Navigating Health Care Data Management: Proposed Changes to HIPAA’s Privacy Rule

Proposed Changes to HIPAA's Privacy Rule

The Health Insurance Portability and Accountability Act (HIPAA) contains Standards for the Privacy of Individually Identifiable Health Information (Privacy Rule). The Privacy Rule applies to covered entities (i.e., (i) a health plan; (ii) a health care clearinghouse; and (iii) a health care provider who transmits any health information in electronic form in connection with a transaction for which DHHS has adopted standards). More specifically, the Privacy Rule broadly establishes national standards to protect individuals’ protected health information (PHI), by requiring certain safeguards, setting limits and conditions on the uses and disclosures of PHI, as well as giving individuals rights over their PHI.

PHI is defined as individually identifiable health information (IIHI) that is:

    • (i) transmitted by electronic media;
    • (ii) maintained by electronic media; or
    • (iii) transmitted or maintained in any other form or medium.

    In January 2021, the Department of Health and Human Services (DHHS) issued a Notice of Proposed Rulemaking (NPRM) which proposes to modify the Privacy Rule. According to DHHS, the NPRM sought to modify HIPAA’s Privacy Rule to support individuals’ engagement in their health care, remove barriers to coordinated care, and decrease regulatory burdens on the health care industry. The NPRM estimated that the total savings from the proposed reform would be roughly $3.2 billion over five years.

    NPRM Spotlight: Proposed Changes to the Right of Individuals to Access Their PHI

    Of the nine different sections contained in the NPRM, the most extensive proposed changes involve changes to an individual’s right to access their PHI. These proposed changes include:

      1. Adding definitions for electronic health record (EHR) and personal health application

      The NPRM defines an EHR as “an electronic record of health-related information on an individual that is created, gathered, managed, and consulted by authorized health care clinicians and staff.” Further, the NPRM proposes to define personal health application as “an electronic application used by an individual to access health information about that individual in electronic form, which can be drawn from multiple sources, provided that such information is managed, shared, and controlled by or primarily for the individual, and not by or primarily for a covered entity or another party such as the application developer.” As stated in the NPRM, these proposed definitions would clarify the proposed modifications to the right of access.

        2. Strengthening the access right to inspect and obtain copies of PHI

        DHHS proposes to enable individuals to use personal resources, such as taking notes, videos, and photographs, to view and capture PHI in a designated record set. These proposed changes are seen as a way to eliminate “persistent barriers” that individuals face when trying to inspect and/or obtain copies of their PHI.

          3. Modifying the implementation requirements for requests for access and timely action in response to requests for access

          • Requests for access: The NPRM prohibits a covered entity from imposing unreasonable measures on an individual exercising the right of access that create a barrier to or unreasonably delay the individual from obtaining access.
          • Timeliness: The NPRM requires that access be provided “as soon as practicable,” but in no case later than 15 calendar days after receipt of the request, with the possibility of one 15 calendar-day extension. 

          4. Addressing the form of access

          When a covered entity offers a summary in lieu of access, the covered entity must inform the individual that they retain the right to obtain a copy of the requested PHI if they do not agree to receive the summary.

          5. Addressing the individual access right to direct copies of PHI to third parties

          The NPRM creates a separate set of provisions for the right to direct copies of PHI to a third party.

          6. Adjusting permitted fees for access to PHI and ePHI

          DHHS plans to change the access fee provisions of the Privacy Rules to establish a fee structure with elements based on the type of access request.

          7. Notice of access and authorization fees

          DHHS proposes to add additional regulations requiring covered entities to provide advance notice of approximate fees for copies of PHI requested under the access right and with an individual’s valid authorization.

          Impact of HIPAA Privacy Rule Update: Covered Entities

          A final rule implementing these proposed changes to the Privacy Rule has not yet been announced. However, the final rule is expected to be posted in 2024. Although the proposed HIPAA Privacy Rule updates aim to relieve the administrative burden imposed on covered entities, in the short term, it undoubtedly will cause significant work for covered entities seeking to comply with these updates. To comply, covered entities will likely incur costs, update various policies and procedures, and also update workforce member training.

          Interested parties are encouraged to contact Varnum’s Health Care Team for assistance navigating and complying with the evolving HIPAA Privacy Rules.

          Tennessee and Virginia State Attorneys General Sue the NCAA

          Tennessee and Virginia State Attorneys General Sue the NCAA

          State Attorneys General Allege NCAA’s NIL Regulations Violate Federal Antitrust Law

          The Tennessee and Virginia attorneys general (AGs) filed a joint lawsuit alleging the NCAA’s NIL regulations violate federal antitrust law. In a press release published by Virginia’s attorney general, he stated that both Virginia and Tennessee “allege that the NCAA’s restrictions on the ability of current and future student-athletes to negotiate and benefit from their…[NIL] rights violate federal antitrust law and is harmful to current and future student-athletes.” The lawsuit comes just one day after it was reported that the University of Tennessee is under NCAA investigation for potential NIL violations.

          The current lawsuit also comes roughly three years after the Supreme Court’s Alston decision, which held that the NCAA could no longer prohibit college athletes from earning compensation from their NIL. Following this decision, the NCAA announced interim NIL policies (which remain in effect), in addition to various states and universities that have also enacted their own NIL regulations. Both Tennessee and Virginia’s state legislature enacted their own respective NIL regulations, and both generally provide that the states have an interest in protecting prospective and current college athletes’ NIL opportunities. The states’ NIL statutes also expressly prohibit athletic associations, including the NCAA, from “interfering with athletes’ ability to earn NIL compensation.”

          The lawsuit alleges “the NCAA is thumbing its nose at the law. After allowing NIL licensing to emerge nationwide, the NCAA is trying to stop that market from functioning.” The lawsuit also points to a recent NCAA proposal which permits current athletes to pursue NIL compensation, but bans prospective college athletes from discussing potential NIL opportunities until they enroll at the university. The AGs claim that by “prohibiting such interactions, the NCAA’s current approach restricts competition among schools and third parties (often NIL ‘collectives’) to arrange the best NIL opportunities for prospective athletes.”

          As laid out in the complaint, the AGs assert that the “NCAA has started enforcing rules that unfairly restrict how athletes can commercially use their [NIL]…at a critical juncture in the recruiting calendar.” Currently, Florida State University, the University of Florida, and the University of Tennessee are all under NCAA investigation for potential NIL violations. The AGs assert that the NCAA’s NIL “anticompetitive restrictions violate the Sherman Act, harm the States and the welfare of their athletes, and should be declared unlawful and enjoined.” Importantly, the AGs asked the court for a temporary restraining order and preliminary injunction that would prohibit the NCAA from enforcing its NIL recruiting rules. A decision is expected in the coming days.

          The lawsuit also comes at a time when NCAA President Charlie Baker and other interested parties have pleaded with federal lawmakers to enact federal NIL legislation, which would provide an antitrust exemption allowing the NCAA to govern without being sued for alleged antitrust violations. However, Congress has yet to act.

          Interested parties should contact Varnum’s NIL Practice Team to ensure they are in compliance with applicable (and potentially changing) NCAA, state, and institutional regulations.

          Corporate Transparency Act: Reporting Challenges for Foreign-Owned Companies

          Corporate Transparency Act: Reporting Challenges for Foreign-Owned Companies
          Visit Our CTA Resource Center

          On January 1, 2024, the beneficial ownership information reporting rule (BOI Rule) issued under the Corporate Transparency Act (CTA) came into effect, ushering in new reporting requirements for companies formed in the U.S. or registered to do business in the U.S. (collectively, reporting companies). 

          The CTA and BOI Rule require the collection and disclosure of information identifying the individuals who beneficially own or exercise substantial control over reporting companies. While this task will be a burden for all types of reporting companies, the CTA and BOI Rule pose unique challenges for some foreign-owned companies, which often have complicated beneficial ownership structures, regular changes to management teams, a strong commitment to compliance measures, and a desire to avoid corporate liability and personal liability for members of their management team.

          New CTA Reporting Requirements

          As explained in a prior advisory, the new beneficial ownership information (BOI) reports will include: (a) for the reporting company, the name, trade name, address and employer identification number (EIN) or taxpayer identification number (TIN) of the reporting company; (b) for each individual who beneficially owns or controls 25% or more of the equity of the reporting company or exercises substantial control over the reporting company (each, a beneficial owner), his or her full legal name, date of birth, complete U.S. residential address, and information from (along with an image of) the individual’s unexpired U.S. passport, state driver’s license or other government-issued identification document; and (c) for certain individuals responsible for the formation of a reporting company on or after January 1, 2024, similar information to that required of beneficial owners.

          The CTA and BOI Rule require reporting companies formed or registered to do business in the U.S. on or after January 1, 2024 to file a BOI report with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury within 90 days of its formation or registration (or, if formed or registered to do business in the U.S. on or after January 1, 2025, within 30 days of its formation). Reporting companies formed or registered to do business in the U.S. prior to January 1, 2024 receive a slight reprieve – they need to file a BOI report on or before January 1, 2025.

          Once a reporting company has filed an initial BOI report, it must file an updated BOI report within 30 days of any change in the information required to be reported to FinCEN, including changes to reported BOI.

          Limited Exemptions for Foreign-Owned Companies

          The CTA includes 23 exemptions from the BOI reporting requirements; however, only a handful of them are likely to apply to foreign-owned companies, including the following:

          Large Operating Company

          Entities that directly employ more than 20 full time employees in the U.S., have an operating presence at a physical office in the U.S., and have filed a federal income tax return or information return demonstrating more than $5 million in gross receipts or sales from sources within the U.S. are classified as “large operating companies” and are exempt from BOI reporting. However, any failure to maintain employment or revenue figures will trigger filing requirements. Additionally, the company will need to be the owner or lessee of real property in the U.S., distinct from unaffiliated businesses, at which it conducts business to satisfy the “physical office” requirement—post office boxes and registered agent addresses will not suffice.

          Publicly-Traded Company

          Entities that have issued securities registered under Section 12 of the Securities Exchange Act of 1934 (1934 Act) or that are required to file supplementary and periodic information under Section 15(d) of the 1934 Act are exempt; however, this exemption will not cover entities that are listed only on a foreign exchange that do not have reporting obligations under the 1934 Act.

          Subsidiary of Exempt Company

          Entities whose ownership interests are entirely controlled or wholly owned, directly or indirectly, by certain enumerated exempt entities are themselves exempt, meaning that if a qualifying parent company is exempt, its subsidiaries may also avoid reporting requirements.

          Importantly, no “upward” exemption to BOI reporting requirements exists for holding companies.

          Reporting Challenges for Foreign-Owned Companies

          Foreign-owned reporting companies that are not eligible for an exemption should keep the following issues in mind as they work with advisors to build a compliance plan for CTA reporting:

          Analyzing all Members of Corporate Family

          Foreign companies often establish a U.S. corporate presence by creating a holding company organized under the laws of Delaware or another U.S. state, with operations conducted through one or more subsidiaries. A compliance plan will be necessary for each entity formed under the laws of a U.S. state or registered to do business in a U.S. state to ensure that it is either exempt or that proper measures have been taken to comply with reporting requirements. Because privately held holding companies do not qualify for an exemption, reporting may be required at that level even if operating entities lower in the family tree are exempt as a “large operating company” or (for lower-tier entities) a “subsidiary” of any large operating company.

          Monitoring Triggers for Updates

          1. Some foreign-owned companies rotate executives through director, officer and managerial roles with their U.S. subsidiaries after a limited period of time. These changes will trigger requirements to file updated BOI reports within 30 days of the change. Further, regular changes in U.S. leadership underline the importance of having a compliance plan in place for incoming executives to ensure that all necessary updates to BOI reports are timely filed.
          2. For purposes of filing BOI reports, beneficial ownership of equity is reported by looking through legal entities to identify individual owners or controllers of equity. Changes to a capitalization table of a parent entity organized and operating entirely outside of the U.S. may therefore trigger an obligation to file an updated BOI report in this country.

          Inactive Entities

          Foreign companies may own U.S. subsidiaries that were previously active but no longer conduct substantial business. While there is an exemption from reporting requirements for certain inactive entities, it is not available to companies owned by foreign persons. Owners of inactive entities should consider dissolving these entities prior to the deadline of any BOI report to avoid incurring reporting obligations or penalties for non-compliance.

          Data Protection and Confidentiality

          Reporting companies should consider how they will comply with data protection obligations and confidentiality requirements associated with the collection of personally identifiable information gathered pursuant to the CTA. It may be beneficial to designate a third-party provider to collect and store this information or direct persons to obtain a FinCEN identifier to mitigate risks associated with data protection, which can be costly. Companies may also need to consult local counsel in certain foreign jurisdictions to ensure that the collection and transmission of sensitive data from persons outside the U.S. is conducted in accordance with local law.

          Access to Information for Disclosure

          Foreign-owned reporting companies should consider including language in their formation and governance documents, employment agreements and employee handbooks that requires individuals to provide information necessary to facilitate CTA compliance. As changes to ownership of foreign parents may trigger update reporting obligations, similar measures may need to be considered with respect to parent companies. The reporting company should be prepared to take action to compel such disclosure, where possible, to avoid liability to the company and personal liability to senior officers.

          Penalties for Non-Compliance; Personal Liability for Senior Officers

          Those who disregard the CTA may be subject to civil and criminal penalties. A person who willfully fails to file a correct and complete initial BOI report or an updated BOI report required by law is subject to a fine of $500 per day (up to a maximum fine of $10,000) and is subject to imprisonment for up to two years.  FinCEN has stated that senior officers of entities that willfully violate the CTA and BOI Rule may be held liable under these penalty provisions.

          Varnum’s Corporate Transparency Act Taskforce of attorneys and other professionals can assist you. Contact Greg Wright of our Business and Corporate practice team, any member of Varnum’s CTA Taskforce, or your Varnum attorney to learn more.

           

           

          Under the Regulatory Microscope: Private Investment in Health Care-Related Entities

          Trends and Developments Impacting Health Care Investing

          Although ownership and control of health care providers engaged in the practice of medicine has traditionally been limited to either non-profit enterprises or licensed medical professionals (and their regulated, professional enterprises), the industry in recent decades has seen an escalating infusion of capital from enterprises including private equity firms, and business structures have been created to accommodate funding from non-licensed, for-profit entities. Given the continued for-profit commercialization of health care and its $4 trillion plus market share, it is unlikely such private investment in the health care ecosystem will voluntarily slow in the foreseeable future.

          Recent calls for greater regulatory scrutiny of such investments in certain health care-related entities, such as medical practices and health care systems, further complicate the already complex regulatory landscape for for-profit health care enterprises, their owners and medical professionals.

          Michigan Medical Group Asks Michigan Attorney General to Investigate Ownership of For-Profit Health Care Organizations

          The Michigan State Medical Society, which represents thousands of Michigan physicians, recently sent a letter to Michigan Attorney General Dana Nessel asking her to investigate what it argues are “widespread violations” of Michigan’s Corporate Practice of Medicine doctrine. The Attorney General’s office stated that it is reviewing the allegations and determining if and how to proceed. Whether the Attorney General initiates a widespread investigation of certain health care organizations’ compliance with the Michigan Corporate Practice of Medicine doctrine remains to be seen.

          Michigan Corporate Practice of Medicine Doctrine: The Basics

          Michigan’s Corporate Practice of Medicine doctrine, as explained in more detail in this advisory, prohibits unlicensed individuals from owning entities that engage in the practice of medicine in Michigan. Put differently, most entities intending to operate a medical practice must generally be owned by individuals who hold a license to practice medicine. While there is a recognized doctrinal exception enabling non-profit health care entities, such as certain health care systems, to employ licensed individuals providing medical care, there is no such exception permitting private equity firms and other for-profit entities that are owned by non-licensed persons from owning Michigan medical practices. The basic policy rationale animating this legal principle, which the Michigan State Medical Society highlighted in its letter to the Attorney General, is that patients are best served when medical decisions are made by licensed medical professionals.

          Sophisticated Structuring: The Use of Management Service Organizations

          The Michigan State Medical Society argues in its letter that in part through their unique use of management service organizations (MSOs), private equity firms circumvent Michigan’s Corporate Practice of Medicine doctrine. MSOs, a separately established entity from the medical practice, are a common structuring device that are established to contract with the medical practice to provide non-medical administrative and management services. Frequently, in private equity acquisitions of businesses involved in medical practices, the private equity firm establishes an MSO that it wholly owns. In recognition of the requirements of the Michigan Corporate Practice of Medicine doctrine, the licensed individuals retain ownership of the professional entity that functions as the operating medical practice engaged in the practice of medicine while the MSO manages the business aspects of the medical practice. In effect, the management contract vests MSOs with management rights over the business of the medical practice.

          Federal Regulator Challenges Private Equity Fund’s Health Care Roll-Ups

          Investments in certain health care-related entities by private equity firms and other unlicensed individual investors has also garnered recent attention from federal regulators. On September 1, 2023, the Federal Trade Commission (FTC) initiated a suit against U.S. Anesthesia Partners, the leading provider of anesthesiology services in Texas, and Welsh Carson, a private equity firm that founded U.S. Anesthesia Partners. The FTC alleges Welsh Carson’s roll-up acquisition strategy aimed at consolidating anesthesiology services in Texas to profit from various synergies violates The Clayton Antitrust Act of 1914 and Federal Trade Commission Act of 1914, both antitrust laws designed to halt anticompetitive practices. Lina Khan, the chair of the FTC, explained “[t]he FTC will continue to scrutinize and challenge serial acquisitions, roll-ups, and other stealth consolidation schemes that unlawfully undermine fair competition and harm the American public.”

          Both licensed medical professionals considering selling their practice and unlicensed investors, including private equity firms, considering investing in the health care sector, should carefully review these latest regulatory developments.

          For assistance navigating the evolving regulatory landscape and ensuring your MSOs are compliant with applicable laws, contact a member of Varnum’s Health Care Team.

          NCAA Changes Stance on Punishment for NIL Violations

          NCAA Imposes Major Sanctions on Florida State University for NIL Violations

          The NCAA Imposes Level II Sanctions on Florida State University for Impermissible Activity with Collective

          Last week, the NCAA announced that it will impose significant sanctions against Florida State University’s (FSU) football team regarding name, image, and likeness (NIL) violations committed during the 2022-23 academic year. The sanctions are in response to evidence that an FSU assistant coach impermissibly facilitated and transported a prospective student-athlete and his family to meet with a booster, who is also affiliated with the program’s NIL collective. The NCAA stated that the assistant coach “provided false or misleading information about his knowledge of any involvement in the violations,” which ultimately increased the severity of the punishment.

          In response, the NCAA announced extensive level-II sanctions against FSU, including:

            • Two years of probation, from January 2024 – January 2026;

            • A requirement to disassociate with the collective involved in the allegations for one year (although the collective may still work with FSU athletes, the university itself cannot be involved);

            • A three-year disassociation from the booster involved;

            • A prohibition on recruiting communication for six weeks over the next two academic years, including the week of January 12-18, 2024;

            • A prohibition on communication with athletes in the transfer portal from April 15-21, 2024;

              • A $5,000 fine plus 1% of the football budget;

              • A 5% reduction in football scholarships over the two-year probationary period, amounting to a total reduction of five scholarships;

              • A reduction in the number of in-person recruiting days during the 2023-24 academic year by six evaluation days during fall 2023 and 18 during spring 2024; and

              • A reduction in football recruiting communications for a total of six weeks during the 2023-24 and 2024-25 academic years.

              Additionally, the NCAA announced the following sanctions against the assistant coach involved:

                • A two-year show-cause (meaning, if the position coach is hired at another school, that school must explain to the NCAA its choice to hire the coach);

                • A 3-game suspension (to be imposed for the first three games of the 2024 regular season); and

                • A restriction from off-campus recruiting.

                Despite the NCAA’s previous hesitancy to harshly penalize member schools for NIL violations, these sanctions may indicate a shift in the NCAA’s approach, and its willingness to penalize schools that violate NIL related rules. Interested parties should contact Varnum’s NIL Practice Team to ensure they are in compliance with applicable NCAA, state, and institutional regulations.

                Name, Image, and Likeness in the Spotlight at the 2024 NCAA Convention

                New Rules on Name Image and Likeness: A Game-Changer for Student-Athletes

                The Division I Council unanimously voted to adopt new rules regarding name, image, and likeness (NIL) at the 2024 NCAA Convention in Phoenix last week. These new rules are primarily aimed at enhancing protections for student-athletes involved in NIL opportunities. The rules, which take effect August 1st, include four elements:

                • Disclosure requirements: Student-athletes will now be required to disclose certain details of all NIL agreements exceeding $600, no later than 30 days after entering or signing the NIL agreement. Additionally, prospective student-athletes will also be required to disclose these details within 30 days of enrollment. This data will be deidentified and provided to the NCAA, who will then use the information to create a database so interested parties can better monitor NIL trends.
                • Voluntary registration: In an effort to create a centralized location for all NIL service providers (i.e., agents, financial advisors, etc.), the NCAA will create a voluntary registration process for all providers seeking to work with student-athletes. The goal of this centralized portal is to help guide student-athletes and provide them with a list of credible providers as they engage in NIL opportunities and representation. The NCAA plans to develop a committee that will monitor this registration process and ensure the needs of student-athletes are met.
                • Standardized contracts: The NCAA aims to provide student-athletes with education on NIL contractual obligations. Accordingly, the NCAA plans to develop a template contract and standard contract terms.
                • Comprehensive NIL education: The NCAA also aims to develop ongoing education and resources for student athletes on NIL policies, rules, and best practices.

                According to the vice chair of the Division I Student-Athlete Advisory Committee, these rules will give student-athletes more confidence as they seek NIL opportunities.

                In addition to the aforementioned adopted proposal, the Division I Council also introduced additional proposals at the recommendation of the NIL Working Group and other stakeholders. Although these proposals would not take effect until at least April, after members and stakeholders are given a chance to provide feedback, the proposals include:

                • School support of NIL activities: The proposals would remove national restrictions pertaining to the level of support a school, and their third-party service providers, may provide to student-athletes as they engage in NIL opportunities. Although schools would still not be able to compensate student-athletes for the use of their NIL, the schools would be permitted to identify potential NIL opportunities. Additionally, an entity associated and/or aligned with a school would also be subject to the same rules regarding NIL, and thus would also be prohibited from directly compensating student-athletes for NIL opportunities.
                • A definition of “NIL entities”: As provided by the NCAA, the proposals would also define a “NIL entity” as “an individual, group of individuals, or any other entity (for example, a collective) organized to support the athletics interest of an NCAA school or group of schools by compensating student-athletes for NIL activities on behalf of itself or another third party.”
                • School support of “NIL entities”: The proposals would both eliminate and add certain regulations regarding NIL entities. For instance, regulations regarding communications between schools and NIL entities, as it pertains to enrolled student-athletes, would be eliminated. However, the proposal would continue to prohibit a school from providing any financial support to NIL entities.
                • Prohibitions regarding “prospects”: Under the proposal, an NIL entity would be prohibited from engaging in any form of communication with a prospect or potential transfer (or any individual associated with them) until they (i) sign a letter of intent, (ii) participate in summer activities or practice with the team, or (iii) enroll at the school and attend classes.

                Both the proposed rules and the adopted rules represent an ongoing shift in the NCAA’s approach to NIL, with NCAA President Charlie Baker recently proposing rules that would permit Division I schools to pay student athletes. In light of these ongoing changes, Varnum’s NIL Team will continue to monitor these efforts.

                Registration for H-1B Lottery

                Update July 30, 2024: U.S. Citizenship and Immigration Services (USCIS) announced it will conduct a second lottery to reach FY 2025 regular cap numerical allocation for H-1B registrations filed in March. Second lottery will include registrations that indicated eligibility for master’s cap and regular cap. Please contact your Varnum immigration attorney with questions.

                The annual electronic registration process for H-1B cap-subject petitions will open for a two-week period in March 2024. U.S. Citizenship and Immigration Services (USCIS) will utilize a random lottery process to select 85,000 petitions for the H-1B cap (65,000 for the general category and 20,000 for the U.S. advanced degree category). Applicants selected in the random lottery will be notified by March 31 and will have until June 30 to submit the H-1B petition for the beneficiary named in the registration.

                Varnum’s immigration attorneys have started to collect information to prepare for the March registration period. Employers with employees on F-1 Optional Practical Training (OPT) or candidates requiring cap-subject H-1Bs should contact us by mid-February for assistance with registration.

                Independent Contractor or Employee? The DOL Issues Highly Anticipated New Rule

                Revised DOL Rules: Employee vs. Contractor Classification

                On January 9, 2024, the U.S. Department of Labor (DOL) issued a final rule that redefines which workers should be classified as “employees,” and which workers qualify as “independent contractors” under the Fair Labor Standards Act (FLSA). The rule will be officially published on January 10, and will be effective on March 11, 2024. 

                The FLSA requires that employees receive at least the minimum wage for all time worked and overtime pay for hours over 40 in a workweek unless they qualify as an exempt employee. Independent contractors, on the other hand, are not “employees” under the FLSA, and are thus not entitled to minimum wage or overtime under that statute. However, independent contractors typically enjoy more freedom than employees, including the opportunity to work for multiple companies at the same time, the ability to set and control their own work schedules, and the opportunity to negotiate their terms of service and pay. Whether a worker qualifies as an “independent contractor” or must be classified as an “employee” is a hotly debated area of the law, and the DOL’s definition has changed over time.

                The final rule issued on January 9 rescinds the employer-friendly guidance that had been in effect since January 2021. That January 2021 guidance made it easier to define a worker as an independent contractor than prior approaches.

                The DOL has now pivoted and returned to previous guidance that made it more difficult for a worker to qualify as an independent contractor. Under the new rule that takes effect on March 11, the emphasis is on whether the worker is “economically dependent on the potential employer for work” or “in business for themself.” Under this new test, six factors are considered, each of which is given full consideration. Those six key factors are as follows:

                1. The Opportunity for Profit or Loss Depending on Managerial Skill. Is the worker able to meaningfully negotiate the pay for the work provided, accept or decline jobs or choose the order of performance, engage in marketing and efforts to expand their business or obtain work, and make decisions regarding hiring, purchasing, or renting of space? If so, then this factor weighs in favor of independent contractor status.
                1. Investments by the Worker and the Employer. If the worker makes “capital or entrepreneurial” investments, they may be considered an independent contractor. Examples of capital or entrepreneurial investments include investment in expensive equipment, software, and facilities, retention of marketing services, or other investments that tend to help the worker work for multiple companies. These investments should be considered on a relative basis with the potential employer’s investments in overall business, to determine if the worker is making similar types of investments, even if on a smaller scale. The worker’s investments that are based on regular performance of a job, such as tools and basic equipment, do not apply.
                1. Degree of Permanence of the Work Relationship. The worker may be an independent contractor if they are not hired indefinitely but are hired for a fixed period of time, non-exclusive, project-based, or sporadically based on the worker being in business for themselves and marketing their services to multiple entities.
                1. Nature and Degree of Control. The worker may be an independent contractor if the worker controls their own schedule, is not supervised in the performance of the work, and is not explicitly restricted from working for others. Consider whether the worker or the company retaining the worker’s services controls the economic aspects of the working relationship, such as setting prices or rates for services and marketing of services or products provided.
                1. Extent to Which the Work Performed is an Integral Part of the Employer’s Business. The worker may not be an independent contractor if the contracted work is an integral part of the business. Work that is not critical, necessary, or central to the principal business supports a finding of independent contractor status.
                1. Skill and Initiative. A worker may be an independent contractor if the work requires specialized skills that the worker brings to the relationship, and “those skills contribute to business-like initiative.” This would exist where the worker uses those skills for marketing purposes, to generate new business, and to obtain work from multiple companies.

                Additional factors may also be considered, if they indicate in some way that the worker is in business for themself, as opposed to being economically dependent on the employer for work.

                Once this new rule takes effect on March 11, it is expected that fewer workers will qualify as independent contractors than under the prior rule. And the consequences of misclassification can be severe — employers who misclassify such workers can be liable for unpaid overtime going back up to three years, double damages, and attorneys’ fees and costs. Employers who use independent contractors should review their classifications prior to March to ensure such workers are properly classified under the DOL’s new rule. 

                Please also note that the IRS has its own rule on which workers qualify as independent contractors, which is similar, but not identical, to the DOL’s new rule. The IRS rule determines whether a worker is an independent contractor who is not subject to withholding and thus can be issued a 1099, or whether the worker must be treated as an employee subject to withholding and issued a W-2.

                Please contact your Varnum attorney, or any member of the firm’s Labor and Employment Practice Team, with questions about how this new DOL rule — or the existing IRS rule — may affect your workforce.