Business owners can expect to be impacted by a number of employment laws and regulations that will go into effect in 2024. These include state-level pushes for pay transparency, continued legislation for paid time off, and ongoing minimum wage increases.
Here is a preview of the five key changes every business owner should be aware of and prepare for.
1. The Department of Labor Unveils Final Rule Clarifying Employee and Independent Contractor Classification
Misclassifying an employee as an independent contractor can result in costly litigation, damages, and penalties. The problem for business owners is that the distinction between independent contractors and employees is not always clearcut.
The U.S. Department of Labor (DOL) recently announced a long-awaited Final Rule to help employers and workers better understand when a worker qualifies as an employee and when they may be considered an independent contractor under the Fair Labor Standards Act (FLSA). The rule provides guidance on proper classification and seeks to combat employee misclassification, which the DOL considers a serious problem because (according to the DOL) it impacts workers’ rights to minimum wage and overtime pay, facilitates wage theft, allows some employers to undercut their law-abiding competition, and hurts the economy at-large. The Final Rule, published in the Federal Register on January 10, 2024, will take effect on March 11, 2024.
The Final Rule restores the multi-factor analysis used by courts for decades, ensuring that all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor. The rule addresses six factors that guide the analysis of a worker’s relationship with an employer:
- any opportunity for profit or loss a worker might have;
- the financial stake and nature of any resources a worker has invested in the work;
- the degree of permanence of the work relationship;
- the degree of control an employer has over the person’s work;
- whether the work the person does is essential to the employer’s business; and
- the worker’s skill and initiative.
Additional factors may also be considered if they are relevant to the overall question of economic dependence. The analysis examines the totality of the circumstances, and no single factor is dispositive.
The Final Rule rescinds the 2021 Independent Contractor Rule, which elevated the comparative value of two “core” factors: (1) the nature and degree of the individual’s control over the work, and (2) the individual’s opportunity for profit or loss. The DOL reversed its previous stance, noting that the “core factors” approach did not comport with the intent and purpose of existing federal law.
2. The NLRB Vastly Expands the Definition of “Joint Employer”
The National Labor Relations Board (NLRB) recently issued its Final Rule establishing a new standard under the National Labor Relations Act for determining whether two employers are “joint employers.” The rule drastically expands the circumstances under which a company is a joint employer of the employees of another company, overriding and rescinding the test published by the NLRB in its 2020 rule. The Final Rule is slated to take effect on February 26, 2024.
Under the new rule, a business is a joint employer if it has the right to exercise control over any of seven enumerated “essential terms or conditions of employment”—even if the company never exercises such control, and even if the only way it could exercise such control would be through an intermediary. These terms and conditions include:
- wages, benefits, and other compensation;
- hours of work and scheduling;
- the assignment of duties to be performed;
- the supervision of the performance of duties;
- work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline;
- the tenure of employment, including hiring and discharge; and
- working conditions related to the safety and health of employees.
Joint employers are also required to participate in a collective bargaining process. In essence, the new rule will make it easier for employees of a contractor, staffing or temp agency, or franchise, to drag the big companies higher up the employment chain into labor disputes.
The NLRB received considerable pushback from the construction, franchising, staffing, and healthcare industries, but nonetheless declined to carve out any exceptions or otherwise make clear how and to what extent the rule applies to particular industries or common business arrangements.
In light of this expansion, employers should consider reviewing their current and pending contracts with third parties to evaluate whether those agreements could be interpreted as reserving the right to potentially control any essential term or condition of another entity’s employees. Employers also should re-examine their employment practices of their supervisors and managers and (to the extent possible under any particular business situation) train them to avoid actions that could be considered as exercising direct or indirect control over another company’s employees.
3. The Federal Trade Commission Proposes Ban on Non-Compete Agreements
Perhaps the biggest change in the employment law landscape has been the nationwide momentum to ban non-compete agreements. Arizona has not yet banned all non-compete agreements. However, Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking seeking to categorically ban nearly all employer non-competition agreements nationwide. If passed in its draft form, the Proposed Rule would:
- prohibit employers from entering into virtually all non-compete agreements with all workers,
- require employers to rescind existing non-compete agreements, and
- require employers to notify past and current employees that their non-compete obligations are no longer in effect.
The Proposed Rule would supersede all less-restrictive state non-compete laws. The FTC is set to vote on the Proposed Rule in April 2024. The rule, if passed, is sure to face strong legal challenges by private parties and industry groups, likely winding up in the U.S. Supreme Court.
Although it could be months before any broad non-compete ban becomes effective, employers should take this time to thoroughly review all existing restrictive covenant agreements, including those that currently restrict former employees, and implement a method for tracking all agreements that recently went into effect. Now is also a good time to update existing non-compete agreements and re-evaluate whether you can protect your legitimate business’s interests with a less burdensome covenant such as a properly tailored and strongly drafted customer non-solicitation or confidentiality agreement.
4. New Beneficial Ownership Reporting Requirements Under The Corporate Transparency Act
The Corporate Transparency Act (CTA) was enacted to enhance transparency in entity structures and ownership to combat money laundering, tax fraud, and other illicit activities. It is designed to capture more information about the ownership of specific entities operating in or accessing the U.S. market. Effective January 1, 2024, the CTA requires non-exempt U.S. entities and non-exempt foreign entities registered to do business in the United States (collectively, “Reporting Companies”) to submit beneficial ownership information (BOI) reports to a confidential FinCEN database. BOI reports must include certain personal information about individuals who, directly or indirectly, (1) exercise substantial control over the Reporting Company, or (2) own or control at least 25% of the ownership interests of the Reporting Company.
Under the CTA, unless an exemption applies, a Reporting Company will typically include all entities that are formed or registered to do business in the United States by the filing of a document with a secretary of state or similar office (e.g., corporations, LLCs, LLPs). If an entity is not created by such a state filing (e.g., most trusts), the entity is not subject to the CTA.
The CTA identifies 23 entities that are exempt from the definition of a “Reporting Company” under the CTA, including but not limited to, large operating companies that include any entity that (i) employs more than 20 full-time employees in the United States; (ii) has an operating presence at a physical office within the United States; and (iii) has filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales. However, most exemptions apply to entities that are already subject to substantial federal or state regulations (for example, banks, publicly traded companies, and other entities that file reports with the SEC, and tax-exempt entities).
Reporting Companies created or registered during the 2024 calendar year will have 90 days to file an initial BOI report. Reporting Companies created or registered before January 1, 2024, will have until January 1, 2025, to submit BOI reports to FinCEN. If your company was created or registered on or after January 1, 2025, you must file BOI within 30 calendar days after receiving actual or public notice that its creation or registration is effective. Updates to the information are due within 30 days of the occurrence of the event triggering the update.
With an estimated 32.6 million companies expected to comply with the CTA, companies must be aware of the CTA’s broad applicability to entities within their structures. To prepare for compliance, businesses should familiarize themselves with the CTA’s requirements and establish internal processes for identifying and updating information on beneficial owners, including boards of directors, foreign affiliates, senior officers, and those controlling a company.
For more information regarding the CTA, please visit https://gknet.com/news/publications/compliance-with-the-corporate-transparency-act/ and FINCEN BOI Reporting Guide: https://www.fincen.gov/sites/default/files/shared/BOI%20Informational%20Brochure%20508C.pdf
5. Arizona Raises Minimum Wage
Arizona is one of 25 states raising the minimum wage in 2024. Under Arizona’s Fair Wages and Healthy Families Act, the state’s minimum wage increased by 50 cents to $14.35 an hour, effective January 1, 2024. While not as large as the increase from 2022 to 2023 ($1.05), this 2024 increase represents a further 3.6% increase over the 2023 minimum wage. The increase will not apply under the following circumstances: If an individual is employed by a parent or sibling, individuals who work as a babysitter in an employer’s home on a casual basis, and people employed by the state of Arizona or federal government agencies. Another exemption applies to individuals working at businesses that generate less than $500,000 in gross annual revenue and is exempt from paying minimum wages under Title 29 United States Code Section 206.
In addition, employers may pay tipped employees as much as $3 an hour less than the minimum wage, provided the weekly pay including tips at least equals the minimum wage for all hours worked. A few Arizona cities have raised this amount and set their own minimum wage— most notably Flagstaff, which increased the minimum wage from $16.80 an hour in 2023 to $17.40 this year.
To remain compliant with labor laws, employers should review and update existing handbook policies and mandatory wage and hour posters to reflect the increase.