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In the past month, we have seen significant developments in estate planning, business law, elder law, and special needs law. We have highlighted the most noteworthy developments to ensure you and your firm stay informed of any changes. From the vacatur of FinCEN’s residential real estate rule, an increase in the age of eligibility for ABLE accounts, a new proposed rule for classifying independent contractors, and new cases addressing AI’s impact on attorney-client and work product privileges, read on to learn how these developments may impact your practice.
Estate Planning
FinCEN’s Residential Real Estate Reporting Rule Vacated
Flowers Title Cos., LLC v. Bessent, No. 6:25-cv-127-JDK, 2026 WL 782283 (E.D. Tex. Mar. 19, 2026)
On April 14, 2025, Flowers Title Companies, LLC (Flowers Title) filed a lawsuit in federal district court challenging a final rule adopted in 2024 by the Financial Crimes Enforcement Network (FinCEN) entitled Anti-Money Laundering Regulations for Residential Real Estate Transfers (the final rule), which requires reports be filed for nonfinanced residential real estate transfers to a transferee entity or trust, with some exceptions. Flowers Title filed a motion for summary judgment, asserting that the final rule violated the Administrative Procedure Act (APA) by exceeding FinCEN’s authority under the Bank Secrecy Act (BSA). Alternatively, Flowers Title asserted that if the BSA authorizes the final rule, then the BSA violates the nondelegation doctrine, exceeds Congress’s enumerated powers, and violates the Fourth Amendment. Flowers Title also asked the court to vacate the final rule.
The court granted Flowers Title’s motion for summary judgment solely on its statutory argument. The court noted that the APA requires courts to set aside agency action that is unlawful because it exceeds statutory authority. Further, under Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), in reviewing whether an agency acted within its statutory authority, courts must not defer to an agency’s interpretation but must determine for themselves whether a law means what the agency says it means.
The court considered two sections of the BSA that FinCEN cited as statutory authority for the final rule. First, the court evaluated 31 U.S.C. § 5318(g)(1), which authorizes FinCEN to require financial institutions to report “any suspicious transaction relevant to a possible violation of law or regulation.” (emphasis added) The court rejected FinCEN’s argument that nonfinanced transfers of residential real property to certain entities and trusts are categorically suspicious transactions. The court held that FinCEN had exceeded its statutory authority: Instead of limiting the reporting rule to suspicious transactions, FinCEN had impermissibly declared that an entire category of residential real estate transactions was suspicious without sufficient explanation.
Further, the court rejected FinCEN’s argument that it was authorized to require reports from financial institutions by 31 U.S.C. § 5318(a)(2), under which FinCEN may require financial institutions to “maintain appropriate procedures, including the collection and reporting of certain information.” The court determined that FinCEN’s interpretation changed the meaning of “maintaining appropriate procedures,” into a substantive obligation to report information. In addition, FinCEN’s interpretation—that § 5318(a)(2) broadly authorized it to impose reporting requirements on financial institutions—would contradict the more limited authority provided by § 5318(g)(1).
The court granted Flowers Title’s motion for summary judgment and vacated the final rule.
Takeaways: The final rule became effective March 1, 2026, but following the Flowers Title ruling, FinCEN issued an alert stating that “reporting persons are not currently required to file real estate reports with FinCEN and are not subject to liability if they fail to do so while the order remains in force.” Notably, two other federal district courts have upheld the final rule (Fidelity National Financial, Inc. v. Bessent, No.: 3:25-cv-554-WWB-SJH, 2026 WL 472350 (M.D. Fla. Feb. 19, 2026) and Corley v. U.S. Department of the Treasury, No. 5:25-cv-00086-H (N.D. Tex. Feb. 25, 2026)). For additional information about the final rule, please see WealthCounsel’s September 2024 and November 2025 monthly recaps.
Transfer of LLC Interest to Charitable Organization Disregarded for Income Tax and Charitable Deduction Purposes
I.R.S. Chief Couns. Mem. 20260401F (Jan. 23, 2026)
On January 23, 2026, the Internal Revenue Service (IRS) issued a Chief Counsel Memorandum addressing whether (1) a taxpayer’s transfer of a nonvoting interest in a limited liability company (LLC) to a 501(c)(3) charitable organization to fund a donor advised fund (DAF) should be respected for federal income tax purposes, (2) the charitable organization had sufficient economic or membership interest to be a bona fide partner in the LLC, (3) partnership income allocated to the charitable organization’s nonvoting interest in the LLC should be taxed to the taxpayer, and (4) the taxpayer could claim a charitable deduction for transfer of the nonvoting interest to the charitable organization.
The memorandum addressed a taxpayer who had formed an LLC and transferred a nonvoting interest to a charitable organization. The taxpayer, as a member of the LLC, opened a brokerage account for the LLC providing him with the authority to manage the LLC’s business activities and investments. The taxpayer made several transfers into the LLC’s brokerage account but did not authorize a distribution to the charitable organization. Although the operating agreement provided that the charitable organization would receive mandatory distributions, the taxpayer did not make any distributions to it. The charitable organization did not have the right to (1) receive any of the investment income without the taxpayer’s consent, (2) participate in the LLC’s management, or (3) exercise control over its interest in the LLC. The taxpayer withdrew funds from the LLC’s brokerage account but did not enter into loan agreements to repay the amounts withdrawn until later dates.
In the memorandum, the IRS stated that the transfer of the LLC interests to the charitable organization must be disregarded under the economic substance doctrine set forth in I.R.C. § 7701(o) because the taxpayer did not make the transfer for a valid nontax business purpose; rather, the sole purpose of the transfer was to claim tax savings. Neither party’s economic position changed as a result of the transfer. Nevertheless, as a result of the transfer, the taxpayer obtained a charitable deduction and avoided income tax despite retaining complete control over the LLC’s assets, as evidenced by the taxpayer’s withdrawals, which were later characterized as loans.
In addition, the memorandum stated that the charitable organization was not a bona fide partner in the LLC because, based on a realistic appraisal of the totality of the circumstances, it did not have a meaningful stake in the enterprise’s success or failure. The charitable organization did not share in the upside potential or downside risk of the LLC and did not realize the value of its nonvoting interest in the LLC. Further, the IRS viewed the LLC, which never engaged in business activity, as a vehicle for income tax avoidance. Based on the facts and circumstances, the charitable organization did not have dominion and control over its interest in the LLC. Therefore, the charitable organization was not recognized as an LLC member or owner of any interest in it for income tax purposes.
The IRS also determined that income from the charitable organization’s nonvoting interest should be treated as taxable to the taxpayer under the assignment of income doctrine. The taxpayer never parted with dominion and control over the charitable organization’s nonvoting interest in the LLC; as a result, for income tax purposes, the taxpayer only assigned the income to the charitable organization. The nonvoting interest had no value because the charitable organization did not have a right to the LLC’s income or distributions.
The IRS further determined that the taxpayer’s charitable deduction under I.R.C. § 170(a)(1) should be disallowed due to the taxpayer’s lack of charitable intent and failure to comply with substantiation requirements, such as providing a contemporaneous written acknowledgement from the charitable organization and attaching a qualified appraisal for the property the taxpayer claimed to have contributed to the charitable organization.
Takeaways: Although the taxpayer ostensibly transferred a nonvoting LLC interest to the charitable organization, the IRS examined the economic reality of the transaction to determine the tax consequences. Because the taxpayer retained complete control over the LLC and the transfer of the nonvoting interest provided nothing of value to the charitable organization, the IRS stated that the taxpayer should not be permitted to take advantage of tax benefits from the transaction, which was deemed merely a tax avoidance vehicle. Although Chief Counsel Memoranda do not have precedential value for other taxpayers, they are instructive regarding the IRS’s position on an issue.
Elder Law and Special Needs Law
Age of Eligibility for ABLE Accounts Now 46
In 2014, Congress passed the Achieving a Better Life Experience (ABLE) Act, making tax-free savings accounts available to individuals who have a qualifying disability with onset before age 26 and are receiving Supplemental Security Income (SSI) or Social Security and Disability Insurance (SSDI) based on blindness or disability or who submit a self-certification of a qualifying disability that began before age 26.
The ABLE Age Adjustment Act (section 124 of the SECURE 2.0 Act, passed as part of the Fiscal Year 2023 Omnibus Spending Bill) allows individuals with disabilities occurring before age 46 and who have a qualifying disability to open an ABLE account. This change took effect January 1, 2026.
Takeaways: The ABLE Age Adjustment Act increases the number of individuals eligible for ABLE accounts, which provide people with disabilities, including disabled Veterans, with a way to improve their financial security and independence without losing their federal benefits. Assets in an ABLE account up to $100,000 do not affect SSI eligibility. In addition, any amount of ABLE account savings up to the specific plan’s limits (which vary) will not affect eligibility for Medicaid, SNAP, housing assistance, and federal financial student aid. According to an article on the Social Security Administration’s website, the increase in the age of the onset of disability to 46 makes an additional 1 million disabled Veterans eligible for ABLE accounts.
Massachusetts Regulation Requiring Special Education Services Be Provided to Private School Students at Public School or Neutral Location Does Not Violate Parents’ Constitutional Rights
Hellman v. Massachusetts Dep’t of Elementary & Secondary Educ., No. 25-1417, 2026 WL 787924 (1st Cir. Mar. 20, 2026)
All Massachusetts students with disabilities are entitled to publicly funded special education services. Under title 603, section 28.03(1)(e)(3) of the Code of Massachusetts Regulations, those services must be provided at a public school or other neutral location. This regulation stems from the Massachusetts Constitution, which prohibits the state from providing aid to private schools. As a result, private school students with disabilities must leave their schools to receive special education services. In contrast, public school students may receive services at the school where they are enrolled.
E.H. and H.H. were children with disabilities enrolled in private schools in Massachusetts. E.H.’s and H.H.’s parents pursued special education services for their children and obtained individualized education programs (IEPs). However, they later decided to forego special education services for their children because their work schedules made it difficult to transport them to public schools to receive those services, and because they wanted their children to attend Jewish schools. They believed that the Massachusetts regulation requiring them to transport their children away from their schools to receive services was unduly burdensome, disruptive, stigmatizing, stressful, inefficient, and distracting from their children’s religious school education.
E.H.’s and H.H.’s parents filed a lawsuit against the members and commissioner of the Massachusetts Department of Elementary and Secondary Education (collectively, the Department), asserting that the regulation violated the Due Process, Equal Protection, and Privileges or Immunities Clauses of the Fourteenth Amendment to the US Constitution. The federal district court granted the Department’s motion to dismiss for failure to state a claim. The parents appealed.
The First Circuit Court of Appeals noted that the Individuals with Disabilities Education Act (IDEA) provides federal grants to support states in providing special education services for children with disabilities. To receive the federal funding, the states must provide those students a free, appropriate public education (FAPE) in the least restrictive environment possible. The FAPE is delivered in accordance with a child’s IEP. The least restrictive environment is an educational placement that enables children with disabilities to be educated together with children who are not disabled to the maximum extent that is appropriate. Under the IDEA, private schools must receive a proportionate share of IDEA funds, but private school students do not have an individually enforceable right to receive special education services. However, under Massachusetts law, children with disabilities in private schools do have an individually enforceable right to special education services.
In assessing the parents’ substantive due process claim, the court determined that the parents alleged a right long recognized by the US Supreme Court as fundamental: Parents have a fundamental liberty interest in directing their children’s education, including the right to send them to a private school. The court found that the Massachusetts regulation does not bar parents from or penalize them for choosing to send their children to private schools; rather, it defines how the state will provide publicly funded special education services to their children. The fact that Massachusetts granted private school students an individually enforceable right did not expand the scope of the federal fundamental right. Further, state law did not guarantee children with disabilities access to on-site special education services. The court determined that the parents’ complaint alleged only an increased logistical burden in obtaining services, not that Massachusetts had barred private education or compelled public education. The court performed a rational basis review, which examines whether a law is rationally related to a legitimate governmental interest. The court found that Massachusetts had a legitimate interest—providing special education services to private school students while complying with the Massachusetts Constitution—but the parents had not met their burden of negating every conceivable basis for the regulation.
The court rejected the parents’ Equal Protection claim on similar grounds. Because the government action did not discriminate against them on the basis of a suspect classification or the exercise of a fundamental right, the court’s review was limited to a rational basis standard. The court found that the parents had failed to allege that the regulation disqualified them from the right to seek a specific protection from the law and that they had not alleged that the reasons offered for the regulation “seem[ed] inexplicable by anything but animus.” Hellman v. Massachusetts Dep’t of Elementary & Secondary Educ., No. 25-1417, 2026 WL 787924, at *12 (1st Cir. Mar. 20, 2026). Rather, the court determined that the Department’s classification of public and private school students for the provision of special education services was a rational and permissible means of administration that complied with the Massachusetts Constitution.
Further, the court held that the parents had not sufficiently alleged a claim under the Privileges and Immunities Clause of the Fourteenth Amendment, which protects only rights of national citizenship and is not a general repository for enumerated substantive rights.
Takeaways: In Hellman, the court held that the Massachusetts regulation did not unconstitutionally restrict E.H.’s and H.H.’s parents from choosing private or religious school for their children by requiring that special education services be provided at a public school or neutral site rather than on-site at their private school. E.H.’s and H.H.’s parents have indicated that they plan to appeal the case to the US Supreme Court, which has recently shown a strong inclination to strike down state provisions and requirements that create disparate hurdles for families seeking to exercise their fundamental rights to religious education and parental autonomy.
Probate Court May Consider Availability of Medicaid Benefits Before Eligibility Decision in Determining Whether to Issue Protective Order Transferring Nursing Home Resident’s Assets and Income to Community Spouse
In re Estate of Sizick, No. 166921, 2026 WL 770893 (Mich. Mar. 18, 2026)
In March 2021, 82-year-old Jerome Sizick suffered from declining health. He was hospitalized and later admitted to a nursing facility. In May 2021, Jerome’s health insurance was terminated, and he began to privately pay for his care. Jerome’s wife, Janet, petitioned the probate court on his behalf for a protective order under Mich. Comp. Law section 700.5401(3) to transfer all Jerome’s assets and most of his income to her. In the petition, Janet described Jerome’s health issues, including his dementia; the couple’s income; estimates of her future monthly expenses; and Jerome’s estimated payment amount with Medicaid coverage. After the petition had been filed, Jerome applied for Medicaid.
In June 2021, while Jerome’s Medicaid application was pending, the probate court entered a protective order finding that Jerome was unable to manage his property and affairs due to physical and mental deficiencies and that the order was necessary to obtain Jerome’s assets for his dependents. The probate court also entered a support order for Janet that directed Jerome to transfer all his assets and $2,318 per month to her. The Michigan Department of Health and Human Services (DHHS) successfully appealed the probate court’s order. The Court of Appeals affirmed in part, vacated in part, and remanded for further proceedings. On remand, in December 2022, the probate court again entered an order for the transfer of assets and a $2,318 per month payment to Janet based on additional evidence she submitted in support of her request. The court backdated its December 2022 order to the date of its June 2021 order. The DHHS again appealed. The Court of Appeals again affirmed in part, vacated in part, and remanded for further proceedings.
In both its opinions, the Michigan Court of Appeals agreed with the probate court that Jerome was unable to manage his own property and affairs. However, it held that it was bound by In re Estate of Schroeder, 966 N.W.2d 209 (Mich. Ct. App. 2020), in which it had held that the probate court could not consider whether Medicaid could meet an individual’s needs without a final determination of their eligibility for Medicaid benefits; as a result, the court found that, in the present case, the probate court had erred in finding that Janet was entitled to support and assets under Mich. Comp. Law section 700.5401(3). In addition, the court of appeals held that the probate court had erred by failing to use updated information about the value of Jerome’s assets and his interest in assets being transferred to Janet. In its second opinion, the court of appeals also found that the probate court had abused its discretion in backdating its December 2022 order to June 2021.
Jerome passed away in April 2024 while Janet’s application for leave to appeal in the Michigan Supreme Court was pending. At his death, Jerome owed $125,231 to the nursing facility, and the facility filed a claim against his estate to recover the amount owed. The court granted Janet’s motion to substitute the personal representative of Jerome’s estate as the petitioner-appellant.
In a unanimous opinion, the Michigan Supreme Court first addressed whether the appeal was moot because of Jerome’s death. Although the DHHS had denied Jerome’s applications for Medicaid benefits, he had requested fair hearings with the Michigan Office of Administrative Hearings and Rules (MOAHR). The court noted that, under federal law, Medicaid benefits can be awarded retroactively to deceased individuals. In Michigan, when a denial of Medicaid benefits is overturned on appeal, the applicant is eligible for retroactive reimbursement. The court therefore determined that the appeal was not moot: There was a live controversy because reinstating the protective order would have a practical legal effect on the pending MOAHR proceedings.
The court then ruled that, when a probate court issues a protective order under section 700.5401(3), the court may consider whether Medicaid benefits may be available to a protected individual before DHHS makes an eligibility determination. Section 700.5401(3) expressly requires the probate court to consider two sets of interests: whether money is needed for the support, care, and welfare of the person seeking the protective order and whether the individual’s dependents need it. The statute does not prioritize either set of interests over the other; rather, it requires the probate court to individually assess each person’s needs. The court thus overruled In re Estate of Schroeder, holding that, because the protective order must account for each individual’s foreseeable future ongoing needs, it must be based on a prospective analysis; further, there was no language in section 700.5401(3) precluding the probate court from considering whether Medicaid benefits are or will be available even if DHHS has not yet determined eligibility. The court determined that Medicaid patient-pay amounts can be estimated using a clearly defined methodology before an application is submitted. In addition, allowing the probate court to consider only Medicaid-related circumstances existing when a protective order is requested would undermine the protections against impoverishment for community spouses provided by the federal Medicare Catastrophic Coverage Act of 1988 (MCCA) by effectively nullifying its judicial mechanism allowing assets transferred to the community spouse via a court order to be excluded from the institutionalized spouse’s eligibility determination.
The court determined that the probate court had properly considered both Jerome’s and Janet’s needs and that sufficient evidence was presented at the 2022 probate court hearing to support the probate court’s order. Accordingly, the court reversed the appellate court’s judgment, reinstated the probate court’s 2022 order, and remanded for further proceedings consistent with its opinion.
Takeaway: The In re Estate of Sizick decision is significant for Michigan elder law practitioners—and practitioners in other states if additional courts adopt the Michigan Supreme Court’s reasoning. The court clarified that, in Michigan, nursing home residents and their spouses are not required to submit a Medicaid application before seeking a protective order transferring the nursing home resident’s assets and income to the community spouse. The decision provides married couples with the opportunity to prevent a spenddown by retaining all or most of a nursing home resident’s assets and income through a protective order, while also receiving Medicaid benefits to pay for the nursing home resident’s care.
Medicaid Recipient’s Property Held Prior to Her Death with Surviving Spouse as Tenants by the Entirety Subject to Medicaid Lien
Forest v. Div. of Med. Assistance & Health Servs., No. A-1344-24, 2026 WL 772366 (N.J. Super. Ct. App. Div. Mar. 19, 2026)
Clerveaux and Philomene Benoit held a parcel of real property as tenants by the entirety. Philomene was a Medicaid beneficiary from 2003 to 2012. During that time, New Jersey’s Medicaid program expended $415,501.30 on her behalf for medical care and services. According to the estate recovery information system of New Jersey’s Division of Medical Assistance and Health Services (Division), the Division sent several notices of its claim of a Medicaid lien to the address of the property following Philomene’s death in 2012. In 2013, the information system was updated to show that Philomene had a surviving spouse.
In 2017, Clerveaux died. In April 2019, the executor of Philomene’s estate sent a letter to the Division inquiring about the status of the Medicaid lien and acknowledging that she had been informed that a lien may be placed on the home. Several days later, the Division sent a letter to the executor stating that it was asserting a claim against Philomene’s estate for the amount expended on her behalf and was filing a lien pursuant to section 30:4D-7.2(a) of the New Jersey Statutes Annotated. In May 2019, the Division sent the executor a copy of the lien claim it had docketed in the superior court referencing the amount expended on Philomene’s behalf and the property.
In August 2024, Mary Forest and Tarketia Ajayi, beneficiaries under Clerveaux’s will, filed a complaint against the Division seeking a declaration that the lien was legally ineffective against his estate, the property, and the proceeds from the sale of the property. The court denied their application. Mary and Tarketia appealed.
The Appellate Division of the New Jersey Superior Court reviewed de novo the trial court’s interpretation of the New Jersey and federal Medicaid statutes. The court noted that federal Medicaid law requires that states enact estate recovery provisions as part of their medical assistance plans. In New Jersey, the Division is authorized by section 30:4D-7.2(a) of the New Jersey Statutes Annotated to file a lien against the estate of a Medicaid recipient for all services received after reaching age 55. Under federal law, the decedent’s estate must include at least all assets included in the estate under state probate law and can include “any other real and personal property and other assets in which the individual had any legal title or interest at the time of death” and assets conveyed to a survivor through “joint tenancy, tenancy in common, survivorship, . . . or other arrangement.” 42 U.S.C. § 1396p(b)(4)(B). Section 30:4D-7.2(a)(3) defines estate to include “other real and personal property and other assets in which the recipient had any legal title or interest at the time of death, to the extent of that interest, including assets conveyed to a survivor, heir or assign of the recipient through joint tenancy, tenancy in common, survivorship, life estate, living trust or other arrangement.”
The court found that under New Jersey law, Philomene’s estate included an interest in property she held at her death, which included her interest in the property held as tenants by the entirety. The court determined that, although the state and federal statutes did not explicitly mention tenancies by the entirety, their definitions of estate “clearly” encompassed them. Forest v. Div. of Med. Assistance & Health Servs., No. A-1344-24, 2026 WL 772366, at *4 (N.J. Super. Ct. App. Div. Mar. 19, 2026). Further, New Jersey’s Medicaid regulations expressly authorize liens on property held as a tenancy by the entirety. N.J. Admin. Code § 10:49-14.1(m). Consequently, property held as a tenancy by the entirety was not uncollectible under the federal or state Medicaid estate recovery statutes. The fact that Clerveaux survived Philomene did not preclude the Division from enforcing a Medicaid lien; rather, it affected only the timing of its efforts to enforce the lien and recover the amounts expended on Philomene’s behalf. Under federal law, states may recover Medicaid benefits from the recipient’s estate—including property held as a tenancy by the entirety at their death—but must wait until after the death of the recipient’s surviving spouse.
The court also rejected Mary and Tarketia’s assertion that the Division’s lien was unenforceable because it was untimely. Pursuant to New Jersey regulations, the Division was required to file a claim within three years of receiving written notice from the personal representative of the estate or other interested party. The regulation did not require it to be filed in court, docketed, or recorded within that time, and the court declined to read such a requirement into the regulation. Therefore, the Division was not precluded from enforcing the lien because it had waited until 2024 to docket it.
Further, the court ruled that the lien did not infringe Clerveaux’s constitutional property rights: Clerveaux did not challenge the lien before his death, and the trial court had declined to address the issue because Mary and Tarketia had not previously raised it. The court noted that it typically did not consider issues not presented to the trial court, but it went on to find that the lien was not an unconstitutional taking of Clerveaux’s property without just compensation; rather, it was an effort to obtain reimbursement of Medicaid benefits paid on Philomene’s behalf through her (not Clerveaux’s) interest in the property. Therefore, the court affirmed the trial court’s judgment.
Takeaways: Medicaid estate recovery statutes vary by state. Some states define a Medicaid recipient’s estate as including only assets that pass through their probate estate. In those states, property held as tenants by the entirety may be protected from estate recovery because it passes to the survivor outside of probate—though this is not always the case. As mentioned, federal law allows states to adopt an expanded definition of estate. States such as New Jersey, which have adopted more expansive definitions of the Medicaid recipient’s estate, allow estate recovery against property held in ways that avoid probate, including property held as joint tenants with a right of survivorship, life estates, and property held in revocable living trusts. In Forest, the court determined that although property held as tenants by the entirety is not explicitly mentioned in federal or state Medicaid statutes, such property is included in the expanded definition of estate set forth in those statutes.
Business Law
Department of Labor Releases New Proposed Independent Contractor Rule
Employee or Independent Contractor Status Under the Fair Labor Standards Act, Family and Medical Leave Act, and Migrant and Seasonal Agricultural Worker Protection Act, 91 Fed. Reg. 9932 (proposed Feb. 27, 2026) (to be codified at 29 C.F.R. pts 500, 795 & 825)
On February 27, 2026, the Department of Labor (DOL) released a new proposed rule that would rescind its 2024 final rule entitled Employee or Independent Contractor Classification Under the Fair Labor Standards Act and replace it with a new final rule setting forth an analysis for determining employee or independent contractor status under the Fair Labor Standards Act (FLSA) similar to the analysis included in a prior Trump-era final rule dated January 7, 2021, with some modifications. The DOL also proposes to apply the same analysis to the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act, both of which incorporate the FLSA’s scope of employment.
On May 1, 2025, the DOL issued a field assistance bulletin stating that it would no longer apply the 2024 Biden-era final rule, which applied a totality-of-the-circumstances test that considered six factors, none of which were weighted more than another.
Like the 2021 Trump-era final rule, the new proposed rule would include an economic reality test for distinguishing whether workers are employers or independent contractors that turns on whether workers are in business for themselves and thus are independent contractors or are economically dependent on an employer for work and thus are employees. The proposed rule identifies five factors that should be considered as part of the economic reality test but places greater weight on two core factors—the worker’s opportunity for profit or loss and the degree of control an employer has over the work. Three additional factors—skill, permanence, and whether the work is part of an integrated unit of production—may be considered but are less probative in determining the correct classification. The proposed rule also states, however, that the factors described are not exhaustive and that no single factor is dispositive.
Takeaways: As set forth in the May 2025 field assistance bulletin, the DOL is currently enforcing the FLSA in accordance with Fact Sheet #13 (July 2008) and Opinion Letter FLSA2025-2, which set out an analysis similar to those in the new proposed rule in determining whether a worker is an independent contractor or an employee under the FLSA. For purposes of private litigation, however, the 2024 final rule remains in effect. The DOL must receive public comments on the proposed rule on or before April 28, 2026.
Note that some states have their own worker classification rules. In the event that federal and state rules conflict, the FLSA requires employers to comply with the standard that provides the highest degree of protection to workers. 29 U.S.C. § 218.
Illinois Wage Law Does Not Incorporate Federal Portal-to-Portal Act Exclusions from Compensable Time
Johnson v. Amazon.com Servs., LLC, No. 132016, 2026 WL 772733 (Ill. Mar. 19, 2026)
Amazon.com Services, LLC (Amazon) owns and operates large warehouses and employs many workers who move, stack, and load packages. In March 2020, during the COVID-19 pandemic, Amazon required all hourly, nonexempt employees to be medically screened before clocking in for their shifts. Former employees later filed a class-action lawsuit alleging that Amazon had violated the overtime provision of the FLSA and Illinois’s wage law, 820 Ill. Comp. Stat. § 105/4a, by failing to pay them overtime for time spent waiting in line before and during the screenings, which averaged 10 to 15 minutes each day. Although the action was initially filed in Illinois state court, Amazon removed the action to federal district court.
The federal district court granted Amazon’s motion to dismiss. It found that the FLSA claims were barred under the Portal-to-Portal Act (PPA), which amended the FLSA to exclude certain pre- and postshift activities from compensable time. In addition, the court concluded that the Illinois wage law claims failed: It found that in previous cases, courts have often looked to the FLSA for guidance in interpreting Illinois’s wage law and that federal case precedent had applied the PPA exclusion to claims under Illinois’s wage law.
The former employees appealed only the dismissal of their Illinois wage law claims and requested that the Seventh Circuit certify to the Illinois Supreme Court the issue of whether the Illinois wage law was subject to the PPA exclusion, given the lack of Illinois authority addressing the issue. In considering their request, the Seventh Circuit found that the text of the Illinois wage law and related regulations supported the former employees’ argument that it did not incorporate the PPA exclusion but that federal case law supported Amazon’s position that the PPA exclusion did apply. Because it was uncertain how the Illinois Supreme Court would resolve the issue, the Seventh Circuit certified the question to the court.
In considering the plain language of section 4a of the Illinois wage law, the Illinois Supreme Court found that, although it contains the same general overtime provision of the FLSA, it does not include the preliminary and postliminary activity exclusion that is set forth in the PPA. In addition, related regulations promulgated by the Illinois Department of Labor adopted a definition of hours worked that includes “all the time an employee is required to be . . . on the employer’s premises,” which “necessarily includes preliminary and postliminary activities.” Johnson v. Amazon.com Servs., LLC, No. 132016, 2026 WL 772733, at *3 (Ill. Mar. 19, 2026). As a result, the court answered the certified question in the negative.
Takeaways: In determining that Illinois wage law does not incorporate the PPA’s exclusions from compensable time, the Illinois Supreme Court clarified that Illinois employers may be liable for overtime claims for certain pre- or postshift activities that employees are required to perform on the employer’s premises.
AI and Legal Tech
Lawsuit Alleges that OpenAI Engaged in Unlicensed Practice of Law
Nippon Life Ins. Co. v. OpenAI Found., No. 1:26-cv-02448 (N.D. Ill. Mar. 4, 2026)
On March 4, 2026, Nippon Life Insurance Company of America (Nippon) filed a complaint against OpenAI Foundation and OpenAI Group PBC (collectively, OpenAI) alleging, in part, that OpenAI—through ChatGPT, an artificial intelligence application it developed and operates—had engaged in the unlicensed practice of law in the state of Illinois.
Nippon asserted that Graciela Dela Torre, a participant in a disability insurance policy provided by her employer, submitted a claim to Nippon alleging that she suffered from several conditions that impeded her ability to manipulate objects with her fingers. Her disability claim was approved in August 2019. In November 2021, however, her benefits were terminated following a determination that she was no longer disabled. Graciela filed a lawsuit against Nippon but ultimately entered into a settlement agreement, signed in January 2024, under which Nippon agreed to make a settlement payment to her and she forever and irrevocably released Nippon from any and all claims.
Graciela soon contacted her lawyer, expressing her dissatisfaction with the settlement agreement and her desire to challenge it. Her lawyer advised her that the settlement agreement precluded her from any further causes of action and that her case had been dismissed with prejudice. Graciela submitted her lawyer’s response to ChatGPT and asked whether her lawyer was gaslighting her. After receiving ChatGPT’s response that her lawyer had gaslighted her, Gabriela fired the lawyer and asked ChatGPT how to vacate the agreement and reopen her lawsuit. She then used ChatGPT to compile and draft a motion to reopen the lawsuit against Nippon, along with many other motions, subpoenas, notices, and statements. In addition, Graciela used ChatGPT to provide her with legal research and legal advice in the reopened lawsuit against Nippon.
In its lawsuit against OpenAI, Nippon asserted that OpenAI, through ChatGPT, had provided Gabriela with legal assistance that induced her to violate her settlement agreement and had violated Illinois law by engaging in the unlicensed practice of law. Nippon requested that the court enter a judgment declaring that OpenAI had engaged in the unlicensed practice of law. It also sought a judgment permanently enjoining OpenAI from providing legal assistance to Graciela and engaging in the practice of law in Illinois as well as compensatory damages of $300,000 and punitive damages of $10 million.
Takeaways: In its complaint, Nippon noted that, on October 29, 2025, OpenAI had amended the terms of use for ChatGPT to prohibit users from using ChatGPT to provide tailored legal advice. Although researchers asserted in 2023 that GPT-4 passed the bar exam with flying colors, this lawsuit is among the first to allege that an AI company, through its AI chatbot, engaged in the unauthorized practice of law. WealthCounsel will continue to monitor this case.
Court Decisions Address Whether Parties’ Communications with AI Tools Waive Privileges
United States v. Heppner, No. 25 Cr. 503, 2026 WL 436479 (S.D.N.Y. Feb. 17, 2026)
In a securities fraud case against defendant Bradley Heppner, a New York federal district court ruled that Bradley’s communications with Anthropic’s generative AI platform, Claude, which led Claude to generate reports outlining Bradley’s defense strategy in anticipation of his indictment, were not protected by attorney-client privilege. Bradley’s counsel had not directed him to produce the reports; they were produced of Bradley’s own volition. The court found that attorney-client privilege did not apply because the AI-generated documents were not communications between Bradley and his attorney and because the AI documents—which Anthropic had disclosed that it may share with third parties—were not confidential. The court also found that the attorney-client privilege did not apply because Bradley did not intend to obtain legal advice from Claude, which provides a disclaimer to users that it cannot provide formal legal advice. The fact that Bradley shared the AI-generated documents with his attorney did not change those nonprivileged communications into privileged ones.
The court also found that Bradley’s AI-generated documents were not protected under the work product doctrine because they were prepared solely by Bradley of his own volition. The purpose of the work product doctrine is to protect lawyers’ mental processes. The documents at issue were not generated at the behest of Bradley’s attorney and did not disclose his attorney’s strategy.
Warner v. Gilbarco, No. 2:24-cv-12333, 2026 WL 373043 (E.D. Mich. Feb. 10, 2026)
A former employee who filed an action against her former employer alleging employment discrimination was a pro se litigant. The defendant employer sought the production of documents and information concerning the employee’s use of third-party AI tools in connection with the lawsuit. The employer argued that the employee had waived the protection of the work product doctrine by using ChatGPT.
The court denied the defendant’s request, ruling that a work product waiver must be a waiver “to an adversary or in a way likely to get in an adversary’s hand.” (emphasis added) Warner v. Gilbarco, No. 2:24-cv-12333, 2026 WL 373043, at *4 (E.D. Mich. Feb. 10, 2026). In addition, the court found that the employee had not waived the work product protections because generative AI programs are “tools, not persons,” even though there may be human administrators in the background. Id. The court agreed with the plaintiff that the defendant sought to compel her to produce her internal analysis and mental impressions, which were not discoverable as a matter of law.
Takeaways: The law regarding the impact of AI use on the work product doctrine and attorney-client privilege is nascent. The foregoing cases are distinguishable to some extent with respect to the work product doctrine. In Heppner, the defendant was represented by an attorney. Because his AI-generated reports did not disclose his attorney’s mental processes, the work product doctrine did not protect them. In Warner, however, the plaintiff was not represented by an attorney but instead represented herself. The court determined that the work product doctrine was not waived by her use of ChatGPT to generate information related to her case, deeming it to be part of her internal analysis and mental impressions as a pro se litigant.
US Supreme Court Declines to Review Ruling Denying Copyright Protection for Work Whose Sole Author Was Generative AI Tool
Thaler v. Perlmutter, 130 F.4th 1039 (D.C. Cir. 2025), cert. denied, No. 25-449, 2026 WL 568327 (U.S. Mar. 2, 2026)
Dr. Stephen Thaler, a computer scientist, created a generative AI tool called the Creativity Machine. The Creativity Machine generated a picture Dr. Thaler called A Recent Entrance to Paradise. On a copyright application that Dr. Thaler submitted to the US Copyright Office, he listed the Creativity Machine as the artwork’s sole author and himself as the owner. The Copyright Office denied the application because there was no human author. The federal district court agreed with the denial, granting summary judgment against Dr. Thaler. The US Court of Appeals for the District of Columbia Circuit affirmed, holding that, although AI may contribute to a human-authored work, the Copyright Act of 1976 requires all work to be authored by a human being to be eligible for copyright protection.
On March 2, 2026, the US Supreme Court denied certiorari in Thaler v. Perlmutter, leaving the judgment of the appellate court intact.
Takeaways: The appellate court’s decision in Thaler is consistent with a 2025 report published by the US Copyright Office concluding that content created by generative AI is entitled to copyright protection only if it has a human author who has controlled sufficient expressive elements. The report discusses the degree to which the human being must contribute to a work for it to be eligible for copyright protection. Please see our April 2025 monthly recap for additional discussion of the Thaler case and our March 2025 monthly recap for a discussion of the 2025 report.
