QUOTEWIZARD LOSES AGAIN: Court Denies Company’s Effort to Re-Open Discovery to Defend Itself in Massive Certified Class Action
One of the most important things for TCPA class action defense attorneys to keep in mind is the CRITICAL importance of keeping discovery open after certification.
I have seen so many cases recently where Troutman Amin, LLP has been brought in to take over a case only to find that previous counsel has agreed to a schedule with all discovery closing before class certification is sought.
That is absolutely insane is my opinion.
And here’s an example of why that is.
As TCPAWorld readers well know QuoteWizard is facing MASSIVE exposure in a certified TCPA class action out in Massachusetts.
Read article on this here.
As if the situation weren’t bad enough already, QuoteWizard apparently allowed discovery to close before certification was sought.
As a result Plaintiff moved for certification on a revised class definition that QuoteWizard had never seen– terrible, but it happens all the time which is why moving to strike errant class definitions from the pleadings is so critical and assuring discovery remains open past certification is necessary.
Once the Plaintiff actually revealed the class, however, QuoteWizard realized it needed additional information from class members it didn’t have.
So last month it asked the court to re-open discovery so it could send some questions to class members to learn about their claims (QuoteWizard cannot unilaterally contact members of the class after certification because they are technically represented by Class Counsel.)
QuoteWizard wanted to ask class members the following:
Interrogatory No. 1: Have you ever made or received calls, texts, appbased messages (e.g., Teams, Discord, Slack), or emails, or attended virtual meetings (e.g., Zoom, Teams), on your cellular telephone related to your occupation or business?
Interrogatory No. 2: Have you ever used your cellular telephone for any purpose other than personal use? If so, please describe how you have used for cellular telephone for purposes other than personal use.
Interrogatory No. 3: Has an employer ever contributed in whole or in part to your cellular telephone bill or have you ever claimed a tax deduction related to your cellular telephone bill as a business expense?
Interrogatory No. 4: Have you ever signed up to receive insurance comparison information or insurance quotes and been contacted by QuoteWizard as a result of that request?
Interrogatory No. 5: Have you ever received text messages from QuoteWizard? If so, how many text messages have you received from QuoteWizard and when?
Well last week the Court denied QuoteWizard’s efforts reasoning that the discovery should have been conducted during the discovery phase:
Defendant could have (1) sought this information during discovery, or (2) upon receiving the expert report from Plaintiff in September 2023. Defendant did neither. Instead, Defendant elected to litigate other discovery issues and class certification before deciding to seek to reopen discovery.
Eesh.
Think ahead folks.
NEVER let discovery close before certification has been decided.
We will, of course, keep an eye on QuoteWizard and see if it survives this class action.
BlueCrest – The Court of Appeal Considers Condition B of the Salaried Members Rules
The Court of Appeal has remitted the case of BlueCrest Capital Management (UK) LLP (BlueCrest) v HMRC back to the First-tier Tribunal (FTT) regarding the application of the UK’s salaried members rules (the Rules) to certain members of BlueCrest, an asset manager engaged in the provision of hedge fund management services, following a finding that the FTT and the Upper Tribunal erred in law with regard to the interpretation of Condition B of the Rules.
The Rules recharacterise certain members of a UK limited liability partnership (LLP) as employees (“salaried members”) rather than members of the LLP for income tax purposes. Condition B essentially prevents recharacterisation as an employee/salaried member if the LLP member in question has, in broad terms, significant influence over the affairs of the LLP. In this judgment, the Court of Appeal considered the interpretation of Condition B.
In summary, the Court of Appeal found that – contrary to the position of the FTT and the Upper Tribunal and to HMRC’s published guidance – significant influence for the purposes of this test needed to derive from the legal and contractual framework of the LLP and it was not enough that an LLP member had de facto influence, even if that de facto influence was significant. The Court of Appeal has asked the FTT to reconsider the case using this narrower interpretation. However, this decision itself might be appealed to the Supreme Court.
LLPs which rely on Condition B/significant influence for any of their members in relation to the Rules should be aware of this development but should also be aware that the case is likely to still have a long way to run.
Overview of the Rules and prior decisions of the FTT and Upper Tribunal
A high-level summary of the relevant aspects of the Rules under consideration in this decision is set out below, together with a summary of the previous decisions in this case. For more information on the background of the Rules and the FTT decision (June 2022) and the Upper Tribunal decision (September 2023), please refer to our Tax Talks blog posts as linked here: BlueCrest FTT Decision – Salaried Member Rules and Asset Managers – Insights – Proskauer Rose LLP and BlueCrest– the Upper Tribunal considers the salaried member rules – Insights – Proskauer Rose LLP.
For UK tax purposes, the general position is that members of UK LLPs are treated as self-employed partners who each carry on the business of the LLP. However, the Rules were introduced to prevent employment relationships being disguised through the use of LLPs to avoid payment of employment-related taxes. In short, the Rules set out three conditions, one of which must be satisfied (or strictly speaking “failed” because the conditions are drafted in the negative) in order for an LLP member to avoid being recharacterised as an employee/salaried member.
The FTT and Upper Tribunal in the BlueCrest case were both concerned with the application of Condition A and Condition B, two of the three conditions referenced above.
Condition A requires that at the beginning of the relevant tax year, it is reasonable to expect that more than 20% of the total amount to be paid by the LLP to an individual member in the next tax year would not be “disguised salary”. This includes fixed amounts, and amounts which are variable, unless these amounts vary by reference to the overall profits or losses of the LLP. So, to satisfy this condition, it must be reasonable to expect at the beginning of the tax year that at least 20% of the member’s pay will vary by reference to the overall profitability of the LLP.
Condition B is considered satisfied if the mutual rights and duties of the members and the LLP give the individual significant influence over the affairs of the LLP.
The FTT found that the BlueCrest senior investment managers had significant influence over the affairs of the LLP based on their financial influence over a material part of BlueCrest’s overall business, which was sufficient to disapply Condition B. This ran contrary to the elements of HMRC’s published guidance which suggested that Condition B required significant influence over the affairs of the LLP as a whole. In relation to Condition A, the FTT determined that all of the members’ remuneration was disguised salary, because bonuses were calculated by reference to individuals’ performance, not in relation to the profitability of the LLP.
The Upper Tribunal upheld the decision of the FTT, concluding on Condition B that the FTT was entitled to find that (i) the significant influence did not have to extend to all of the affairs of the LLP, as this was an unrealistic approach and would give rise to strange results for larger partnerships, and (ii) that HMRC’s argument that influence should be limited to managerial influence was attempting to read words into the statute. The FTT’s decision on Condition A was also upheld as bonuses were set initially without reference to the overall profitability of the LLP and so were disguised salary.
The Court of Appeal findings on Condition B and significant influence
HMRC argued that the Upper Tribunal made an error of law in its interpretation of Condition B by relying on the de facto position without regard first to what the rights and duties of the LLP members were as a matter of law, and that the decision of the Upper Tribunal should therefore be overturned.
The Court of Appeal agreed and confirmed that, on a proper construction, the test for significant influence was (i) whether the individual had influence over the affairs of the LLP, (ii) whether the source of that influence was the mutual rights and duties of the members of the LLP, in which case it was qualifying influence, and (iii) whether that qualifying influence was significant.
On the first point, influence over the affairs of the LLP, as interpreted by the Court of Appeal, was to be viewed as broader than influence over the business of the LLP and meant the affairs of the LLP generally viewed as a whole and in the wider context of its group. The definition of business in the relevant LLP Agreement should also be taken into consideration. The Court of Appeal considered that the Tribunals had been wrong to confine the test to parts of the affairs of the LLP without a focus on the decision making at a strategic level.
The main focus of the Court of Appeal in their decision related to the second point. The Court of Appeal held that Condition B requires the relevant influence to derive from the “mutual rights and duties” of the members of the LLP and the LLP itself based on the statutory and contractual framework applying to it. In practice, this would mean the influence must derive from the rights and duties of the members as set out in the LLP Agreement and, if not excluded by virtue of that LLP Agreement, the provisions of the LLP Regulations 2001.
Neither HMRC nor BlueCrest had made this argument in the FTT or Upper Tribunal. It had been raised by the Upper Tribunal but in the context of it being “common ground” between the parties that the FTT was entitled to consider the actual position and any de facto influence held by members in addition to the terms of the LLP Agreement. Despite this – and despite acknowledging that HMRC’s own guidance accepted the possibility that the influence in question could derive from the de facto position (an approach which still forms the basis of HMRC’s guidance in its Partnership Manual today) – the Court of Appeal held that it was incorrect to ignore the need for the influence to derive from the legal framework, i.e. the LLP Agreement and the LLP Regulations 2001 (if relevant).
Finally, in relation to the third point that any influence must be significant, the Court of Appeal held that BlueCrest and HMRC had been correct to present evidence on any de facto influence wielded by members, but this should have been used only to evaluate whether qualifying influence was significant.
In light of these points, the decisions of the FTT and Upper Tribunal were set aside and the case remitted to the FTT for consideration of the evidence in light of the correct statutory interpretation of the test.
The Court of Appeal also rejected BlueCrest’s procedural objection that HMRC had been allowed to rely on a new point of law. In doing so, the Court highlighted the public interest in taxpayers paying the correct amount of tax and ensuring justice is balanced with requirements of fairness and case management.
Cross Appeal by BlueCrest – Condition A: variable remuneration
Although the main focus of the case was on Condition B, BlueCrest appealed on whether the portfolio managers and supervisors of portfolio managers could avoid recharacterisation as salaried members by virtue of Condition A. The Court of Appeal upheld the decision of both Tribunals and confirmed they came to substantially the right conclusion.
The question under Condition A related to whether the definition of “disguised salary” was met. Portfolio managers and supervisors of portfolio managers had three elements of remuneration, one of which was a discretionary allocation akin to a bonus. BlueCrest argued that this had a real link to the profits of the LLP, though the bonuses were not computed by reference to the profit and losses of the LLP.
The Court of Appeal agreed with HMRC’s argument that, on the facts, the overall amount of profits of the LLP merely functioned as a cap on remuneration which was variable without reference to overall profits. Therefore, the Court upheld the Tribunals’ decisions that the individual members of the LLP, including portfolio managers and supervisors of portfolio managers, could not avoid recharacterisation as salaried members/employees by virtue of Condition A.
Conclusion
The Court of Appeal’s interpretation of what constitutes significant influence for the purposes of Condition B of the Rules is narrower than (i) the position set out in the prior judgments in this case and (ii) the relevant guidance in HMRC’s published manuals. This narrower interpretation ignores de facto influence which is not derived from the mutual rights and duties of the LLP member as set out in the LLP Agreement and, if not excluded by virtue of that LLP Agreement, the provisions of the LLP Regulations 2001.
The Court of Appeal have sent the case back to the FTT for the FTT to reconsider the case in light of this narrower interpretation. It is possible, and perhaps likely, that BlueCrest will decide to appeal the decision to the Supreme Court. In that case, if permission to appeal is granted, the next step would be for the Supreme Court to consider the points raised in this Court of Appeal judgment, rather than the FTT reconsidering the case. We will continue to monitor the proceedings until the final position is known.
LLPs which place reliance on Condition B and their members having significant influence may wish to refresh whether that position would still be appropriate if the narrower interpretation of the test applies, particularly if the members’ position under the salaried member rules relies solely on Condition B.
New Wave of Executive Orders Seek to Redirect EPA’s Focus
Within hours of taking office, President Trump issued a flurry of Executive Orders (EO), including several that will undoubtedly affect a wide range of environmental policies nationwide. While the full implications of these EOs, as well as potential additional actions, are far from clear at this early stage, there are several takeaways for those who are in the environmental-regulated community to consider.
While reviewing the summary below of a limited sampling of recent EOs touching on environmental policy, it is important to remember that a significant portion of environmental policy, regulation, and enforcement occurs at the state level and impacts from federal policies and approaches can take many years to be felt, if at all. In fact, in some instances, the policies and strategies at the federal level can produce the opposite approach at the state level. Therefore, it is crucial for any regulated entity to have a strong comprehension of the federal and state landscape as it may apply or interact with its operations, permits, and compliance.
Environmental Justice
With just one EO—Initial Recission of Harmful Executive Orders and Actions—nearly 80 EOs from the prior administration were revoked. The list included several EOs related to environmental justice, such as the “whole of government” approach and the “Justice40” initiative. Environmental justice was also singled out in “Ending Radical and Wasteful Government DEI Programs and Preferencing,” which ordered federal agencies to terminate all environmental justice offices and positions.
Greenhouse Gases and Energy Resources
An EO entitled “Unleashing American Energy” directs the Environmental Protection Agency (EPA) and other agencies to review actions “that impose an undue burden on the identification, development, or use of domestic energy resources — with particular attention to oil, natural gas, coal, hydropower, biofuels, critical mineral, and nuclear energy.” The apparent purpose here is to reverse course on greenhouse gas and other federal rules on various energy sources. Furthermore, EPA has been directed, within 30 days, to provide recommendations on the “legality and continuing applicability” of EPA’s 2009 GHG risk finding, which is the underpinning of EPA’s climate rules. Similarly, this EO does away with the “social cost of carbon” metric that was intended to monetize the benefits of policies that curb emissions.
Hiring Freeze and Return to Office
While not EOs, two executive memoranda will surely influence EPA through workforce impacts, resources, and management of priorities. The first, entitled “Return to In-Person Work,” directs all federal agencies, including the EPA, to terminate remote work arrangements and require employees to return to work in person on a full-time basis. The second, entitled “Hiring Freeze,” freezes federal civilian employee hiring, including EPA staff. The Office of Management and Budget is tasked with delivering a plan within 90 days to further shrink the federal workforce “through efficiency improvements and attrition.” It is very likely that staffing levels at the EPA will be reduced significantly, which could impact the EPA’s capacity to keep up with permitting and enforcement matters.
Updates for Employers Using Private Plans to Comply with Minnesota’s Paid Leave Law
Minnesota is one of a dozen states that have enacted a statewide program providing compensation to employees during family and medical leaves. Minnesota’s law provides job protection and payment of benefits through a state-run insurance program to qualifying employees to take up to 12 weeks of leave for family and/or medical reasons (or a combined total of up to 20 weeks of leave if the employee qualifies for both types of leave in one benefit year) (“the Paid Leave Law”). The insurance program will be funded through employer and employee contributions beginning on January 1, 2026. Employees can also begin applying for compensation beginning on January 1, 2026.
Recently, the Division outlined how employers can use self-insured plans or plans from an insurance carrier to comply with the Paid Leave Law. The Division refers to insurance plans providing coverage for Minnesota’s Paid Leave law as “Equivalent Plans.”
Equivalent Plans must allow for the same, or more comprehensive, coverage than is expressly required by the Paid Leave Law. The Division details the conditions that an Equivalent Plan must meet to comply with the Paid Leave Law. As explained by the Division, employers can choose to use an Equivalent Plan to cover one leave category (family or medical) and can participate in Minnesota’s Paid Leave program to cover the other leave category (family or medical). The Minnesota Department of Commerce will begin accepting applications from employers to use Equivalent Plans “in the spring of 2025” according to the Division. The Minnesota Department of Commerce recently published a checklist for employers to submit along with their Equivalent Plan application.
The Division is set to provide more information about Equivalent Plans soon. According to the Division, the information is likely to include a cost estimation calculator for employers and employees, and more details about the application process employers must follow to secure an approved Equivalent Plan.
Minnesota’s Paid Leave Division published final proposed rules in December, that, if adopted, will regulate the state’s Paid leave Law. We are monitoring these developments and will continue to provide updates as we approach the January 2026 rollout.
Hadley M. Simonett contributed to this article.
EPA Proposes Risk Management Rule to Protect Workers from Inhalation Exposure to PV29
On January 14, 2025, the U.S. Environmental Protection Agency (EPA) issued a proposed rule to address the unreasonable risk of injury to human health presented by Color Index (C.I.) Pigment Violet 29 (PV29) under its conditions of use (COU) as documented in EPA’s January 2021 risk evaluation and September 2022 revised risk determination. 90 Fed. Reg. 3107. The proposed rule states that the Toxic Substances Control Act (TSCA) requires that EPA address by rule any unreasonable risk of injury to health or the environment identified in a TSCA risk evaluation and apply requirements to the extent necessary so the chemical no longer presents unreasonable risk. To address the identified unreasonable risk, EPA proposes requirements to protect workers during manufacturing and processing, certain industrial and commercial uses of PV29, and disposal, while also allowing for a reasonable transition period prior to enforcement of said requirements. Comments are due February 28, 2025. EPA notes that under the Paperwork Reduction Act (PRA), comments on the information collection provisions are best assured of consideration if the Office of Management and Budget (OMB) receives comments on or before February 13, 2025.
As reported in our January 25, 2021, memorandum, pursuant to TSCA Section 6(b), EPA determined that PV29 presents an unreasonable risk of injury to health, without consideration of costs or other nonrisk factors, including an unreasonable risk to potentially exposed or susceptible subpopulations (PESS) identified as relevant to the 2021 risk evaluation for PV29 under the COUs. EPA notes that the term “conditions of use” is defined in TSCA Section 3(4) to mean the circumstances under which a chemical substance is intended, known, or reasonably foreseen to be manufactured, processed, distributed in commerce, used, or disposed of. To address the unreasonable risk, EPA proposes, under TSCA Section 6(a), to:
Require use of assigned protection factor (APF) 50 respirators and equipment and area cleaning to address the risk from inhalation exposure to dry powder PV29 (also referred to as regulated PV29), where dry powder PV29 is expected to be present, for the following COUs:
Domestic manufacture;
Import;
Incorporation into formulation, mixture, or reaction products in paints and coatings;
Incorporation into formulation, mixture, or reaction products in plastic and rubber products;
Intermediate in the creation or adjustment of color of other perylene pigments;
Recycling;
Industrial and commercial use in automobile (original equipment manufacturer (OEM) and refinishing) paints and coatings;
Industrial and commercial use in coatings and basecoats paints and coatings;
Industrial and commercial use in merchant ink for commercial printing; and
Disposal.
Require manufacturers (including importers), processors, and distributors in commerce of regulated PV29 to provide downstream notification of the requirements.
Require recordkeeping.
EPA notes that not all TSCA COUs of PV29 are subject to the proposed rule. As described in the 2021 risk evaluation and the September 2022 revised unreasonable risk determination, four COUs do not contribute to the unreasonable risk: distribution in commerce; industrial/commercial use in plastic and rubber products — automobile plastics; industrial/commercial use in plastic and rubber products — industrial carpeting; and consumer use in professional quality watercolor and acrylic artist paint. Consumer use in professional quality watercolor and acrylic artist paint was the only consumer COU evaluated as part of the 2021 risk evaluation. More information on EPA’s September 2022 revised unreasonable risk determination is available in our September 9, 2022, memorandum.
EPA requests public comment on all aspects of the proposed rule. According to EPA’s December 20, 2024, press release, EPA “is especially interested in hearing perspectives from the public on the feasibility and effectiveness of the proposed requirements for worker protections, including from workers and entities that would be required to implement the workplace protections.”
Commentary
EPA’s evaluation of PV29 was expected to be “easy” when it was identified as one of the first ten chemicals selected for risk evaluation. PV29 is a poorly soluble, low toxicity (PSLT) particle. EPA’s approach to PSLTs has been evolving over the years and has been the subject of controversy, including whether carcinogenicity in rats from “kinetic lung overload…[where the] dust overwhelms the lung clearance mechanisms over time” is relevant to humans.
Since EPA first issued its 1994 document titled “Methods for Derivation of Inhalation Reference Concentrations (RfCs) and Application of Inhalation Dosimetry,” scientific advances in mechanistic modeling of inhalation dosimetry have matured. The scientific understanding of the most appropriate dose metric for PSLTs (i.e., retained dose, not deposited dose) has also evolved. In 1994, EPA developed the regional deposited dose ratio (RDDR) model, an empirical model that provides predictions of deposited dose. In 2021, EPA developed an update to the multiple-path particle dosimetry (MPPD) model (i.e., MPPD EPA 2021 v.1.01). This model is an improvement over the RDDR model because it incorporates the best available science, including “some dose metric predictions…based on mechanistic descriptions instead of empirical fitting…[and] providing prediction of retained mass….” Prior to this update, MPPD was already recognized as a superior model versus RDDR for inhalation dosimetry. For example, EPA’s Integrated Risk Information System used MPPD when developing an inhalation reference concentration for benzo[a]pyrene in January 2017; the National Institute for Occupational Safety and Health also used MPPD for developing its recommended exposure limit for carbon nanotubes in April 2013.
EPA used the MPPD model in the revised draft risk evaluation for PV29. EPA subsequently used the RDDR model in the Final PV29 risk evaluation. EPA stated that “The change in model [i.e., RDDR rather than MPPD] resulted in unreasonable risk determinations for all [occupational nonusers] ONUs and industrial and commercial use in automobile paint [original equipment manufacturer] OEM and refinishing condition of use” (emphasis added). EPA justified this change by stating “The MPPD model was not thought to be appropriate because the particle size data was not robust enough and the MPPD model cannot calculate [human equivalent concentrations] HECs for the hamster data…, while the RDDR model can accept hamster data input.” We find this justification hollow. EPA did not state why the particle size data were robust enough for the RDDR model but not the MPPD model. Further, EPA did not use the hamster data as the basis for its point of departure (POD) in the Final PV29 risk evaluation. We suspect this change was based on a preferred outcome (i.e., unreasonable risks), rather than an objective scientific evaluation to determine if there is unreasonable risk.
Interestingly, EPA calculated an existing chemical exposure limit (ECEL) of 0.014 mg/m3 for PV29, but it did not provide the underlying documentation for this value. Instead, EPA only stated that it chose not to propose an ECEL for PV29 because EPA was unable to identify a “method with a limit of detection lower than the calculated ECEL….” Without the underlying documentation, it is impossible to determine if EPA’s proposed regulatory action is based on the best available science or if the protective measures meet the requirement to protect workers “to the extent necessary” to mitigate the risk identified.
EPA derived PODs based on the HEC of 0.28 mg/m3 derived from rats and the HEC of 0.16 mg/m3 that it derived from hamsters, but these PODs are based on a dose metric (i.e., deposited dose) that does not represent the best available science (i.e., retained dose). EPA should have used the results of the rat inhalation study (the most sensitive species) and calculated the HEC based on the retained dose. That would provide a POD that would be both health protective and based on the best available science. Without that POD and an appropriate benchmark margin of exposure (MOE), EPA cannot justify its proposed regulatory action.
The proposed PV29 risk management rule has the potential to be more impactful than other EPA risk management rules because of the thousands of PSLTs listed on the TSCA Inventory. If either of EPA’s proposed risk management options is issued in final, it will set a bad precedent by serving as the basis for all of EPA’s risk evaluations for PSLTs when respirable particles are formed. Stakeholders need to be aware and be engaged. It is critically important that the rule be based on the best available science. This is a good opportunity for EPA to work with the U.S. Occupational Safety and Health Administration (OSHA) to revise the permissible exposure limit (PEL) for particulates not otherwise regulated (PNOR) (PSLTs fall into this category), given the immense number of opportunities for exposure to PSLT dust in the workplace, many of which are not under TSCA authority.
Tax Proposals Potentially Being Considered by the U.S. House Budget Committee in Reconciliation
On January 17, 2025, multiple news outlets and other sources reported the existence of a memorandum circulated by the U.S. House of Representatives Budget Committee to the House Republican Caucus (the “Memorandum”) containing an extensive list of budget proposals that may be considered in connection with the new Congress’s widely expected budget reconciliation legislation. The Memorandum, which is publicly available via link from a number of news outlets,[1] contains approximately fifty pages of proposals covering a wide range of policy areas and enumerating scores of potential specific legislative proposals (along with estimated budget effects in most cases), some of which are seemingly mutually exclusive. Included in the memo are a number of tax-related proposals, including tariff proposals, which are briefly set forth below.
It is not possible to know whether any or all of these proposals will ultimately be included in the budget reconciliation bill (or any other proposed legislation). It is also very possible that any number of other proposals may be considered in what is expected to be a lengthy legislative process. Additionally, the expiration of a sizable number of the tax provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”) may further affect the development of several of these proposals. However, potentially affected taxpayers should be aware of these tax-related proposals and closely monitor all developments involving the budget reconciliation legislation.
Although the Memorandum presents the proposals in no particular order, for ease of reference this blog post organizes the proposals as:
Tax Proposals Involving Tariffs and Trade;
Tax Proposals Affecting Businesses;
Tax Proposals Affecting Employees and Unions;
Tax Proposals for Business Tax Credits;
Tax Proposals Relating to Municipal and other Tax-Exempt Bonds;
Tax Proposals Relating to the Deductibility of State and Local Taxes (“SALT”);
Other Tax Proposals Affecting Individual Taxpayers and Households;
Tax Proposals Affecting Exempt Organizations; and
Tax Proposals Affecting the Internal Revenue Service.
Notably, the Memorandum includes no current proposals relating to the taxation of partnerships and very limited proposals related to international taxation other than as related to trade. Although the proposals in the Memorandum generally do not reference particular sections of the U.S. Internal Revenue Code (“IRC”), where the relevant Section cross-reference is sufficiently clear it is included here to aid the reader.
Tax Proposals Involving Tariffs and Trade
A “Border Adjustment Tax” that would “create a new tax on goods where they are consumed, not purchased” resulting in a “shift from an origin-based tax to a destination-based tax.”
Codify and increase “Section 301 Tariffs” on products from China.
Require “de minimis” value shipments to pay existing “Section 301 Tariffs.”
Create a 10% across the board tariff on all imports.
Tax Proposals Affecting Businesses
Lower the corporate income tax rate to 15%. (IRC Section 11)
Lower the corporate income tax rate to 20%. (IRC Section 11)
Repeal the 15% corporate alternative minimum tax. (IRC Section 55)
Return to immediate expensing of research and development (“R&D”) costs, which under the TCJA are required to be amortized. (IRC Section 174)
Implement “Neutral Cost Recovery for Structures,” to allow businesses to index the value of deductions to inflation and a real rate of return (to address the time value of money).
Subject credit unions (exempt from income tax under current law) to the federal income tax. (IRC Section 501(c)(1))
Tax Proposals Affecting Employees and Unions
Subject employees to tax on employer-provided transportation benefits (such as transit passes and parking) that are excluded from income under current law. (IRC Section 132)
Subject employees to tax on all employer-provided meals and lodging, other than for the military that are excluded from income under current law. (IRC Section 132)
Subject employees to tax on the value of on-site gym facilities intended for employee and family use that are excluded from income under current law. (IRC Section 132)
Impose a federal excise tax on “non-representation spending” by federal unions.
Impose “new limits” on the deductibility of “DEI training” by federal unions.
Tax Proposals for Business Tax Credits
Proposed repeal of tax credits for carbon oxide sequestration, zero-emission nuclear power production and clean fuel production (IRC Sections 45Q, 45U and 45Z), as well as the electric vehicle (“EV”) tax credit. (IRC Section 30D)
Changing the EV credit to be available only to EV buyers, not lessors. (IRC Section 30D)
Repeal of “Green Energy” tax credits “created and expanded” under the Inflation Reduction Act (“IRA”). The discussion of this proposal identifies these credits as including those “related to clean vehicles, clean energy, efficient building and home energy, carbon sequestration, sustainable aviation fuels, environmental justice, biofuel and more.”
Ending the Employee Retention Tax Credit (“ERTC”), by extending the moratorium on claims processing and eliminating the ERTC for claims submitted after January 31, 2024, along with stricter penalties for fraud. (Section 2301 of the CARES Act)
Tax Proposals Relating to Municipal and other Tax-Exempt Bonds
Eliminate the exclusion of interest on municipal bonds. (IRC Section 103)
Eliminate the exclusion of interest on private activity bonds, Build America bonds and other non-municipal bonds. (IRC Sections 103, 141-150)
Tax Proposals Relating to the Deductibility of State and Local Taxes (“SALT”) (IRC Section 164)
Under the TCJA, the SALT deduction is limited to $10,000 per taxpayer, and married persons filing jointly are subject to the same $10,000 limitation as a single filer. This statutory limitation is scheduled to expire in 2025. The memorandum lists five alternative approaches to SALT, four applicable to individual SALT deductions and two to SALT deductions for business:
Make the TCJA $10,000 limitation permanent but double the limitation (to $20,000) for “married couples”.
Make the general provisions of the TCJA provision permanent, but increase the thresholds to $15,000 for individuals and $30,000 for married couples.
Eliminate the deductibility of state and local income or sales taxes, but preserve the deductibility of property taxes. In this proposal, the TCJA $10,000 limitation would be allowed to expire in 2025.
Eliminate the SALT deduction for businesses (presumably including eliminating the pass-through entity tax (“PTET”) workaround), and the individual SALT deduction would be “unchanged from current law.”
Repeal the SALT deduction, in its entirety, for both individuals and businesses (presumably including eliminating the PTET workaround).
Other Tax Proposals affecting Individual Taxpayers and Households
Entirely eliminate the federal estate tax. (IRC Sections 2001-2210)
“Fully repeal” the home mortgage interest tax deduction. (IRC Section 163)
Lower the home mortgage interest deduction cap from the TCJA level of $750,000 to $500,000. (IRC Section 163)
Eliminate the deduction for contributions to qualifying health organizations (patient advocacy groups, professional medical associations and “other U.S.-based charitable organizations with [IRC Section] 501(c)(3) tax status.” (See also Tax Proposals Affecting Hospitals and Health Organizations). (IRC Section 170)
Either raise or eliminate the foreign earned income exclusion on Americans residing overseas. (IRC Section 911)
Replace Health Savings Accounts with a $9,100 “Roth-style” Universal Savings Account indexed to inflation.
Make certain changes to HSAs to increase their availability and flexibility. (IRC Section 223)
Permit a deduction for auto loan interest payments.
Eliminate the deductibility of interest on student loans. (IRC Section 163)
Eliminate the income tax on tips, which are currently subject to income and payroll taxes.
Create a “blanket exemption” on the taxation of “overtime earnings.”
Eliminate the “head of household” filing status. (IRC Section 1)
Eliminate the exclusion of scholarship and fellowship income used for tuition and related expenses. (IRC Section 117)
Eliminate the American Opportunity Credit for qualified educational expenses. (IRC Section 25A)
Eliminate the Lifetime Learning Credit for a portion of certain qualified tuition and related expenses. (IRC Section 25A)
Eliminate the maximum $2,100 credit for child and dependent care. (IRC Section 21)
Requiring both children and parents have a social security number to claim the Child Tax Credit. (IRC Section 24)
Restructure the Earned Income Tax Credit in certain ways. (IRC Section 32)
Tax Proposals Affecting Exempt Organizations
Eliminating nonprofit status for hospitals, and taxing hospitals as “ordinary for-profit businesses.” (See also Tax Proposals Affecting Individuals). (IRC Section 501(c)(3))
Expanding the excise tax on the net investment income of certain university endowments by increasing the rate tenfold, from 1.4% to 14%. (IRC Section 4968)
Expanding the criteria to impose the university endowment excise tax to effectively require certain universities to either “enroll more American students or spend more of their endowment funds on those students,” or become subject to the endowment tax. (IRC Section 4968)
Tax Proposals Affecting the Internal Revenue Service
Repeal remaining increased IRS funding from the Inflation Reduction Act.
FOOTNOTES
[1] See, e.g.,House Budget Committee Circulates New Detailed List of Budget Reconciliation Options Including Draconian Medicaid Cuts Within House Republican Caucus , last visited January 27, 2025. This article contains an embedded link to both the original Politico article reporting the Memorandum (subscription required) and the Memorandum itself.
Corporate Transparency Act Reporting Remains Voluntary
This Corporate Advisory provides a brief update on recent litigation regarding the Corporate Transparency Act (CTA) and its reporting requirements. It is not intended to, and does not, provide legal, compliance or other advice to any individual or entity. For a general summary of the CTA, please refer to our prior CTA Corporate Advisories from November 8, 2023, and September 17, 2024. Please reach out to your Katten attorney for assistance regarding the application of the CTA to your specific situation.
As of January 24, 2025, the Corporate Transparency Act’s (CTA) reporting requirements remain voluntary. On January 23, 2025, the Supreme Court of the United States (SCOTUS) issued an order that granted the US government’s motion to stay the nationwide injunction issued by the US District Court of the Eastern District of Texas in the case of Texas Top Cop Shop, Inc. v. McHenry (formerly Texas Top Cop Shop, Inc. v. Garland). This headline appeared to have the effect of reinstating the CTA’s reporting requirements and deadlines. However, such SCOTUS order does not appear to impact a separate stay issued against the enforcement of the CTA’s reporting rules issued by the US District Court of the Eastern District of Texas in Smith v U.S. Department of the Treasury. The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has interpreted the SCOTUS ruling similarly. Specifically, FinCEN noted: “On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop.” Accordingly, the CTA’s reporting requirements remain on hold, and reporting companies are not currently required to file Beneficial Ownership Information Reports with FinCEN, and FinCEN has stated that reporting companies are not subject to liability if they fail to file Beneficial Ownership Information Reports with FinCEN while the Smith order remains in force.
Note that this SCOTUS order relates solely on the nationwide injunction and was not a ruling on the constitutionality of the CTA.
The Supreme Court order is available here.
The FinCEN alert is available here.
Our updated CTA Corporate Advisory providing background on the Texas Top Cop Shop case is available here.
A Little Too Late: The Department of Justice and Federal Trade Commission’s Last Minute New Antitrust Guidelines for Business Activities Affecting Workers
In a last-ditch effort (just days before the change of administration), the Federal Trade Commission (FTC) and the Department of Justice (DOJ) issued new Antitrust Guidelines for Business Activities Affecting Workers (“2025 Guidelines”) on January 16, 2025, replacing the 2016 “Antitrust Guidance for Human Resource Professionals.”
Outgoing FTC Chair Lina Khan, the force behind the FTC’s Noncompete Ban, explained “These antitrust guidelines provide clarity to businesses about the practices that can violate the law—from agreements between firms to fix workers’ wages to coercive noncompetes.”
But exactly what role — if any — the 2025 Guidelines will play in the future remains in the air. Incoming FTC Chairman Andrew Ferguson vehemently dissented to the release of the new 2025 Guidelines just days before the change in administrations, labeling them “a senseless waste of Commission resources.” His comments signal that the 2025 Guidelines may be ignored or even replaced in the near future.
What’s Not Allowed?
The 2025 Guidelines provide a non-exhaustive list of seven different forms of business practices that, under certain conditions, can run afoul of the antitrust laws.
Agreements between companies not to recruit, solicit, or hire workers, or to fix wages or terms of employment, may violate antitrust laws and may expose companies and executives to criminal liability. Oral or written understandings to set wage ceilings or informally agree not to cold-call employees can be illegal, even if they do not result in actual harm (such as lost wages).
Agreements in the franchise context not to poach, hire, or solicit employees of the franchisor or franchisees may violate antitrust laws. Written or oral no-poach and similar agreements are subject to antitrust scrutiny even if they are between a franchisor and a franchisee or, for example, among the franchisees of the same franchisor.
Exchanging competitively sensitive information with companies that compete for workers may violate antitrust laws. Exchanging wage and benefit information with competing employers may be illegal even if companies use a third party or intermediary — including a third party using an algorithm — to share such information.
Employment agreements that restrict workers’ freedom to leave their job, such as noncompete provisions, may violate the antitrust laws. The 2025 Guidance highlights the use of noncompetition covenants used in mergers and the all-but-failed attempt by the FTC to administratively legislate a noncompete ban. As we previously reported, the FTC Noncompete Ban was blocked in August 2024. New FTC Chairman Ferguson has been openly critical of the FTC Noncompete Ban since its inception, foreshadowing the end of the fight over the ban.
Other restrictive, exclusionary, or predatory employment conditions that harm competition may violate the antitrust law.
Overly broad nondisclosure agreements that prohibit employees from disclosing information that “relates to” or is “usable in” an industry are potentially unlawful.
Non-solicitation covenants that restrict a person from working in an industry may be unlawful.
Requiring an employee to repay expensive training costs that prohibit the employee from competing in a new business may result in increased scrutiny.
Independent contractors used as replacement labor. The 2025 Guidelines specifically highlight the use of technology and smartphone apps that match independent contractors, rather than employees, with consumers for services. Collusion between competitors to set rates for these independent contractors can be a per seviolation per the 2025 Guidelines.
False earnings claims. Businesses that advertise higher compensation or benefits than are available are in jeopardy of engaging in unfair or deceptive business practices. When workers are lured to businesses that advertise significantly more compensation than the worker is likely to receive, honest businesses are less able to fairly compete for those workers.
What Businesses Should Do Now
Even with the uncertainty over the 2025 Guidelines’ fate, their publication provides a good reminder and opportunity for businesses to assess policies and strategize on employment agreements.
Employers should review employment agreements, compensation practices, and hiring policies to ensure compliance with antitrust laws.
Businesses engaging in joint ventures or collaborations should ensure that any restrictive covenants are narrowly tailored and reasonably necessary to the partnership’s goals.
Legal counsel is strongly recommended to assess practices such as noncompetes, information sharing, and hiring restrictions to ensure compliance with applicable law.
Noncompete Agreements: Updated Income Thresholds for 2025
As our readers know, in 2024 the Federal Trade Commission’s (FTC) proposed regulation to eliminate almost all noncompete agreements did not come to fruition — at least for now. As we reported earlier this month, however, the failure of the FTC ban has not stopped states from sharpening their hostility toward employer non-compete agreements.
One method many states use to restrict noncompete agreements is income thresholds, which prohibit employers from entering into noncompete agreements or other restrictive covenants with employees who earn below a certain wage. We previously wrote about these restrictions here. In several states, the threshold increases annually. Specifically, thresholds in Washington, Colorado, Maine, Rhode Island, Oregon, Virginia, and Washington D.C. increase each year. So, as we ring in 2025, we also ring in higher income thresholds in those states.
Washington: Washington’s noncompete statute, RCW 49.62.020, originally established an income threshold of $100,000. The Washington State Department of Labor & Industries adjusts the threshold annually to account for inflation. According to its website, the 2025 threshold for employees is $123,394.17. Washington maintains a higher income threshold for independent contractors, which increases to $308,485.43 in 2025.
Colorado: Colorado’s new noncompete law established a noncompete income threshold and a non-solicitation income threshold. The noncompete threshold is based on the Colorado Department of Labor’s definition of a “highly compensated” worker, which is updated annually. The non-solicitation threshold is 60% of the noncompete threshold. In 2024, the noncompete threshold was $123,750, and the non-solicitation threshold was $74,250. In 2025, the thresholds will be $127,091 and $76,254.60, respectively.
Maine: Maine bases its threshold on the federal poverty level. Maine’s threshold is 400% of the federal poverty level. Accordingly, Maine is updating its $60,240 threshold from 2024 to $62,600 in 2025.
Rhode Island: Rhode Island’s threshold is also based on the federal poverty level. Rhode Island’s threshold is 250% of the federal poverty level. Thus, Rhode Island’s threshold of $37,650 in 2024 is being increased to $39,125 in 2025.
Oregon: Oregon’s threshold is based on the consumer price index for all urban consumers in the western region, which increases its threshold from $113,241 in 2024 to $116,427 in 2025.
Virginia: Virginia’s threshold is based on the average weekly wage in the Commonwealth, which increases the Commonwealth’s 2024 threshold of $73,320 to $76,081.20 in 2025.
Washington D.C.: D.C.’s threshold is adjusted annually based on the Consumer Price Index. Although not yet released, D.C.’s $154,200 threshold is expected to increase considerably in 2025.
None of the other states that currently impose income thresholds are set to increase their thresholds in 2025. Under Illinois’s recent noncompete law, the $75,000 income threshold is not set to increase until 2027. As for the remaining states, a date of increase is not predetermined, and there is no reason to expect increases in 2025. New Hampshire’s threshold is tied to the federal minimum wage, Maryland’s threshold is set at $15 per hour and will not change (absent new legislation), Massachusetts’ threshold is tied to whether an employee is exempt under the FLSA, and Nevada’s threshold is based on whether an employee is paid on an hourly basis.
In light of the new thresholds, employers expecting to enter noncompete agreements with employees in Washington, Colorado, Maine, Rhode Island, Oregon, Virginia, or Washington D.C. should work with counsel to modify their agreements to meet these new standards as well as conside adjusting compensation for key employees who are close to the new thresholds. We will continue to monitor and report on developments in this highly dynamic area of law.
2025 Outlook: Recent Changes in Construction Law, What Contractors Need to Know
The construction industry is at a crossroads, influenced by shifting economic landscapes, technological advancements, and evolving workforce dynamics. With 2025 under way, businesses must stay ahead of key trends to remain competitive and resilient. Understanding these industry shifts is critical—not just for growth, but for long-term sustainability and safety.
Here’s what to expect in 2025:
Job Market
According to the Michael Bellaman, President and CEO of Associated Builders and Contractors (“ABC”) trade organization, the U.S. construction industry will need to “attract about a half million new works in 2024 to balance supply and demand.” This estimate considers the 4.6% unemployment rate, which is the second lowest rate on record, and the nearly 400k average job openings per month. A primary concern as we enter 2025 is to grow the younger employee pool, as 1 in 5 construction workers are 55 or older and nearing retirement.
While commercial construction has not yet been as heavily impacted as residential construction by the lack of workers, the demand for commercial will increase as more industries are anchored on U.S. soil. Think of bills such as the CHIPS and Science Act that allocated billions in tax benefits, loan guarantees, and grants to build chip manufacturing plants here. This is true regardless of political party; investing in American goods and manufacturing seems to be a bipartisan opinion.
AI and Robotics
At the end of 2024, PCL Construction noted that AI will be an integral part of the construction industry. Demand for control centers will drive up commercial production, though the workforce lack may present some challenges when it comes to a construction company’s productivity and workload capacity.
AI will not just change the supply and demand market, but also will be integrated in the day-to-day mechanics and sensors for safety measures within a construction zone. On top of the demand for microchips catalyzed by the CHIPS and Sciences Act, AI is used to “monitor real-time activities to identify safety hazards.” AI-assisted robotics can take on meticulous work such as “bricklaying, concrete pouring, and demolition while drones assist in surveying large areas.” We will start to see where the line is drawn between which jobs require a skilled worker and which can be handled by AI without disrupting the workforce.
Economic Factors
The theme of the years following COVID-19 has been to return the economy to what it was pre-pandemic, including slashing interest rates and controlling inflation. With this favorable economic outlook for 2025, construction companies can look to increasing their projects. On the residential side, the economic boom may drive housing construction to meet demand. On the commercial side, less inflation and lower interest rates for the business can lead to more developmental projects such as megaprojects and major public works. Economist Anirban Basu believes that construction companies may not reap these benefits until 2026 due to the financing and planning required.
Bringing production supply chains back to U.S. soil can help alleviate some of the global concerns such as the crisis in the Red Sea, international wars, and the high tariffs proposed by the Trump Administration. Again, economists are predicting this bountiful harvest in a few years rather than immediately.
Environmental Construction
Trends toward sustainability are leading the construction industry toward greener initiatives such as modular and prefab structures. Both options find the construction agency developing their structures outside of the building sites.
AI can also play a hand in developing Building Information Modeling (“BIM”) to better understand the nuances, possible pitfalls, and visualization of the project before construction begins. Tech-savvy construction agencies are already using programs such as The Metaverse or Unreal Engine for BIM and can significantly reduce project time, resources, and operational costs.
Employee Safety and PPE: Emphasis on employee safety – smart PPE and “advanced monitoring systems”
PPE requirements will far surpass the traditional protective gear (such as helmets, masks, and gloves). Construction sites may soon be required to supply smart PPE products that can scan a worker’s biometrics and environment to prevent medical anomalies or hazardous environmental conditions. Smart PPE devices will be enabled with Internet of Things (“IoT”) to ensure real-time data transmission and to use data analytics to track patterns or predict risks.
Conclusion
The construction industry’s future hinges on adaptability and innovation. By addressing workforce shortages, integrating AI-driven solutions, and adopting sustainable practices, companies can position themselves for success in a dynamic market. Whether it’s preparing for the long-term economic upswing or enhancing employee safety through smart PPE, proactive measures today can lead to stronger, more resilient operations tomorrow. Staying informed and prepared will be crucial for navigating the challenges and seizing the opportunities ahead.
The DOL Issues New Guidance On The Relationship Between The FMLA and State Paid Family Medical Leave Programs
Employers face a complicated patchwork of state, local and federal laws governing time off for family and medical reasons. The intersection of these often-overlapping laws creates numerous issues including how to handle time off that qualifies under both state paid family medical leave (PFML) laws and the federal Family and Medical Leave Act (FMLA). On January 14, 2025, the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) issued an opinion letter stating that employers cannot require employees to use their employer-provided paid time off such as vacation time while the employee is taking leave under the FMLA and receiving pay under a state or local PFML program. The WHD explained that the DOL’s FMLA regulations on substitution of paid leave apply to leave taken under a PFML program in the same way they apply when an employee is on FMLA leave and receiving benefits under a paid disability plan.
Background
Thirteen states and the District of Columbia have adopted mandatory PFML programs, and more states are considering similar legislation. Each state program is unique, but generally PFML programs provide income replacement for a certain number of weeks from a state fund for employees who are absent from work for specified family reasons, such as the birth of a child, and/or medical reasons, such as the employee’s own serious health condition. State and local PFML laws vary widely in their payment and eligibility structures but often employees who are eligible for leave and benefits under a state program are also eligible for unpaid leave under the FMLA.
Substitution of Paid Leave
When an employee takes job-protected leave under the FMLA, the regulations state that an employee may elect, or an employer may require an employee, to “substitute” accrued employer-provided paid leave (i.e., paid vacation, paid sick leave) for any part of the unpaid FMLA entitlement period. However, if an employee taking FMLA receives payments under a disability plan or worker’s compensation program, the employer cannot unilaterally require the employee to use accrued employer-provided paid time off.
DOL’s Guidance
Against this backdrop, the DOL opined that while state and local PFML programs are not directly addressed in the FMLA regulations, the same principles apply to such programs as those that apply to employees that receive payments on FMLA from workers’ compensation insurance programs or disability plans. These principles include:
Where an employee takes leave under a state or local PFML program, if the leave is covered by the FMLA, it must be designated as FMLA leave and the employee must be given notice of the designation, including the amount of leave to be counted against the employee’s FMLA leave entitlement.
Where an employee, during leave covered by the FMLA, receives compensation from a state or local PFML program, the FMLA substitution provision does not apply to the portion of leave that is compensated. This means that an employee or employer cannot unilaterally require the concurrent use of employer-provided paid leave for leave that is already compensated by the PFML program.
Where an employee is receiving compensation through the state or local PFML program that does not fully compensate the employee for their FMLA covered leave, the employer and employee may agree, if state law permits, to use the employee’s accrued employer-provided paid leave to supplement the payments under the state or local leave program, but the employer cannot require it.
If an employee is eligible for a state or local PFML program under circumstances that do not qualify as FMLA leave, the employer cannot apply the leave against the employee’s FMLA entitlement.
If an employee’s leave under a state or local PFML program ends before the employee has exhausted the full FMLA entitlement, the employee is still entitled to the protections of the FMLA and the employee could elect, or the employer could require the employee, to substitute the employer-provided paid leave consistent with the FMLA rules and regulations.
The DOL provides a useful example to illustrate these principles:
Yvette takes eight weeks of continuous FMLA leave to care for her mother following her mother’s inpatient surgery. Yvette’s employer notifies her that the eight weeks are designated as FMLA leave. Caring for a parent with a serious health condition is also a qualifying reason under her state’s family leave program, and she applies for and receives benefits that replace two-thirds of her normal income each week that she is on leave, for up to six weeks.
During the six weeks that Yvette is receiving paid leave benefits under the state program, under the FMLA, her employer cannot require, and she cannot unilaterally elect, to substitute her accrued vacation under her employer’s leave plan and thereby receive full pay from her employer in addition to the state-paid benefit. However, if Yvette’s state permits an employee to use accrued paid leave concurrently with the state’s paid leave, the FMLA permits Yvette and her employer to agree that Yvette will use one-third of a week of her vacation time each week to supplement the portion of her full pay that is not provided by the state’s paid leave benefit.
During the final two weeks of Yvette’s FMLA leave, she will have exhausted her state program’s paid leave. At that point, her leave becomes unpaid leave, and the FMLA substitution provision applies. Yvette elects to use her employer-provided accrued paid vacation time to receive pay during the final two weeks of her FMLA leave.
Using the False Claims Act to Police Federal Contractors’ Employment Practices
Two recent events — one settlement and one executive order — have heightened the risk that the False Claims Act (FCA) will be used as a tool to enforce the employment obligations of companies doing business with the federal government.
First, on January 16, 2025, the Department of Justice (DOJ) announced a settlement with Bollinger Shipyard. DOJ alleged that Bollinger violated the False Claims Act by knowingly billing the US Coast Guard for labor provided by workers who were not verified in the E-Verify system. Under FAR 52.222-54, federal contractors are required to enroll in the E-Verify program and verify the employment eligibility of all new employees as well as verify the eligibility of existing employees before assigning them to a contract. This is the first case we are aware of where DOJ has used the FCA to enforce the requirement to use the E-Verify system.
Second, included among the flurry of “Day-One” executive orders issued on January 21, 2025, the Trump Administration issued an executive order entitled “Ending Illegal Discrimination and Restoring Merit-Based Opportunity.” Among other things, this sweeping order addressed the “Federal contracting process” in Section 3(b).
Section 3(b) instructs the Office of Federal Contract Compliance Programs to “immediately cease . . . Holding Federal contractors and subcontractors responsible for taking ‘affirmative action’ [and] Allowing or encouraging Federal contractors and subcontractors to engage in workforce balancing based on race, color, sex, sexual preference, religion, or national origin.” (emphasis added).[1] That section further purports to prohibit federal contractors from advancing diversity initiatives by directing that “the employment, procurement, and contracting practices of Federal contractors and subcontractors shall not consider race, color, sex, sexual preference, religion, or national origin in ways that violate the Nation’s civil rights laws.”
To give teeth to this new mandate, the executive order attempts to bring its requirements within the purview of the FCA by providing:
(iv) The head of each agency shall include in every contract or grant award:
(A) A term requiring the contractual counterparty or grant recipient to agree that its compliance in all respects with all applicable Federal anti-discrimination laws is material to the government’s payment decisions for purposes of section 3729(b)(4) of title 31, United States Code; and
(B) A term requiring such counterparty or recipient to certify that it does not operate any programs promoting DEI that violate any applicable Federal anti-discrimination laws.
There is tension between this directive and current law. For example, in Escobar, the Supreme Court expressly rejected the notion that the government can establish materiality for FCA purposes through an agreement term. “The materiality standard is demanding. . . A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment. Nor is it sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance.” Universal Health Serv. Inc. v. United States ex rel. Escobar, 579 U.S. 176, 194 (2016).
Further, there are few cases where the FCA was used to enforce a contractor’s employment practice obligations under current law. In Hill, the US Court of Appeals for the Seventh Circuit upheld the dismissal of an FCA case where the whistleblower alleged that the city of Chicago failed to follow its required affirmative action hiring plan. United States ex rel. Hill v. City of Chicago, Ill., 772 F.3d 455 (7th Cir. 2014). The court in that case held that the city’s implementation of a program that was different from the plan could not trigger the knowing element required for a false claim. Id. at 456.
Notably, the anticipated agreement clause and certification required by the executive order do not prohibit all diversity programs, but only those that “violate any applicable Federal anti-discrimination laws.” Accordingly, to be actionable under the FCA a plaintiff would likely need to show that a defendant knew at the time of its certification that it intended to violate applicable law.
[1] On Friday, January 24, 2025, Acting Secretary of Labor Vince Micone issued Secretary’s Order 03-2025, which directs “all DOL employees” to “immediately cease and desist all investigative and enforcement activity under the rescinded Executive Order 11246.” The order clarified that it applied to “all pending cases, conciliation agreements, investigations, complaints, and any other enforcement-related or investigative activity.” Notably, it provides that investigations or reviews under Section 503 and VEVRAA are “held in abeyance pending further guidance.”