Instructions will include directions on where to mail a passport and supporting documents.
  2. Estimated processing times of six to eight weeks. Expedite requests will not be considered.

It is important to note that an H-1B visa issued domestically under this program does NOT provide lawful H-1B status and employment authorization in the United States or an extension of H-1B status. An H-1B visa issued under this program only serves as a “ticket” to apply for admission to the United States in H-1B status the next time the applicant travels internationally and does not govern the H-1B visa holder’s authorized period of stay and employment in the United States.

While the DOS’ pilot program is preliminary and limited in time, the program does present an encouraging step toward more efficient visa issuance and may help tackle the lengthy processing times experienced by many visa applicants at U.S. Consulates worldwide. However, the eligibility requirements for this program are very specific, limited to only H-1B visa applicants who meet a long-list of requirements.

© 2023 Miller, Canfield, Paddock and Stone PLC
For more news on H-1B Visa Renewal, visit the NLR Immigration section.

10 Market Predictions for 2024 from a Healthcare Lawyer

As a healthcare lawyer, 2023 was a pretty unusual year with the sudden entrance of a number of new players into the healthcare marketplace and a rapid retrenchment of others. With innovation showing no signs of slowing down in the year ahead, healthcare providers should consider how to adapt to improve the patient experience, increase their bottom line, and remain competitive in an evolving industry. Here are 10 personal observations of the past year that may help you plan for the year ahead.

  1. Health tech will continue to boom. Without a doubt, in my practice, health tech exploded, and understandably. In the face of tight margins, healthcare technology may offer the promise of immediate returns (think revenue cycle). But it is also important to understand the context. Health tech offers the promise of quick implementation relative to construction of clinical space, and it can be accomplished without additional clinical staff or regulatory oversight, potentially resulting in a prompt return on investment. Advancing technologies and AI will enable real-time, data driven surgical algorithms and patient-specific instruments to improve outcomes in a variety of specialties.
  2. Value-based care is here to stay. Everyone is interested in value-based care. In the past, value-based care was simply aspirational. Now, there are significant attempts to implement it on a sustained basis. It is not a coincidence that there has also been significant turnover in healthcare leadership in the past few years, and that has likely led to more receptivity.
  3. Expansion of value-based care models. There has been considerable activity around advanced primary care and single-condition chronic disease management. We are now starting to see broader efforts to manage care up and down the continuum of care, involving multi-specialty care and the gamut of care locations. Increased pressure to lower costs will result in increased volumes in lower cost, ambulatory settings.
  4. Regulatory scrutiny will continue to increase. For most, this is a given. In 2023, we saw increased scrutiny up and down the continuum, whether related to pharmaceutical costs, regulation of pharmacy benefit managers, healthcare transaction laws, or innovations in thinking around healthcare from the Federal Trade Commission. With the impending election, it is likely healthcare will receive considerable attention and scrutiny.
  5. Private equity (“PE”) will resume the march – with discipline. In my practice, PE entities rethought their growth strategies to focus on how to bring acquisitions to profitability quickly, from a “growth at all costs” mind set. Now there appears to be an increasing focus on operations and an emphasis on making realistic assumptions to underly growth. This has led to a more realistic pricing discipline and investment in management teams with operational experience.
  6. Partnerships. There is an increasing trend towards partnerships between PE entities and health systems. Health systems are under considerable financial stress, and while they do not universally welcome PE with open arms, some systems do appear open to targeted partnerships. By the same token, PE entities are beginning to realize that they require clinical assets that are most readily available at health systems. This will continue in 2024.
  7. The rise of independent physician groups. There is increasing activity among freestanding physician groups. Some doctors are leery of PE because they believe it is solely focused on profits. Similarly, many physicians are reluctant to be employed by health systems because they believe they will simply become a referral source. While we are not likely to see a return to 2002, where many PE and health system physician deals were unwound, we will see increasing growth by independent physician groups.
  8. Continued consolidation. The trend towards consolidation in healthcare is nowhere near ending. To assume risk (the ultimate goal of value-based care), providers require scale, both vertically and horizontally. While segments of healthcare slowed in 2023, a resumption of growth is inevitable.
  9. Increased insolvencies. Most healthcare providers have very high fixed costs and low margins. Small swings in accounts receivable collections, wages, and managed care payments can have a large impact on entities that are just squeezing by.
  10. New entrants. Last year saw several new entrants to the healthcare marketplace nationally. Who in 2023 would have thought Best Buy would enter the healthcare marketplace? There is still plenty of room for new models of care, which we will see in 2024.

2024 promises to be an interesting year in the healthcare industry.

© 2023 Blank Rome LLP
For more news on 2024 Healthcare Industry Laws, visit the NLR Health Law & Managed Care section.

FDA Announces Draft Supplemental Guidance on Menu Labeling

  • Today FDA announced an update to its Menu Labeling Supplemental Guidance which addresses implementation of menu nutrition labeling requirements. The menu labeling rules only apply to standard menu items offered by “covered establishments,” which are defined as restaurants and similar retail food establishments with 20 or more locations doing business under the same name and offering for sale substantially the same menu items, as well as restaurants and similar retail establishments that register to voluntarily subject themselves to the menu labeling requirements. (21 CFR 101.11).
  • The menu labeling regulations require disclosure of calories on menu and menu boards, and require that other nutrition information (e.g., fat, sugar, protein) be available in written form on the premises and provided to the customer upon request. Notably, the menu labeling regulations do not require disclosure of “added sugars” as is now required on packaged foods.
  • The draft update includes two new Q&As which (1) clarify that nutrition information can be provided on third party platforms (TPPs) through which food is ordered and delivered and (2) that added sugars may voluntarily be declared.
  • Although FDA accepts comments on any guidance at any time, comments on the draft new Q&As are due by February 12, 2024, to ensure they are considered before FDA begins work on final versions.
© 2023 Keller and Heckman LLP
For more news on FDA Menu Labeling Regulations, visit the NLR Biotech, Food, Drug section.

Teenagers Making a Buck Over School Break? Employers Beware: The Department of Labor Dictates When and Where

For many kids (and school staff), the last bell before winter break heralds freedom and fun. But many teenagers also use the extended time off from school to squeeze in some extra paid work. That means employers should brush up on their obligations under child labor laws. Doing so is especially important since the United States Department of Labor (DOL) announced an increased focus on identifying and stopping unlawful child labor earlier this year. On the heels of this initiative, we outlined best practices for manufacturing employers to avoid inadvertent use of child labor.

In this article, we outline key child labor requirements for companies across industries, as compliance with these requirements is likewise under the DOL’s microscope. Namely, the DOL enforces the Fair Labor Standards Act (FLSA) regulations which dictate when and where children aged 14 to 17 can work. The DOL can (and has been with increasing frequency) investigate employers to review compliance with these parameters — and penalize employers who do not comply.

RESTRICTIONS ON WORK HOURS

Under FLSA regulations, children aged 14 and 15 may not work:

  • During school hours;
  • More than 3 hours on a school day, including Friday;
  • More than 8 hours on a non-school day, such as during winter break;
  • More than 18 hours during a week when school is in session;
  • More than 40 hours during a week when school is not in session, such as during winter break — meaning no overtime for this group; or
  • Before 7:00 a.m. or after 7:00 p.m. (except between June 1 and Labor Day, when the evening hour is extended to 9:00 p.m.) — meaning, you guessed it, no work after 7:00 p.m. during winter break.

Keep in mind that state laws often set stricter work hours requirements. For example, while the FLSA does not restrict work hours for children aged 16 and 17, many state laws do.

RESTRICTIONS ON WORK ENVIRONMENTS

FLSA regulations also ban 14- and 15-year-olds from working in anything other than a list of specified environments. For example, they may work in:

  • Most office jobs;
  • Most retail and food service establishments;
  • Occupations like bagging groceries, stocking shelves, and cashiering;
  • Intellectual or artistically creative occupations, like as a musician, artist, or performer;
  • Limited kitchen work involving cleaning and preparation of food and beverages (but no “cooking” unless certain conditions are satisfied, and no baking); and
  • Clean-up work and grounds maintenance (so long as certain power equipment is not used).

For the 16- and 17-year-old cohort, the FLSA prohibits working in “Hazardous Occupations,” which are identified in a series of “Hazardous Occupation Orders” (“HOs”). The HOs prohibit working in or with:

HO 1 Manufacturing and storing of explosives.
HO 2 Driving a motor vehicle and being an outside helper on a motor vehicle.
HO 3 Coal mining.
HO 4 Forest fire fighting and fire prevention, timber tract management, forestry services, logging, and sawmill occupations.
HO 5* Power-driven woodworking machines.
HO 6 Exposure to radioactive substances.
HO 7 Power-driven hoisting apparatus.
HO 8* Power-driven metal-forming, punching, and shearing machines.
HO 9 Mining (other than coal mining).
HO 10 Meat and poultry packing or processing (including the use of power-driven meat slicing machines).
HO 11 Power-driven bakery machines.
HO 12* Balers, compactors, and paper-products machines.
HO 13 Manufacturing brick, tile, and related products.
HO 14* Power-driven circular saws, band saws, guillotine shears, chain saws, reciprocating saws, wood chippers, and abrasive cutting discs.
HO 15 Wrecking, demolition, and shipbreaking operations.
HO 16* Roofing operations and all work on or about a roof.
HO 17* Excavation operations.

The asterisk* indicates that there are student-learner and apprenticeship exemptions, which typically involve specific criteria that employers must meet in order to employ a 16- or 17-year-old in the occupation. (Please note: No 14- or 15-year-old is ever permitted to work in an HO.) This winter break, remember that “HO, HO, HO” is generally a “no, no, no” for minor employees.

BOTTOM LINE: BE CAREFUL WITH THE KIDS!

Employing minors can be a great way for them to gain valuable real-world experience and, of course, money. But employers should take care to ensure that their minor employees are scheduled appropriately and are not permitted to work in any prohibited tasks or with any prohibited equipment. Don’t let the extra help around the holidays trigger a DOL investigation or child labor law violation!

© 2023 Foley & Lardner LLP
For more news on Employing Minors Over Holiday Break, visit the NLR Labor & Employment section.

NLRB Issues Final Rule on Joint-Employer Status, Answering a Major Question No One Asked

On October 26, 2023, the National Labor Relations Board (NLRB or “Board”) issued its Final Rule (the “Rule”) on Joint-Employer status under the National Labor Relations Act (NLRA). Slated to take effect on December 26, 2023, the Rule returns to and expands on the Obama era Browning-Ferris test, scrapping the NLRB’s 2020 Joint Employer test for the sole reason that the current Board disagrees with the 2020 test, and setting up a potential showdown with the Supreme Court over the “major questions” doctrine and the scope of the NLRB’s administrative authority.

The Final Rule Summarized

 Under the new Rule, any entity that shares or codetermines one or more of a group of employees’ “essential terms and conditions of employment” will be considered a joint employer of the employees along with any other entity controlling that work, that is their “primary employer.” Those “essential terms and conditions of employment” as listed in a new NLRB Fact Sheet are:

  1. wages, benefits, and other compensation;
  2. hours of work and scheduling;
  3. assignment of duties to be performed;
  4. supervision of the performance of duties;
  5. work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline;
  6. tenure of employment, including hiring and discharge; and
  7. working conditions related to the safety and health of employees.

The Rule is purported to be grounded in common law agency principles and will apply where control – or potential control – over any of the above terms and conditions is reserved to an entity, irrespective of whether or not such control is actually exercised and whether such control is direct or indirect. The Rule is expected to allow the Board to rely on standard contractual terms, such as those typically found in agreements between temporary agencies and other suppliers of labor and their clients, to make sweeping declarations of joint employer status, regardless of the factual circumstances.  Such findings would obligate putative joint employers to engage in collective bargaining with employee representatives over any of those essential terms and conditions of employment over which they potentially exercise control, even if such control is indirect. While the NLRB’s press release about the Rule asserts that, to make a codetermination, the Board will conduct factual analyses on a case-by-case basis, it is clear that the Rule will effectively make it much easier for the Board to designate common business relationships as instances of joint employment.

Potential Concerns and Consequences

An expanded definition of joint employment is the latest indicator of the current NLRB’s efforts to cast a wider net across the nation’s workforce, organized or not. The effects remain to be fully realized but may place more businesses directly under the Board’s jurisdiction. For example, where a non-unionized business has a relationship with an organized shop that the NLRB deems to constitute a joint employment arrangement, that non-unionized business could find itself a responding party to an unfair labor practices charge brought by representatives of the shop workers.

Accordingly, employers and their vendors or other suppliers of services and/or labor must consider how their relationships may be viewed under the Rule. Agreements should be reviewed for any language that could be construed as establishing forms of worker control that would implicate an entity as a joint employer and might benefit from the addition of language explicitly providing that such arrangements do not create an employment relationship.

Legal challenges to the Rule are expected, and the NLRB’s position may be on shaky ground following the Supreme Court’s decision in West Virginia v. EPA, which called into question the validity of agency action that the Court determines to be a “transformative expansion” of administrative authority and an attempt to answer a “major question” that is better left to elected representatives in Congress rather than to the Executive Branch’s administrative agencies. To be sure, if allowed to stand, the NLRB’s efforts to establish a Joint Employer rule will have significant ripples throughout the U.S. economy. We will keep you informed as this issue winds its way through the courts.

©2023 Epstein Becker & Green, P.C. All rights reserved.
For more on NLRB’s Joint Employer Rule, visit the NLR Labor & Employment section.

Fed Issues FAQs Clarifying That Credit-Linked Notes Can Serve as Valid Capital Relief Tools for U.S. Banks

On September 28, the Federal Reserve Board (“FRB”) posted three new FAQs to its website regarding Regulation Q (Capital Adequacy of Bank Holding Companies, Savings and Loan Holding Companies, and State Member Banks). The FAQ guidance provides additional clarity on the use of credit-linked notes (“CLNs”) to transfer credit risk and offer capital relief to U.S. banks. While in some respects the FAQs merely confirm positions that the FRB has already taken in regard to individual CLN transactions, these FAQs are nevertheless important inasmuch as they publicly memorialize the FRB’s view of these products as valid capital management tools.

The FAQs speak to two different formats of CLNs: those issued by special purpose vehicles (“SPV CLNs”) and those issued directly by banks (“Bank CLNs”). The FRB’s view of SPV CLNs is relatively straightforward: per the FAQs, the FRB recognizes that properly structured SPV CLNs constitute “synthetic securitizations” for purposes of Regulation Q and that the collateral for such SPV CLNs can serve as a credit risk mitigant that banks can use to reduce the risk-weighting of the relevant assets.

The FRB’s posture toward Bank CLNs, however, is more nuanced.  According to the FRB, unlike SPV CLNs, Bank CLNs do not technically satisfy all of the definitional elements and operational criteria applicable to “synthetic securitizations” under Regulation Q, such that banks that issue Bank CLNs would not be able to automatically recognize the capital benefits of such transactions (as would be the case with properly structured SPV CLNs). The reasons for this are twofold: first, Bank CLNs are not executed under standard industry credit derivative documentation; and second, the issuance proceeds from Bank CLNs generally are owned outright by the issuing bank (rather than held as collateral in which the issuing bank has a security interest). Nevertheless, the FRB recognized that Bank CLNs can effectively transfer credit risk; as such, the FRB is willing to exercise its “reservation of authority” to grant capital relief on a case-by-case basis for Bank CLNs where the only two features of the Bank CLNs that depart from the strictures of Regulation Q are those described above. In other words, Bank CLNs can offer capital relief, but only if the issuing bank specifically requests such relief from the FRB and the FRB decides to grant such relief under its reservation of authority powers.

In his statement dissenting on the issuance of the U.S. Basel III endgame proposed rules—our discussion of which is available here—Federal Deposit Insurance Corporation (“FDIC”) Director Jonathan McKernan argued for increased clarity on the FRB’s position with respect to CLNs in order to provide U.S. banks with better parity in relation to their European counterparts (which routinely issue CLNs in different formats). While these FAQs may not fully address FDIC Director McKernan’s concerns, they do begin to provide some clarity concerning the effective use by banks of CLNs as capital management tools.

© Copyright 2023 Cadwalader, Wickersham & Taft LLP
Article about by: Daniel Meade , Jed Miller of Cadwalader, Wickersham & Taft LLP
For more articles on finance, visit the NLR Financial Institutions & Banking section.