Federal Rules, State Action Complicate In-House Labor Strategies

Labor and employment issues will take significant bandwidth for in-house lawyers as federal agencies race to finalize rules ahead of the presidential election and states take varied approaches with new laws affecting the workplace.

While Biden administration regulators update nationwide requirements for things like overtime and anti-discrimination protections, state and local lawmakers are stitching together a patchwork of mandates for paid leave, pay transparency, and noncompete agreements.

Failing to comply with this slew of rapidly changing requirements carries a high risk of financial and reputational damage that in-house counsel seek to avoid for their companies.

“The number-one thing that keeps me up at night are the differences and managing those differences,” between states’ employment laws, said Marni Helfand, general counsel and chief human resources officer at The Planet Group, a recruiting and staffing company.

“It all keeps getting compounded,” Helfand said. The growing number of different laws “just makes it exponentially more challenging every year,” she said.

Employment Relationship

Two new regulations go directly to deciding whether a business has an employment relationship with a worker—which triggers job rights and corresponding compliance obligations.

The US Labor Department made it harder for companies to classify workers as independent contractors rather than employees under the Fair Labor Standards Act, a federal law that governs wages and working hours. The rule went into effect March 11.

Employment classification is a crucial issue for the gig economy and more traditional industries such as construction, trucking, hospitality, health care, education, and information technology.

The National Labor Relations Board also issued a new rule affecting another facet of the employment relationship: joint liability under federal labor law. The agency lowered the bar for one company to qualify as a joint employer of another firm’s workers, such that it would share liability for labor law violations and legal obligations to negotiate with unions.

Companies that have avoided unionization by keeping labor at arm’s length—particularly franchisers and companies that rely on workers obtained via staffing firms and other business-to-business arrangements—have the most at stake from a lowered bar for joint employment.

It was also set to take effect March 11, but was blocked by a federal district court. Litigation over the rules is expected to continue.

Litigation Limbo

The uncertainty stemming from court challenges to rules can put companies in a tough spot, creating the chance of a business getting ready for a regulation that never takes effect or skipping preparation only to have the measure go live.

A company’s strategy when litigation puts rules in limbo depends on its business model and its tolerance for risk, including reputational risk, said Roger King, senior labor and employment counsel at the HR Policy Association.

Still, preparing for these new requirements despite ongoing litigation is the more prudent move, said Ian Schaefer, an attorney with Sheppard, Mullin, Richter & Hampton LLP who counsels employers.

A company that uses contract labor should evaluate whether its workers are classified correctly as employees or contractors, and if it’s exerting the level of control over another company’s workers that could trigger a joint-employment relationship, Schaefer said. That includes reviewing contracts as well as understanding what’s happening on the ground, he said.

“If it looks and feels like an employment relationship, you can call it whatever you want, but the Labor Department or a court is going to say the workers are employees,” Schaefer said.

More Federal Rules

Other federal rulemaking priorities address overtime pay, anti-discrimination laws, retirement investments, and workplace immigation.

The Equal Employment Opportunity Commission recently finalized a measure to clarify and elaborate on the types of reasonable accommodations that the Pregnant Workers Fairness Act empowers employees to seek. The agency’s rule includes a provision allowing accommodations for abortion-related medical conditions, which has drawn strong criticism from Republican lawmakers.

Employers will need to determine whether human resources staffers who work on pregnancy-related accommodations would have religious objections to abortion, said Jonathan Segal, a workplace law attorney with Duane Morris LLP. If so, they’d need to put in place a process for granting that HR worker a religious accommodation to abstain from processing accommodations tied to abortion, he said.

If the company itself opposes abortion on an organizational level and intends on denying those types of accommodation, then it should be ready to litigate, Segal said.

The US Supreme Court’s 2014 ruling in Burwell v. Hobby Lobby Stores could give certain religiously motivated corporations ammunition in court, but only if they sue the EEOC to escape enforcement of the rule or defend against a pregnancy bias lawsuit brought by the EEOC rather than the worker herself, he said. That’s because the Hobby Lobby decision was based on the Religious Freedom Restoration Act, which protects against state action, Segal said.

Meanwhile, the Labor Department is nearing release of a regulation that could extend overtime protections to more than 3 million workers. But it’s not totally clear how much the DOL Wage and Hour Division’s rule will raise the threshold for OT eligibility over its current cutoff of about $35,600. Acting Labor Secretary Julie Su indicated the regulation could cover workers making as much as $60,200 annually.

“There’s a tried and true game plan for preparing for this kind of regulatory change,” said Paul DeCamp, an attorney with Epstein Becker & Green PC and former WHD chief during the Bush administration.

The first step involves identifying workers who will become overtime eligible under the new rule, DeCamp said. Companies then have to decide on an approach, which could mean accepting that those workers can earn overtime or raising their compensation so they remain ineligible for premium pay, he said.

Companies will also want to think about other issues, such as whether to convert salaried workers to hourly pay when they become OT eligible and, if so, choosing their rate of pay and working hours, DeCamp added.

More work-related rules are also expected. Companies that sponsor 401(k) plans will need to mind a hotly anticipated Labor Department measure that would broaden the kinds of retirement advice that are subject to strict fiduciary standards under federal benefits laws. And firms that rely on highly skilled foreign workers should watch for an impending Department of Homeland Security regulation aiming to clamp down on abuse of the annual H-1B visa lottery.

State Leave Laws

At the state and local level, lawmakers are moving swiftly on paid leave and other employment issues.

Current federal law requires 12 weeks annually of unpaid, job-protected time off for workers who need to care for themselves or a family member during serious or prolonged illness or injury. The US doesn’t require pay for that leave and a federal mandate has remained elusive.

In the absence of federal action, 13 states plus Washington, D.C., have enacted universal paid leave programs funded by payroll taxes that ensure most workers have access to time off with partial income replacement for the birth or adoption of a child, or other family and medical reasons.

Now, more states are considering new paid leave programs this year, such as Hawaii, Illinois, and Michigan. New York lawmakers are proposing an expansion of the state’s program including a substantial increase in the maximum amount of weekly benefits. There’s also growing momentum around variations on voluntary, opt-in, and private-market efforts to increase paid leave access.

New Hampshire and Vermont each have launched a paid family and medical leave plan for state government employees with an option for private-sector employers or employees to buy in. And several states including Florida, Texas, and Virginia have passed laws specifically authorizing insurance companies to offer paid family leave plans as employee benefit offerings, much as they’ve done with short-term disability for years.

State-run programs can differ widely in terms of duration of leave that workers can take each year, the size of employers obligated to participate, and the extent to which employers are required to hold the job of an employee on long-term leave.

Pay Transparency Trend

Pay transparency in job ads is another quickly spreading state policy trend.

Only a half dozen states so far, plus New York City and Washington, D.C., have adopted the measures, but they’ve become a major compliance consideration, especially for large employers.

Many businesses hiring in California, Colorado, Hawaii, New York, and Washington state—or advertising a remote job that could be performed in those states—face legal requirements to include salary ranges in their job ads, while some also require benefits information. Similar mandates are set to take effect in Washington, D.C., on June 30 and Illinois on Jan. 1, 2025.

Colorado’s law and the Illinois measure require employers to advertise and notify existing employees of promotional opportunities. Unlike other states, New York’s law applies to ads for jobs that will be based elsewhere but report to an office or supervisor inside the state.

Maine, Massachusetts, Minnesota, and New Jersey are considering their own such laws, and a Maryland bill is awaiting Gov. Wes Moore’s (D) signature as of this writing.

Some employers are opting to post salary ranges for all US jobs, while others are including the information only where a state or local law requires it, said Lulu Seikaly, senior corporate employment counsel at Payscale, which develops software to help businesses manage compensation.

Some businesses are still taking their chances on leaving out the salary range in job ads, Seikaly said, but she recommends employers take the opposite approach—including pay info in all job postings both for legal compliance and talent recruitment reasons.

“If they’re caught, there are legal implications, financial implications, and I think the worst part, social implications,” since job seekers increasingly expect to see a pay range in job ads, especially millennial and Gen Z candidates, she said.

Noncompetes on the Move

Restrictions on employers’ use of noncompetes are also changing across cities, states, and federal agencies.

While some states have been regulating restrictive covenants for years, the Federal Trade Commission roiled the landscape last year when it rolled out a plan to impose a nationwide ban on those contracts. The NLRB’s general counsel has also announced her view that noncompetes violate federal labor law, which means companies should expect the agency to police such agreements.

Some employers aren’t yet drastically changing how they use noncompetes, partly because of potential litigation challenging those efforts from the FTC and NLRB.

However, changes are moving forward in some states. California, Minnesota, North Dakota, and Oklahoma ban virtually all employee noncompetes. At least 11 other states plus the District of Columbia ban employers from imposing noncompetes on workers whose income falls below certain pay thresholds or who qualify as hourly, non-exempt workers under federal wage law.

California this year expanded its restrictions to declare the state’s courts won’t enforce noncompetes even if they were signed in other states, and to impose civil penalties on employers that require employees to sign the contracts, even if they don’t try to enforce them.

Russell Beck, an attorney focused on trade secrets and noncompete law at Beck Reed Riden LLP in Boston, said compliance with California’s law is “difficult because there’s a lot of ambiguity about what happened.”

One of the unresolved questions is whether California now bans non-recruit contracts, which forbid an employee from recruiting their colleague to follow them to a competing business, he said.

Washington state clarified a requirement that employers notify new hires about noncompetes no later than their “initial oral or written acceptance” of the job. The state also expanded a ban on restricting low-income workers’ job flexibility to include contracts barring service provided to a former employer’s customers.

The New York City Council is considering a range of noncompete proposals, including one to outright ban the contracts. The New York state legislature is expected to revisit the issue, after Gov. Kathy Hochul (D) vetoed a ban attempt in December. Connecticut, Michigan, and New Jersey also have measures in the works this year that could expand their restrictions on employers’ use of noncompetes.

“The companies that have used them responsibly in the past are not changing their approach to using them,” Beck said, referring to companies using noncompetes only with employees who have access to trade secrets or when there’s another legitimate business need.

“Then you have the irresponsible companies, and I don’t think they’re changing their behavior either,” he said.