• State regulatory permits are on hold. Texas has suspended all data center permitting by state agencies while the PUCT, ERCOT and TWDB assess grid and water impacts.
• The rules are changing. New power and water requirements, along with increased oversight for large-load data center projects, are likely in the future.
• Now is the time to evaluate exposure. Companies with Texas data center or power infrastructure projects should assess potential impacts on schedules, budgets and regulatory strategy.

In a significant development for the rapidly expanding Texas data center market, Gov. Greg Abbott has directed the Texas Commission on Environmental Quality (TCEQ) to halt permitting for data center projects until ongoing state audits evaluating impacts on electric reliability and water resources are completed. According to the governor’s Sept. 21 announcement, no state agency should move forward with regulatory approvals related to data center development until data necessary for those audits has been obtained and reviewed. The directive follows recent actions requiring audits by the Public Utility Commission of Texas (PUCT), Electric Reliability Council of Texas (ERCOT) and Texas Water Development Board (TWDB).

What Happened?

Abbott stated that “Texans must come first” and directed TCEQ to issue no permits sought by data center projects while ERCOT and TWDB evaluate the industry’s impact on grid reliability, security, water usage and infrastructure costs. The governor also emphasized that data centers should bear their own infrastructure costs, comply with electricity and water reporting requirements and avoid adverse impacts on local communities. The administration has further indicated that it will pursue legislation to eliminate financial incentives for data centers during the next legislative session.

As Abbott indicated in his letter to TCEQ to halt permitting, “[b]ecause the information sought by the PUC, ERCOT, and TWDB is necessary to make informed decisions by each of those agencies, no other state agency shall move forward with regulatory approvals related to data centers until this information is acquired.” Accordingly, the permitting halt extends to all state agency approvals required for data center developments.

Why This Matters

Texas has emerged as one of the nation’s leading data center markets due to abundant land, favorable business conditions and access to significant electric generation resources. The state’s increasing scrutiny of large-load facilities reflects growing concerns regarding:

• Grid reliability and resource adequacy as large energy users seek expedited interconnection
• Water availability and reporting obligations for facilities with substantial cooling requirements
• Cost allocation for transmission, generation and other infrastructure needed to serve hyperscale loads
• Community impacts, including siting, land use, environmental permitting and local opposition
• Potential legislative and regulatory changes affecting project economics and development timelines

The governor’s directive creates uncertainty for projects currently in development and may result in delays for permitting, financing, site selection, interconnection planning, construction schedules and related transactions.

Potential Impacts on Businesses

The directive extends beyond traditional data center developers. Potentially affected stakeholders include:

• Hyperscale and AI data center operators
• Real estate developers and infrastructure funds
• Energy companies developing dedicated generation or behind-the-meter power solutions
• Utilities, electric cooperatives and transmission providers
• Industrial and manufacturing companies evaluating large-load projects
• Investors, lenders and joint venture participants involved in Texas digital infrastructure projects

Companies pursuing Texas projects should closely monitor evolving requirements from ERCOT, PUCT, TWDB and TCEQ, as well as anticipated legislative proposals that could alter siting, permitting, water-use, reporting, incentive and infrastructure cost-recovery frameworks.

How BakerHostetler Can Help

BakerHostetler’s national Data Center Project Development team regularly advises clients on complex data center development matters, including permitting and environmental compliance, ERCOT and utility regulatory issues, power supply arrangements, transmission and interconnection matters, water-use considerations, tax incentives, real estate acquisition and development, project financing, government affairs and litigation risk. Our multidisciplinary team is actively tracking Texas regulatory and legislative developments and can help clients assess project impacts, manage permitting risks, engage with regulators and position projects for successful development in an increasingly complex regulatory environment.

• Independent contractor classifications for spa and wellness workers face increased scrutiny, particularly where employers exercise significant control over schedules, work location and job duties.
• Operational requirements matter. Requiring contractors to work set shifts, stay on-site during downtime, or perform administrative and support tasks may undermine independent contractor status.
• Hospitality employers should proactively review contractor arrangements for spa, salon, fitness and wellness personnel to identify and address potential wage and hour misclassification risks.

A recent lawsuit involving a resort in Hawaii serves as a timely reminder for hospitality employers that the classification of spa, salon and other personnel as independent contractors can present significant wage and hour risks.

The litigation was brought by massage therapists, estheticians, nail technicians, hair stylists and other spa workers who alleged they were improperly classified as independent contractors rather than employees. According to the allegations, workers were required to work scheduled shifts, remain on-site during assigned hours even when they had no clients, and perform various operational tasks for the resort, including cleaning, laundry, inventory management and retail store staffing.

Although the case remains pending and no court has determined whether the workers were properly classified, the federal district court has denied efforts to dismiss significant portions of the workers’ claims. The litigation therefore serves as a reminder of the scrutiny that may be applied to independent contractor arrangements in the hospitality and wellness industries.

Why This Matters

Although worker-classification tests vary by jurisdiction, many focus heavily on the degree of control exercised by the business. Facts such as requiring workers to maintain employer-set schedules, remain on premises during downtime, perform non-client-facing operational duties and integrate their services into the employer’s business operations may create challenges in supporting independent contractor status.

Hospitality employers utilizing spa personnel, salon workers, fitness instructors, wellness providers or similar service professionals as independent contractors should consider reviewing their current arrangements, particularly where workers:

• Are required to work specific shifts or minimum hours.
• Must remain on-site when not serving clients.
• Perform operational or administrative duties for the business.
• Are economically dependent on a single facility or resort.
• Have limited discretion over how, when and where services are performed.

Key Takeaway

The allegations in this particular litigation underscore the importance of ensuring that actual day-to-day working relationships align with independent contractor classifications. Hospitality employers operating spas, salons, wellness centers or similar guest services offerings should periodically review those arrangements with counsel to assess classification risks under applicable federal and state laws.

BakerHostetler’s Wage and Hour Compliance team and Contingent Workforce team regularly assist employers in evaluating independent contractor classifications, conducting workforce classification audits, assessing compliance risks under federal and state law, and implementing practical strategies to reduce misclassification exposure. Employers that utilize spa workers, salon professionals, fitness instructors, wellness providers or other service providers classified as independent contractors are encouraged to contact us to discuss their workforce structure and compliance practices.

• The Department of Justice is nearing completion of its FARA Rulemaking.
• Recent DOJ statements suggest a more permissive final rule than was anticipated when the Rulemaking was announced in early 2025.
• FARA exemptions governing commercial activity, nonprofit organizations, and law firms appear likely to be affected.

On August 14, the Department of Justice (DOJ) published its semiannual Unified Agenda in the Federal Register. Buried in that lengthy document was a one-paragraph entry from DOJ’s National Security Division (NSD) announcing that NSD “is now considering a final rule that adopts many – but not all” of the proposals from DOJ’s January 2025 Foreign Agents Registration Act (FARA) Notice of Proposed Rulemaking (NPRM).[1]

Many FARA commentators had written this rulemaking off. The NPRM, which was published in the final weeks of the Biden administration, originally proposed to narrow the commercial, domestic activity, and legal exemptions that corporations, law firms, and lobbying shops have relied on for decades. But in the early days of the Trump administration, then-Attorney General Pam Bondi issued a memorandum indicating that DOJ would limit criminal FARA enforcement to cases resembling traditional state-sponsored espionage,[2] and the NPRM comment period closed without further action.

Now, a year and a half later, a final rule may be on the way. NSD’s entry, published days after Todd Blanche was sworn in as Attorney General, says the rule will “expand the availability of exemptions commonly relied upon by corporations and law firms.” Although the NPRM would have narrowed those exemptions, DOJ’s description suggests the final rule may take the opposite approach.

The Commercial Exemption

Section 613(d)(1) of FARA exempts agents engaged “in private and nonpolitical activities in furtherance of the bona fide trade or commerce” of a foreign principal. This is the single most relied-upon FARA exemption by corporations because it allows a U.S. subsidiary of a foreign company to lobby to further its own commercial interests without registering.

The NPRM proposed two changes to the exemption. First, it proposed to remove the word “directly” from the existing regulation, so that activities that “promote” – not just “directly promote” – a foreign government’s interests would lose the exemption. Second, the NPRM proposed a new carveout for tourism promotion, reversing long-standing DOJ advisory opinions that had treated tourism promotion work as inherently political and requiring registration.

The “expand the availability” language in the Unified Agenda, however, suggests that DOJ may be walking back its deletion of the word “directly.” Meanwhile, the tourism carveout, one of the few parts of the NPRM that drew broad support from commenters, could very well survive.

The Domestic Activity Exemption

Section 613(d)(2) of FARA exempts agents engaged in “other activities not serving predominantly a foreign interest.” Under current regulations, agents whose political activities on behalf of a foreign corporation are neither directed by nor directly promote a foreign government’s interests are generally exempt from registration. DOJ has applied this exemption broadly, including with respect to nonprofits.

Here, the NPRM took a harder line, with DOJ proposing a two-step framework. First, an entity would need to evaluate whether it fell into four categorical exclusions from the exemption: intent to benefit a foreign government, foreign government influence over the activities, foreign government as principal beneficiary, or activities on behalf of a state-owned enterprise that promote foreign political interests. If none of the categorical exclusions applied, the entity would then need to clear a “totality of the circumstances” test, comprising five non-exhaustive factors, to avail itself of the exemption. The NPRM also proposed to clarify that the exemption covers noncommercial interests – a response to comments from the nonprofit community.

This proposal drew the most criticism during the NPRM comment period, as the categorical exclusions and multifactor test would have given DOJ wide discretion to second-guess an entity’s reliance on the exemption after the fact. The “expand the availability” language in the Unified Agenda suggests that at least some of that original proposal could be scaled back. Whether DOJ will keep the categorical exclusions, narrow them, or drop the two-step framework altogether remains to be seen.

The Legal Exemption

Section 613(g) of FARA exempts lawyers who represent a disclosed foreign principal before a U.S. court or agency. The NPRM proposed to extend the exemption to advisory work outside the courtroom, “provided such representation does not extend beyond the bounds of normal legal representation.” But it drew a bright line: a lawyer “seeking to persuade persons who are not involved in the proceeding” –  Congress, the press, the public – “to adopt or change foreign or domestic U.S. policy” would not qualify for the exemption.

The Unified Agenda, however, specifically references exemptions relied upon by “law firms,” which signals that the final rule will address the legal exemption. Whether DOJ will broaden the safe harbor for advisory work, change the definition of out-of-proceeding communications, or both, is unclear.

—

The reports of the demise of the FARA rulemaking are, it seems, greatly exaggerated, and the final rule may be more favorable to the regulated community than the NPRM had indicated. Until DOJ publishes a final rule, the scope of each exemption remains an open question. No publication timeline has been provided.

BakerHostetler’s Political Law and Federal Policy teams counsel corporations, lobbying firms, trade associations, and nonprofits on FARA registration, compliance, and enforcement. We advise on exemption and registration assessments, ongoing reporting, audits, compliance programs, and responses to DOJ letters of inquiry. We also help clients prepare comments on proposed rulemakings and engage with the FARA Unit on advisory opinion requests to clarify the scope of exemptions that may be available.

[1] Amending and Clarifying Foreign Agents Registration Act Regulations, 90 Fed. Reg. 40 (Jan. 2, 2025), https://www.federalregister.gov/documents/2025/01/02/2024-30871/amending-and-clarifying-foreign-agents-registration-act-regulations.

[2] General Policy Regarding Charging, Plea Negotiations, and Sentencing, Office of the Att’y General, U.S. Dep’t of Justice (Feb. 5, 2025), https://www.justice.gov/ag/media/1388541/dl?inline.

• The New York Legislature has passed Senate Bill 2236-A, the Wage Payment Integrity Act (the Act), which would expand the definition of “wages” under the New York Labor Law (NYLL) to include bonuses and other employment compensation not payable at the employer’s sole and absolute discretion.
• If signed into law, the Act would require employers seeking to preserve discretion over bonuses and other compensation to clearly and consistently communicate that any such payments are subject to the employer’s sole and absolute discretion.
• The Act would also strengthen the consequences for failing to maintain or produce written employment terms required by NYLL Section 195 and clarify that higher-earning executive, administrative, and professional employees may pursue civil remedies relating to unpaid benefits and wage supplements despite the inapplicability of NYLL Section 198-c’s criminal penalties.

Overview

The New York Legislature has passed Senate Bill 2236-A, known as the Wage Payment Integrity Act. The Act would amend Sections 190, 195 and 198-c of the NYLL and materially affect how employers characterize, communicate, and document bonuses and other forms of compensation. The underlying bill passed both legislative chambers on Sept. 8 but the governor has not yet signed them into law.

According to its sponsors, the Act is designed to address recurring litigation over whether bonuses and other incentive compensation qualify as wages protected under Article 6 of the NYLL. According to the Act’s justification memorandum, courts have interpreted Article 6 too narrowly by excluding certain promised bonuses from wage-payment protections simply because they depend on factors other than an individual employee’s performance. The sponsors contend that this judicial interpretation does not reflect modern compensation arrangements, which frequently depend on team results, company performance, profitability, or market conditions, and the goal of the Act is to address this reality.

The Act would also both strengthen the consequences for employers that fail to maintain or produce written employment terms required by NYLL Section 195, which requires employers to provide specified wage notices and compensation information to employees and maintain related employment records, and expand the availability of civil remedies under NYLL Section 198-c for certain executive, administrative, and professional employees seeking unpaid benefits and wage supplements.

If signed into law by the governor, the Act will take effect immediately and apply prospectively to actions filed on or after its effective date.

Expanded Definition of ‘Wages’ and New Notice Requirement

NYLL Section 190 currently defines “wages” as “the earnings of an employee for labor or services rendered, regardless of whether the amount of earnings is determined on a time, piece, commission, or other basis,” as well as benefits or wage supplements defined under NYLL Section 198-c, subject to specified statutory exceptions. The Act expands the existing definition to expressly include “any employment compensation that is not payable at the employer’s sole and absolute discretion.”

In addition, the Act would impose a new notice requirement for employers seeking to exclude a bonus or other form of employment compensation from this definition of “wages.” Specifically, an employer would need to notify employees in a “clear, prominent, timely and uncontradicted” manner that the employer retains “sole and absolute discretion to decide whether or not to pay” the bonus or other discretionary compensation.

Practical Impact of the Expanded Definition of ‘Wages’ and the Notice Requirement

As outlined above, a central premise of the Act is that compensation should not lose wage-payment protection simply because it depends on factors beyond an individual employee’s performance. To illustrate that point, the Act’s justification memorandum provides the example of a portfolio manager whose bonus is tied both to the manager’s performance and to the overall performance of the employer. According to the Act’s sponsors, such compensation would constitute wages unless the employer clearly communicated from the outset that the payment remained entirely discretionary at the employer’s sole discretion.

The same reasoning could apply to compensation tied to departmental performance, company profitability, team sales, or other collective metrics. The critical inquiry will be whether the employer retained and clearly communicated sole and absolute discretion over the payment, rather than whether the compensation was based solely on the employee’s individual performance.

Presumption Based on Missing Written Terms

The Act also increases the consequences for an employer’s failure to maintain or produce written employment terms as required by NYLL Section 195. Under the Act, if an employer does not produce those terms when requested by the commissioner of labor or by an employee, a rebuttable presumption arises that the employee’s version of the employment compensation terms reflects the agreed-upon terms with the employer.

Civil Remedies for Higher-Earning Employees

The Act also seeks to amend NYLL Section 198-c(3), which addresses agreed-upon benefits and wage supplements while providing criminal penalties for certain wage violations. Under current law, certain executive, administrative, and professional employees earning more than $1,300 per week are excluded from coverage. The Act clarifies that, although those employees remain outside the scope of the criminal enforcement provisions, they may nevertheless pursue civil claims against their employers relating to unpaid benefits and wage supplements.

Effective Date and Employer Considerations

If signed into law, the Act will take effect immediately but would only apply to actions filed on or after the effective date, and it will significantly affect how New York employers structure and communicate bonus, incentive, commission, and other supplemental compensation arrangements. In anticipation of the Act’s passage and implementation, employers should begin reviewing existing compensation programs and ensure that any intended reservation of discretion is clear and prominent, communicated timely, and consistently reflected in any plans, policies, and employee communications.

Should you have any questions about the Act, BakerHostetler’s Employment Team is ready to assist.

• 11th Circuit upholds FCA qui tam provision against constitutional challenge.
• Decision aligns with every federal appellate court to address the issue.
• Additional constitutional challenges remain.

On Tuesday, Sept. 1, in United States ex rel. Zafirov v. Florida Medical Associates, LLC et al., a panel of the U.S. Court of Appeals for the Eleventh Circuit rejected a constitutional challenge to the False Claims Act’s (FCA) qui tam provision. The court specifically held that the provision – which permits private parties (or relators) to pursue claims under the FCA on behalf of the government – does not violate Article II’s Appointments Clause. Namely, the court held that relators are not “Officers of the United States” because they do not occupy a continuing position established by law. In reaching this conclusion, the court emphasized that a relator’s role is temporary and limited to a particular case, a relator does not receive a “continuing emolument” and a relator’s duties are personal and cannot be assumed by another relator. On appeal was a first-of-its-kind decision by Judge Kathryn Mizelle of the U.S. District Court for the Middle District of Florida, which furthered decades of constitutional challenges to the FCA’s qui tam provision. However, since Mizelle’s decision, no other court had followed her lead, with many expressly rejecting it. By reversing, the Eleventh Circuit aligns itself with every other U.S. Court of Appeals to have addressed the issue, including the Fifth Circuit (en banc) as well as the Sixth, Ninth and Tenth circuits.

The Eleventh Circuit’s decision comes while the Third Circuit also considers the constitutionality of the FCA’s qui tam provision in U.S. ex rel. Penelow v. Janssen Products, LP. There, the defendants raised the constitutional issue in their posttrial briefing before Judge Zahid Quraishi of the U.S. District Court for the District of New Jersey. No. 12-cv-7758, 2025 WL 937504, at *12 (D.N.J. Mar. 28, 2025). In rejecting the defendants’ argument, the court gave the issue short shrift and, in reference to the Zafirov district court decision, declined to follow what it described as a “singular non-precedential and out-of-circuit decision, and instead follow[] every federal circuit court of appeals that has addressed this issue and hold[] that the FCA’s qui tam provisions are constitutional.” Id. On appeal before the Third Circuit, oral argument was held on March 18, and a decision is forthcoming.

What’s next?

Because the district court relied solely on the Appointments Clause to find the FCA’s qui tam provision unconstitutional, the Eleventh Circuit vacated and remanded for the district court to address the defendants’ constitutional challenges under the Take Care Clause and the Vesting Clause.

Broadly speaking, absent traction at the U.S. Court of Appeals level, future challenges to the constitutionality of the FCA’s qui tam provision will continue to face obstacles. And in the Eleventh Circuit specifically, which includes the Middle District of Florida and other top venues for FCA qui tam filings, it will be business as usual. Nonetheless, even absent a circuit split, comments by Justices Clarence Thomas, Brett Kavanaugh and Amy Coney Barrett in the Polansky case from 2023 – that “the Court should consider the competing arguments on the Article II issue in an appropriate case” – indicate there may still be appetite on the Supreme Court to take up the issue. This is despite the Court’s recent denial of certiorari in U.S. ex rel. Streck v. Eli Lilly, where the constitutional challenge to the FCA’s qui tam provision was not raised until the defendant’s en banc request to the Seventh Circuit.

Key Takeaways

• The New York Legislature has passed a bill that would amend the New York Labor Law to give current and former employees broad access to, and the right to obtain copies of, their personnel records.
• The bill would impose significant new obligations on employers, including expanded recordkeeping requirements and a requirement to notify employees within 10 days whenever negative information is added to a personnel record, with an opportunity for employees to submit a rebuttal.
• If signed by Governor Kathy Hochul, covered employers would have 60 days after enactment to comply with these new obligations and could face monetary penalties for noncompliance.

Overview of Senate Bill 3460

On May 19, 2026, the New York Legislature passed Senate Bill 3460, which would add Section 210-b to the New York Labor Law and substantially expand current and former employees’ rights to access personnel records. The new law would also create significant new recordkeeping and disclosure obligations for covered employers, which include both public and private employers in New York.

If Governor Kathy Hochul signs the bill into law, employers would need to comply with the law’s new obligations within 60 days after enactment. To help employers prepare, the sections below provide a high-level overview of the records covered by the bill, its personnel record protections and related employer requirements.

Covered Personnel Records

The bill broadly defines “personnel record” to include any employer-maintained record that identifies an employee and “is used or has been used, or may affect or be used relative to that employee’s qualifications for employment, promotion, transfer, additional compensation or disciplinary action.” The definition also includes qualifying records maintained by third parties pursuant to a contract with the employer but excludes personal information about anyone other than the employee if disclosure would constitute an unwarranted invasion of privacy.

The bill specifically provides that all the following written information or documents qualify as covered personnel records:

• Name, address, date of birth, job title and description
• Rate of pay and any other compensation paid to the employee
• Starting date of employment
• The employee’s job application
• Resumes or other forms of employment inquiry submitted to the employer by the employee in response to the employer’s advertisement
• All employee performance evaluations, including employee evaluation documents
• Written warnings of substandard performance
• Lists of probationary periods
• Waivers signed by the employee
• Copies of dated termination notices
• Any other documents relating to disciplinary action regarding the employee

This list is nonexclusive, and the bill expressly provides that the above categories do not limit the broader definition of “personnel record” noted above.

New Notice Requirements for Negative Information

The new law would require employers to notify employees within 10 days after placing information in a personnel record that is, has been or may be used to negatively affect the employee’s employment, promotional opportunities, compensation or transfer prospects or to expose the employee to discipline.

Employees also would have the right to challenge or rebut disputed records. If an employee disagrees with information contained in the personnel record:

• The employer and employee may mutually agree to correct or remove the information.
• If no agreement is reached, the employee may submit a written statement explaining their position.
• That statement must become part of the personnel record and must accompany the disputed information when shared with third parties.

The bill also provides that if an employer places information in a personnel record that it knew or should have known was false, the employee may seek expungement through a collective bargaining process, personnel procedures or judicial action.

Employee Access Rights

Upon written request, employers would need to provide employees with a free copy of their personnel records within five business days.

Employers may limit reviews to two times per calendar year, excluding reviews required after negative information is added to an employee’s record.

Record Retention Obligations

The new law would require employers to maintain complete personnel records from the commencement of employment through three years after the termination of employment. Subject to the bill’s provisions permitting removal by mutual agreement, employers would be required to maintain the complete personnel record without deletions or expungement during that period, although, as indicated above, materials can be removed by mutual agreement between the employee and employer.

Additionally, if an employer maintains written personnel policies, those policies must be made continuously available at the location where personnel matters are administered.

Anti-Retaliation Protections

The bill contains broad anti-retaliation provisions prohibiting “an employer or any other person” (“other person” is not defined in the bill) from discharging, threatening, penalizing, discriminating against or otherwise retaliating against employees who exercise their rights under the statute. The bill specifically identifies immigration-related threats or reports as prohibited forms of retaliation.

Collective Bargaining Agreements

The bill explicitly notes that its requirements do not supersede a collective bargaining agreement, provided the agreement gives employees access to personnel records that are at least substantially similar to the access rights created by the bill.

Enforcement and Penalties

The bill would authorize the New York attorney general to enforce the new law’s provisions and would permit the attorney general to impose fines ranging from $500 to $2,500 for violations.

Looking Ahead

Although the Legislature has passed SB3460, the bill is not yet law. If signed by the governor, employers would have only 60 days to comply. Employers should consider reviewing their personnel record practices now to prepare for potential new obligations and monetary penalties if the bill is enacted. We will continue to monitor this bill and will provide a supplemental alert if it is signed into law. Please contact the authors of this alert or your BakerHostetler attorney contact if you have any questions.

• The Department of Justice’s (DOJ) National Fraud Enforcement Division (the Fraud Division) officially has complete oversight over tax investigations and prosecutions, marking a significant change in tax enforcement that stood for decades.

• Under a final rule, effective Aug. 24, the assistant attorney general for the Fraud Division (AAG) – currently, Colin M. McDonald – now has exclusive authority over cases arising under the internal revenue laws, among several other broad subject matter areas. This departs from previous policy, under which the chief of the DOJ’s Criminal Division had oversight over all tax prosecutions.

• Given the government’s increased attention and resource allocation to the Fraud Division, as emphasized in AAG McDonald’s Aug. 13 memorandum (the Memorandum), companies and individuals should anticipate heightened scrutiny in the stated areas of focus, including compliance with the Internal Revenue Code.

• What’s more, given the Fraud Division’s breadth of investigative power, nonprofit charitable organizations are likely to continue to see increased scrutiny. Indeed, the DOJ and IRS have stated their intention to focus on nonprofit entities that they believe may be operating illegally, including the “knowing” use and receipt of funds for activities that exceed the organization’s charitable purpose.

Key Details

A final rule[1] (the Rule), which came into effect on Aug. 24, substantially bolsters the investigatory and prosecutorial powers of the recently created Fraud Division. In April 2026, the DOJ created the Fraud Division to combat fraud against the government and the public. To accompany the Rule, AAG McDonald released the Memorandum outlining what he referred to as a “broad mandate” to combat various types of fraud. The Memorandum includes an outline of the government’s substantial mobilization of resources for use in the Fraud Division. These resources include hiring personnel and investing in technology to aid the division’s ability to detect wrongdoing. The Memorandum also highlights key enforcement priorities, including the prosecution of those who are viewed as potentially evading taxes or assisting others in doing so.

As it relates to tax enforcement, the Rule formally transfers enforcement oversight for Internal Revenue matters to the head of the Fraud Division. This is a momentous shift in the authority over tax investigations and prosecutions, which have historically been overseen by the separate Tax Division within the DOJ and, more recently, the Tax Section within the Criminal Division. The Rule also empowers the head of the Fraud Division with additional authority to conduct investigations into Internal Revenue misconduct, including through the AAG’s nationwide jurisdiction to open special grand juries and the ability to conduct investigations anywhere in the U.S.

Background

Until recently, sole enforcement authority for federal tax crimes was held by the DOJ’s Tax Division. However, following a reorganization in December 2025, the former Civil and Criminal Tax Division attorneys were relocated to the DOJ’s Civil and Criminal Divisions, respectively. Now, these resources and the authority to prosecute violations of the Internal Revenue Code have been removed from within the Criminal Division and placed under the purview of the newly formed Fraud Division. How this reorganization will affect long-standing tax enforcement policies, including tax prosecutions requiring Tax Division approval and the ability of a taxpayer under investigation to present its case to Tax Division attorneys at a Taxpayer Conference before charges are brought – important procedural safeguards for individuals and entities under criminal investigation – remains to be seen.

The Rule and establishment of the Fraud Division are part of this administration’s larger focus on fraud enforcement. The DOJ stated that its work to “combat fraud supports President Trump’s Task Force to Eliminate Fraud, a whole-of-government effort chaired by Vice President J.D. Vance to eliminate fraud, waste, and abuse with Federal benefit programs.”[2]

Tax Enforcement

The newly enacted Rule[3] designates the functions assigned to the AAG of the Fraud Division. For tax enforcement purposes, the AAG of the Fraud Division will oversee all criminal proceedings arising under the Internal Revenue laws, including criminal proceedings involving money owed to or paid by the U.S.[4]

The Rule also amends the Criminal Division’s regulations. Before the Rule’s adoption, the duty to investigate and pursue criminal fraud litigation was generally assigned to the Criminal Division. Now, the DOJ has assigned this duty to the new Fraud Division, and it has been directed to prioritize certain types of cases, including those related to tax fraud.[5]

The Memorandum specifically outlines the Fraud Division’s mandate to prioritize prosecuting certain tax schemes and crimes, including those involving so-called refund mills – where “unethical return preparers include false claims on individuals’ tax returns,” often in exchange for higher fees. The Memorandum also emphasizes investigation and prosecution of false returns and abusive promoters.

The Fraud Division not only will focus on tax enforcement but also will deploy a range of modern tools to do so. According to the Memorandum, the Fraud Division “will deploy the full arsenal of criminal tax tools paired with data analytics, financial forensics, and nationwide coordination.” The Memorandum states that these capabilities will allow the Fraud Division to “identify tax misconduct earlier, pursue tax offenders more efficiently, and deliver meaningful deterrence in service of the American taxpayer.”

Enforcement Generally and Powers of the Fraud Division

In addition to jurisdiction over tax crimes, the Fraud Division will manage criminal proceedings in the following areas: criminal fraud (except cases specifically assigned to the Antitrust Division);[6] trade fraud; customs duties, tariffs, or other external revenue or foreign commerce; fraud or abuse with respect to health plans; healthcare fraud; and controlled substances distribution and diversion schemes.[7]To “ensure necessary flexibility,” the Fraud Division will also oversee other cases assigned by the attorney general.[8] Relatedly, the attorney general or deputy attorney general may also assign to the Fraud Division other duties and functions.[9] This development also coincides with the formation of the White House’s own Antifraud Task Force, of which Vice President Vance is the chairman and that will include a representative of the DOJ.[10] The DOJ has explicitly stated the Fraud Division will support Vice President Vance’s efforts.[11]

Additionally, the Fraud Division has authority to seek injunctions against fraud under 18 U.S.C. 1345; obtain restitution, seize or forfeit property, and recover forfeitures or damages; enforce compliance with final judgments; and recover and impose penalties, including actions for the imposition of penalties for conspiring to defraud the U.S. (when such actions are related to specifically identified areas).[12] The Rule vests with the head of the Fraud Division or his deputy assistant attorneys general the ability to bring special grand juries in any U.S. jurisdiction and certify that a legal proceeding is against a person who is believed to have participated in an organized criminal activity, for purposes of obtaining depositions to preserve testimony.[13] The Rule also removes a prohibition on redelegating authority and allows assistant attorneys general to delegate all litigating authority to section chiefs.

Practical Implications

In practice, broad enforcement powers beget heightened scrutiny. Consistent with the priorities described in AAG McDonald’s Memorandum, the Rule emphasizes the Fraud Division’s commitment to bringing enforcement actions involving efforts to defraud the government or “steal” taxpayer dollars.

The broad grant of authority to prosecute tax fraud and matters arising out of the Internal Revenue laws, coupled with AAG McDonald’s recent statements concerning the Fraud Division’s efforts to “deploy the full arsenal of criminal tax tools paired with data analytics, financial forensics, and nationwide coordination,” in order to “identify tax misconduct earlier,” and deliver “meaningful deterrence” is significant.[14] Individuals and companies should review their policies and compliance programs to ensure adherence to all applicable laws. In addition, entities should have a plan in place if they find out they are or may be subject to a DOJ or IRS investigation, including if a search warrant is executed on the entity’s office.

Continued Focus on Nonprofit Enforcement

Nonprofit entities, which have already faced heightened scrutiny under the current administration, should continue to be vigilant given this new Rule and the accompanying Memorandum. In the past year, the DOJ and the IRS have opened investigations against and, in some cases, indicted tax-exempt organizations. The establishment of the Fraud Division and the enactment of the Rule suggest that this trend will continue. These inquiries will be further bolstered by the DOJ’s work with IRS Criminal Investigations (CI). IRS CI has also been keenly focused on tax-exempt organizations, with Chief Jared Koopman recently discussing his goal of preventing criminal activity from funneling money through tax-exempt groups.[15] These efforts by the IRS include updating the annual nonprofit tax return, the Form 990, to require additional information related to government contracts, grants and fiscal sponsorship agreements.

Those operating in the nonprofit and charitable contribution spaces should evaluate their operations and, if necessary, work with counsel to minimize their potential exposure and the risk of being swept up into the wave of investigations.

Conclusion

The creation of the Fraud Division, the mobilization of significant resources and the Fraud Division’s oversight of criminal tax enforcement represent a significant change in the DOJ’s tax enforcement strategy. The Rule consolidates broad investigative and prosecutorial authority within a division tasked with pursuing fraud against the government and taxpayers, signaling that criminal tax enforcement is a top priority. Nevertheless, questions remain regarding how long-standing Tax Division policies will operate under the new structure. Until further guidance emerges, individuals, businesses, tax professionals and nonprofits should monitor developments, review compliance programs and prepare for increased scrutiny from the DOJ and its newly equipped Fraud Division.

The BakerHostetler Criminal Tax Defense team and White Collar, Investigations and Securities Enforcement and Litigation team include dozens of experienced individuals, including numerous attorneys who have served in the DOJ and the DOJ Tax Division. Our team has extensive experience in defending regulatory investigations and litigation and in providing compliance counseling. Please feel free to contact any of our experienced professionals if you have questions about this alert.

[1] 28 CFR pt. 0 (2026).

[2] Press Release, Department of Justice Announces Launch of National Fraud Detection Center to Combat Fraud Against Taxpayer-Funded Programs, Dep’t of Just. (Aug. 24, 2026), available at https://www.justice.gov/opa/pr/department-justice-announces-launch-national-fraud-detection-center-combat-fraud-against.

[3] 28 CFR pt. 0, Subpart M, §§ 0.70 and 0.71.

[4] See 28 CFR § 0.70(b), (d).

[5] See 28 CFR § 0.55(b).

[6] However, the Fraud Division has the specific authority to investigate cases involving defective pricing and bid-rigging schemes – typically areas that the Antitrust Division would have authority over.

[7] See 28 CFR 0.70(a), (c), (e), (f). The BakerHostetler team covered these areas in greater detail in a recent alert – see Assistant Attorney General Memorandum to Fraud Division Outlines Division’s Key Enforcement Priorities, BakerHostetler (Aug. 21, 2026), available at: https://www.bakerlaw.com/insights/assistant-attorney-general-memorandum-to-fraud-division-outlines-divisions-key-enforcement-priorities/.

[8] See 28 CFR 0.70(g), (h).

[9] See 28 CFR 0.70(l).

[10] Exec. Order, Establishing the Task Force to Eliminate Fraud (Mar. 16, 2026), available at: https://www.whitehouse.gov/presidential-actions/2026/03/establishing-the-task-force-to-eliminate-fraud/.

[11] Press Release, This Week in Fraud: DOJ’s New Fraud Division Announces Numerous Fraud Enforcement Actions and a New Strike Force to Investigate and Prosecute Fraud on the West Coast, Dep’t of Just. (May 1, 2026), available at: https://www.justice.gov/opa/pr/week-fraud-dojs-new-fraud-division-announces-numerous-fraud-enforcement-actions-and-new.

[12] See 28 CFR 0.70(i).

[13] See 28 CFR 0.71(a), (b).

[14] See Memorandum from Assistant Att’y Gen. Colin M. McDonald, The Fraud Division’s Enforcement Priorities (Aug. 13, 2026), available at:https://www.justice.gov/opa/pr/assistant-attorney-general-colin-m-mcdonald-issues-memorandum-national-fraud-enforcement.

[15] Erin Schilling, IRS Focuses Enforcement on Nonprofits, Easing Compliance Burdens, Bloomberg Law (Aug. 26, 2026), available at: https://www.bloomberglaw.com/product/blaw/bloomberglawnews/daily-tax-report/BNA%20000001a03a31df9badf37b35a51e0000?bna_news_filter=daily-tax-report.

• The Department of Justice Antitrust Division (DOJ) recently announced “targeted” second requests with the stated goal of expediting reviews and reducing merger litigation. Simultaneously, DOJ unveiled an updated model timing agreement.
• DOJ subsequently announced its first closure of an investigation under these procedures, acknowledging the emergence of AI competitors as sufficient to permit consolidation of horizontal competitors in traditional software development.
• DOJ also settled its lawsuit against private equity firm KKR, alleging that it failed to file HSR notifications, failed to include all responsive documents with its HSR filings, and altered the content of responsive documents. KKR agreed to pay a record $250 million to settle the lawsuit.

In a busy summer for the DOJ, several notable announcements concerning enforcement of the HSR Act were recently released. First, DOJ announced a return of “targeted” second requests, which have the potential to meaningfully reduce burdens on transacting parties subject to a second request. Second, just a few weeks later, DOJ announced the first closure of such an investigation under these new procedures. Substantively, this announcement signals DOJ’s potential openness to early resolution of second request investigations. Finally, DOJ announced a settlement with KKR, ending a lawsuit alleging KKR’s systematic failure to file, failure to include responsive documents, and in some cases, intentional alteration of the content of its HSR filings. We discuss each of these developments in turn.

Return of “Targeted” Second Requests

On July 23, the DOJ announced the return of “targeted” second requests, as well as a revised model timing agreement.[1] Associate Attorney General Stanley E. Woodward Jr. stressed that the DOJ remains committed to cutting red tape and staying out of the way of the vast majority of mergers and acquisitions that do not cause antitrust concerns. The DOJ also reiterated that, at all times, it remains open to negotiated relief that would resolve a potential competition concern in lieu of litigation to block a transaction.

When parties to a proposed transaction file HSR, either the Federal Trade Commission or DOJ reviews the filings for competition concerns. The vast majority of transactions clear without any follow-up from the agencies. But in about 2 percent of such transactions, the agencies identify a competition concern that the parties are unable to resolve before the expiration of the statutory waiting period. These filers are served with a “second request” – the equivalent of a broad and burdensome subpoena for documents, data and narrative responses. By statute, the service of a second request extends the waiting period until 30 days after both parties “substantially comply” with the second request, which gives the agencies a defined window to sue to block the transaction if they believe the transaction should be blocked. Compliance with a second request is typically burdensome, time-consuming and expensive for transacting parties.

The announcement only applied to DOJ’s review of merger transactions. Specifically, to potentially reduce this burden in some cases, the DOJ announced the return of “targeted” second requests, whereby the filing party would be required to provide DOJ with information and documents that DOJ identifies as priority items. Upon receipt of the priority items, DOJ commits to a quicker review, followed by a decision to close the investigation, to modify the second request to reduce burden, or to keep the investigation open fully. While this could enable quicker substantial compliance with a second request, to receive this “targeted” treatment, a filer would need to enter into a timing agreement.

Although the streamlined procedures could result in a focused review and a quick DOJ determination as to whether an investigation may be closed, parties will need to evaluate the implications of the new timing agreement for their closing. The new timing agreement does not provide a commitment that the “expedited review” will resolve the DOJ’s concerns. DOJ instead retains discretion to require full compliance with the second request if its concerns are not resolved by the “expedited review.” Additionally, if the investigation is not resolved in the expedited window, the timing agreement includes an “Earliest Closing Date” – 60 days after the compliance date. This doubles the waiting period that is required by statute – 30 days. And before a party could even certify substantial compliance, the model timing agreement requires a minimum 30-day period following production of structured data to certify substantial compliance. In total, this means that a party to a second request that seeks streamlined treatment would effectively face a 90-day waiting period to close a transaction from the time when structured data productions are complete.

So the question becomes: which is better, (a) a standard second request and a standard 30-day post-compliance waiting period, or (b) a potentially “targeted” second request, which if granted, would result in a streamlined investigation, but if refused by the DOJ, would result in a filer’s being bound to a timing agreement that effectively includes a 90-day waiting period post-production of structured data and other concessions favorable to DOJ? There are trade-offs. Certainly, the reduced cost and burden of a more-focused investigation are benefits to HSR filers if the expedited process results in clearance. But if the expedited process fails to result in clearance, then the timing agreement requires more time before the merger can be completed. Where the equities lie will vary depending on the circumstances of a given transaction and the goals of the parties.

First “Targeted” Second Request Investigation Closed

On Aug. 19, DOJ announced its first closure of a second request investigation under the framework for targeted second requests.[2] The proposed merger of Seismic Software Inc. and Highspot Inc. presented potential horizontal competition issues. The proposed transaction is a horizontal consolidation of two companies that “offer sales enablement software platforms to businesses.” The parties’ primary argument against anticompetitive harm as a result of the horizontal consolidation involved AI. As software providers, the parties asserted that horizontal consolidation allowed traditional software providers to better compete against the emerging AI-based competitors. To explore these arguments, DOJ caused the parties to enter into a timing agreement and collected priority materials addressing these arguments. Following the review of the priority materials, DOJ agreed with the parties and closed the investigation. Woodward again heralded the targeted second request procedures, saying, “The resolution of this matter using a targeted approach is an excellent example of the Antitrust Division efficiently reviewing a proposed merger with an expedited focus on key dispositive issues.”

DOJ Settles KKR Lawsuit for Record $250 Million

On Aug. 26, DOJ announced the settlement of a landmark lawsuit against private equity firm KKR.[3] DOJ sued KKR in Jan. 2025, alleging a number of violations of premerger review law where KKR had been party to more than 100 HSR-reportable transactions since 2021.[4] DOJ alleged that from 2021 to 2022, KKR violated the HSR Act at least 16 times and failed to make any HSR filing for at least two transactions that were HSR reportable. DOJ also claimed that KKR systemically omitted responsive “Item 4” documents – those documents that address substantive competitive issues with a transaction and must be produced in connection with the preparation of an HSR filing – from at least 10 of the suspect HSR filings. Finally, DOJ alleged that KKR altered the content of its Item 4 documents for at least eight of the suspect HSR filings.

Penalties for violation of the HSR Act are significant and can be assessed per day, per violation.[5] DOJ and KKR settled the lawsuit for $250 million, but DOJ claimed that the maximum penalty available for the alleged violations exceeded $650 million. Woodward touted the settlement and the DOJ’s efforts: “This historic $250 million civil penalty – more than 20 times any prior HSR penalty obtained by the DOJ – sends a powerful message: the Department is committed to vigorous enforcement of the Act . . . . Companies that disregard their legal obligations will face serious consequences.”

***

BakerHostetler’s merger clearance team has extensive experience in assessing HSR reportability, preparing HSR submissions and conducting cost-effective post-filing advocacy, including successful clearance of second request investigations. The merger clearance team includes former DOJ Antitrust Division leaders and state attorney general personnel who have experience investigating mergers for competition concerns. Please feel free to contact any of our experienced professionals if you have questions about this alert.

[1] https://www.justice.gov/opa/pr/justice-department-resumes-targeted-hsr-merger-review-process

[2] https://www.justice.gov/opa/pr/statement-department-justice-antitrust-division-closing-its-investigation-merger-seismic

[3] https://www.justice.gov/opa/pr/kkr-agrees-pay-record-250m-penalty-serial-violations-federal-premerger-review-law

[4] https://www.justice.gov/archives/opa/pr/justice-department-sues-kkr-serial-violations-federal-premerger-review-law

[5] The maximum daily fine increases annually. The current maximum daily fine is $53,088.

• DOJ is expanding its ability to detect cross-program fraud. The National Fraud Detection Center is designed to combine data, analytics and investigative resources across federal and state agencies, enabling investigators to identify patterns and relationships that may not be visible within a single program or agency.
• Healthcare providers and other recipients of federal funds may face increased data-driven scrutiny. Billing anomalies, ownership structures, referral relationships, utilization trends, financial flows and activity across multiple federal benefit programs may more readily generate investigative leads.
• Organizations should assess whether their compliance functions can identify cross-functional risks early. Compliance reviews should account for data maintained across business units, affiliates and government programs and should be equipped to investigate unusual patterns before they draw government attention.

On August 24, 2026, the Department of Justice (DOJ) announced the launch of its new National Fraud Detection Center (NFDC), a prosecutor-led, multiagency initiative designed to identify fraud across federal programs through expanded data sharing, sophisticated analytics and unprecedented coordination among federal and state enforcement agencies.

The announcement signals a further evolution in DOJ’s approach to fraud enforcement. Healthcare providers, government contractors, financial institutions and other organizations that receive, administer or participate in federally funded programs should closely monitor the initiative and assess whether their compliance functions can identify data patterns that may draw government scrutiny.

According to DOJ, the NFDC is intended to address a longstanding limitation in federal fraud enforcement – agencies historically have had substantial visibility into their own programs, but more limited ability to identify conduct, actors or patterns spanning multiple programs. Rather than relying principally on referrals from individual agencies, the Center is designed to combine data and analytical capabilities across the government to identify suspicious patterns and generate criminal investigative leads for prosecutors and law enforcement agencies.

Its inaugural participants include the FBI, Homeland Security Investigations, IRS Criminal Investigation, Financial Crimes Enforcement Network, the Pandemic Response Accountability Committee and Treasury, together with Inspectors General from numerous departments and agencies, including HHS, Veterans Affairs, Labor, Education, Agriculture, Homeland Security, HUD and the Small Business Administration. DOJ also specifically identified partnerships with several state governments.

The breadth of that participation is significant. Information that previously may have been reviewed within separate agency silos can be analyzed collectively. In particular, government investigators may be better positioned to identify relationships among providers, beneficiaries, owners, financial transactions and claims across multiple federal programs.

Effect on the Healthcare Industry 

DOJ has made healthcare fraud one of the principal priorities of its newly created National Fraud Enforcement Division. The Department’s June 2026 National Health Care Fraud Takedown resulted in charges against 455 defendants, including 90 doctors and other licensed medical professionals, involving more than $6.5 billion in alleged false claims.

The NFDC provides DOJ with additional infrastructure to identify potential cases before a traditional investigative referral occurs. Claims anomalies, common ownership, referral relationships, financial flows and activity involving multiple federal benefit programs may increasingly generate investigative scrutiny through centralized analytics.

In practical terms, providers should assume that government investigators will have greater ability to connect information maintained by different agencies and identify patterns that may not be apparent when individual claims or transactions are viewed in isolation.

The creation of the NFDC reinforces the importance of viewing compliance through the same data-driven lens increasingly employed by the government. Organizations participating in federally funded programs should consider whether their own compliance functions can identify unusual billing, referral, utilization and payment patterns before those patterns attract government attention.

Companies should also evaluate whether compliance reviews adequately account for information maintained across different business units and federal programs rather than examining each program independently. Particular attention should be given to outlier billing, rapid changes in utilization, unusual geographic patterns, relationships among commonly owned entities, high-risk referral arrangements and other anomalies that sophisticated government analytics may identify.

The larger message from DOJ is clear: federal fraud enforcement is becoming increasingly centralized, coordinated and data driven. The NFDC gives prosecutors and investigators a new mechanism for finding potential cases rather than waiting for potential cases to find them.

For companies operating in highly regulated industries or receiving substantial federal funds, that development warrants attention now – not after an investigative inquiry arrives.

• The New Jersey Department of Labor and Workforce Development has launched its electronic portal for employers to submit separation information required under New Jersey’s Unemployment Compensation Law.
• New Jersey employers must report separations through the portal within seven days and provide certain benefit eligibility information.
• Failure to timely provide required information may result in negative consequences for employers, such as limiting an employer’s ability to contest benefit charges and exposing the employer to statutory penalties.

Overview

The New Jersey Department of Labor and Workforce Development (NJDOL) has launched its long-anticipated electronic Employer Response Portal (the portal), which employers must use to submit separation information under New Jersey’s Unemployment Compensation Law (the law). Initially enacted in 2022, the law was intended to expedite unemployment benefit determinations by requiring employers to electronically submit separation information to the NJDOL. Although the law took effect in 2023, implementation was delayed until the NJDOL established the portal, which has now taken place.

Electronic Reporting Requirements

The portal significantly changes many employers’ prior practices of providing separation information only after a former employee has applied for unemployment benefits. Now employers must proactively report separations – including layoffs, discharges, resignations and retirements – through the portal and provide such information so that the NJDOL can assess benefit eligibility. This generally includes the employee’s separation date, last day worked, reason for separation, wages, work schedule, employer and supervisor contact information, and other relevant supporting documentation.

Importantly, employers must also continue providing separating employees with Form BC-10, Instructions for Claiming Unemployment Benefits. However, the NJDOL has clarified that employers are not required to upload or submit the BC-10 form through the portal.

Submission Timing

The NJDOL has instructed employers to submit separation information through the portal within seven days of separation. If the NJDOL notifies an employer that required separation information is missing or incomplete, the employer must generally respond within seven calendar days, though there are certain follow-up requests that may carry a shorter deadline.

Employers also should act promptly upon receiving an unemployment benefit determination, as the law generally gives an employer only seven calendar days after confirmed receipt of notification of an initial determination to file an appeal.

Consequences for Noncompliance

If an employer fails to timely provide required information, the NJDOL may decide the claim based on the information available and the employer may lose the ability to challenge certain benefit charges attributable to the claim. An employer that willfully fails or refuses to furnish required information may also be subject to monetary penalties.

Going Forward

The portal’s launch transforms what had largely been a statutory reporting obligation into a practical compliance requirement. Going forward, employers should treat the portal as a new component of the separation process and ensure that systems are in place to promptly report employee separations, respond to follow-up requests from the NJDOL and monitor unemployment determinations for applicable appeal deadlines. Should you have any questions or need assistance with this new electronic reporting requirement, BakerHostetler’s Employment team is ready to assist.