Answers to Michigan Employer’s Biggest Questions on ESTA and IWOWA
On July 31, 2024, a ruling from the Michigan Supreme Court reinstated the ballot-initiated versions of the 2018 voter-approved Earned Sick Time Act (ESTA) and Improved Workforce Opportunity and Wage Act (IWOWA).
This ruling has significant impacts on Michigan employers.
On October 01, 2024, HR Collaborative hosted labor and employment attorney, Ashleigh Draft, and litigation attorney, Francesca Parnham, from Varnum LLP for a deep dive into both ESTA and IWOWA.
Please be advised: The following was prepared for a general information presentation given on October 1st, 2024. It does not provide, and is not intended to constitute legal advice. It may no longer be up to date as of your reading.
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Background on ESTA and IWOWA
A lot of people may be wondering how we got here in regards to ESTA. Michigan has had a paid sick leave law since 2018. Now, after a Michigan Supreme Court decision, we know there are going to be changes to that law.
Michigan’s constitution allows citizens to initiate laws by a ballot initiative. And that’s what happened in 2018. There were two ballot initiatives. There was the Earned Sick Time Act (ESTA) and the Improved Workforce Opportunity Wage Act (IWOWA).
Before there was an opportunity to vote on those proposals, Michigan’s legislature adopted both and then immediately amended them. There is no provision in the Michigan Constitution stating whether or not an immediate amendment is permitted after this kind of adoption. The bottom line is that Michigan legislature’s actions in 2018 came under fire through litigation and made it all the way up to the Michigan Supreme Court.
During Summer 2024, the Michigan Supreme Court held that the legislature’s actions back in 2018 were unlawful. As a result, it ordered reinstatement of the laws in their initial ballot proposal wording so that the Paid Medical Leave Act (PMLA) is now going back to the initial ballot proposal language and will be known as the Earned Sick Time Act (ESTA).
What Are Key Differences Between PMLA and ESTA?
There are some key changes between PMLA and ESTA. PMLA is what we’ve been living with since 2018, whereas ESTA is the original ballot proposal language and will be re-instated February 21, 2025, unless there is legislative action to change it.
The PMLA only covers Michigan employers with 50 or more employees. ESTA covers Michigan employers with 1 or more employees. ESTA does not cover federal government employees.
We have a much broader scope of who is being covered. In addition, the scope is broadened because PMLA only covered non-exempt employees in Michigan working 25 hours per week or more. ESTA is more expansive. It covers all employees working in Michigan without regard to whether or not they’re exempt, non-exempt, whether or not they’re seasonal, full time, or part time. Under ESTA, all employees of Michigan Employers will be covered.
Another unique thing about ESTA is that the definition of employee is different. Under PMLA, we have a clear definition of who is an employee: whether or not the worker is on the employer’s payroll and if they are a W2 Employee.
Under ESTA, the language is different. We don’t have that same clarity. Under ESTA, an employee is defined as someone who is engaged in service to the employer in the business of the employer. The thinking is to try and capture some people who would have been classified as independent contractors.
The Michigan Department of Labor and Economic Opportunity (LEO), which is the entity interpreting and enforcing this new law, has said that independent contractors, true independent contractors, are not going to be covered by ESTA. We’ve already received guidance from LEO, but that’s probably the reason why the original ballot proposal was drafted with the unique definition; they were trying to capture some independent contractors. This may be subject to change.
How Is Sick Time Accrual Impacted Under ESTA?
Under PMLA, employers have to allow employees to accrue one hour of earned sick time per every 35 hours worked, which may be capped at one hour per week or 40 hours of earned sick time in a year. Under ESTA, employees accrue one hour of earned sick time per every 30 hours worked, and the weekly and annual accrual is uncapped.
Under PMLA, employees were only allowed to carry over up to 40 unused hours if the time was accrued. Under ESTA, you have to allow an employee to carry over all hours that they earn and accrue from one year to the next and there’s no cap.
With ESTA, you can cap employees use of hours to 72 hours per year, but not their accrual or carryover. What is likely to happen is that some employees will accrue large amounts of earned sick time leave, but they’re capped in their use to 72 hours per year.
Under ESTA, employers don’t have to pay out accrued time upon termination of employment, so the uncapped carryover allowance may generate a situation where employees have large balances of earned sick time that is forfeited upon separation from employment.
For small businesses with fewer than 10 employees, there is a provision under ESTA that they can provide 40 hours of paid leave instead of the 72 hours, but they must allow accrual of an additional 32 hours of unpaid leave.
What Is a “Small Business” Under ESTA?
A business is considered small if it has fewer than 10 individuals on its payroll. You must include workers who are engaged as contractors or through a staffing agency. It doesn’t matter if the worker is full-time, part-time, or temporary.
The business does not qualify for the exemption if it had 10 or more employees on the payroll during any 20 or more calendar workweeks in the current or preceding calendar year, and the 20 workweeks need not be consecutive.
As soon as a business meets that 10 or more-employee threshold for 20 workweeks, then they are covered as a full-size business, not a small business, under ESTA for the remainder of that year and for the following calendar year.
Additional ESTA Changes
There are a few more key differences when it comes to ESTA that employers must follow.
No Fault Attendance Policies and Medical Documentation
Under no fault attendance policies, you have to exclude an ESTA absence. For employers with no fault attendance, it doesn’t matter if the leave is excused or unexcused, you get an attendance point. You cannot assign those points for leave taken under ESTA.
There are also some changes to the notice provision that an employee needs to provide to the employer.
If the need for sick leave is foreseeable, then the business can require up to seven days’ notice. If the need for leave is unforeseeable, then the business can only require notice as soon as practicable.
Asking for medical documentation is only permitted after three consecutive days of leave. And the employer has to pay for any costs that are associated with the medical documentation. For instance, if the employee has to go to an urgent care to get the documentation, then the employer will have to pay that cost. And under any circumstances, the employer cannot delay granting sick leave while waiting to receive the documentation.
Preserving Accrued ESTA Time
Another key change is that accrued and unused ESTA time has to be preserved if the employee separates but then returns within six months. It must also be preserved if a business is assumed by a successor entity, all of the ESTA leave needs to stay with the employee at the new business.
In addition, if the employee transfers to a separate entity, or a separate division within the same family of companies, the leave needs to stay with them.
Record Keeping under ESTA
Employers are required to keep records of ESTA leave for three years.
Importantly, there are presumptions against the employer for ESTA record keeping. For example, if in two years from now, there is a question of whether or not the employer complied with ESTA, if the employer does not have any records, the employer will have to rebut the presumption that the leave complied with ESTA. If the employer is in front of a court, the court must presume that the employer violated the act.
It is very important to keep your records and keep them for at least three years.
Posting ESTA Requirements
Employers must post ESTA requirements. If LEO has translated the ESTA poster into a language that is spoken by at least 10 percent of your workforce, you must put the poster up in that language.
Anti-Retaliation Under ESTA
Obviously, employers can never retaliate against an employee for exercising rights under a statute. But interestingly with ESTA, there is a rebuttable presumption of a violation if an employer takes an adverse action against an employee within 90 days of the employee engaging in opposition type activity.
This does not mean that employers cannot discipline an employee for 90 days after they take paid leave. What employers need to do is if they are disciplining an employee within 90 days, proceed very carefully, and keep documentation of the rule violation and treat other employees similarly.
In addition, there is also a private right of action under ESTA. Employees can choose to go straight to court, or they may file the claim with the state agency, and either of those can be filed within three years of violation.
Employees can get damages, liquidated damages, reinstatement, and their attorney’s fees in addition to civil penalties.
Improved Workforce Act and Minimum Wage Law (IWOWA)
What will the Improved Workforce Act and Minimum Wage (IWOWA) do? First, we’ll see an increase to the state’s minimum wage, and this increase will be annual. We’ll see annual changes to the minimum wage based on inflation, which will be a rate set by the Michigan Department of Treasury. Lastly, it will phase out the current tip credit provisions.
What Is Michigan’s Current Tip Credit Provision?
A tip credit allows employers of employees who customarily receive tips to count a portion of those tips in calculating whether the employees have been paid minimum wage. Under IWOWA, Michigan’s tip credit provisions will be phased out over the next four years, pursuant to the court’s order.
How Will Minimum Wage Change Under IWOWA?
The court was very intentional about the burden that these changes would have on employers. They have balanced the interest in restoring the act and its intent and have accounted for the passage of time.
As of February 21st, 2025, the general minimum wage will be $10.00 plus an inflation adjustment. On October 1st, 2024 LEO announced it would be $12.48 overall. Every year after that, we will see annual adjustments for inflation in coming years. For the tipped workers minimum wage as of February 21st, 2025, it will be 48% of the state minimum wage.
Every year, the minimum wage will be adjusted based on inflation. The act requires that the adjusted minimum wage rate be published by November 1st, for the upcoming rate change in the new year. Every October, the state treasurer will calculate and adjust the minimum wage rate and publish that by November 1st, providing employers notice of that.
Using approximate numbers, on February 21st, 2025—we are at $12.48 with the tip credit being $6.49. By 2028, we would see a potential $14.97 minimum wage, and the tip credit would be phased out by the end of those four years so that they are the same minimum wage.
See full increase schedule from LEO here.
How Will Training Wage Change Under IWOWA?
This wage applies to employees that are younger. The training wage was $4.25 per hour and could be made to employees of 16 to 19 years of age for the first 90 calendar days of employment. There has been no change to the training wage provision of the act, and it’s operating as usual.
Potential Ripple Effects on Wage Rates
The changes from IWOWA will have a ripple effect on other wage rates, and really an overall economic impact specifically with restaurant employers. A lot of restaurants and advocacy groups are being very active about the topic, specifically regarding the four-year phase out of the tip credit.
Additional ESTA & IWOA Questions
How does ESTA work with FMLA, Short Term Disability, and other paid leaves?
FMLA leave and ESTA leave may run concurrently. So, if an employee is taking FMLA leave, and the reason for leave is FMLA-qualifying and also qualifying under ESTA, the employer can require those leaves run concurrently, even though ESTA leave will be paid and FMLA leave may be unpaid, depending on your workplace’s particular policy.
Employers may use existing paid leave plans in general to satisfy the requirements of ESTA, so long as the paid leave plan is at least as generous as ESTA. Short term disability probably will not meet the criteria.
In addition, a lot of employers use one bucket of PTO, and that will very likely need to change depending on company policy. ESTA allows unlimited carry-over and unlimited accrual, and employers don’t want to apply that to their entire PTO bucket. Many employers are thinking about breaking those off and tracking them separately.
What if our plan is more robust?
An employer plan might comply with ESTA if it is offering paid leave through a bucket of PTO. Employers must offer it in ways that are at least as generous as ESTA. For example, if offering unlimited accrual, at least one hour per 30 hours worked of that paid leave will have to be carried over every year without any restriction, and you can use that paid leave for any of the reasons listed under ESTA.
If the employer’s leave plan or bucket of general paid leave satisfies all ESTA requirements, it can use it instead. But many employers are moving away from an all-encompassing PTO plan and choosing to track ESTA separately, simply due to the rules being challenging to track.
How does the accrual work? And what increments of time can you use for ESTA leave?
Employees accrue one hour for every 30 hours worked, with no cap. If the employee works 40 hours in a work week, that’s 1.33 hours of accrual.
Another difference to keep in mind is that the increments of time that can be used for ESTA leave is different than PMLA, which is one-hour increments. Under ESTA, employers need to let employees use ESTA leave in an amount of time equal to the smallest unit they use to track time.
For example, if a manufacturer tracks people’s time to the tenth of an hour, they must allow employees to use ESTA leave to the tenth of an hour.
Is there a cap on the hourly minimum wage?
There is no cap currently, and it is determined based on the Michigan Department of Treasury’s inflation rate. We have forecasted out until 2028, but there is no set cap in the future. Possible legislation may come into effect, depending on elections and who is in charge.
How much of ESTA and IWOWA is anticipated to go into effect?
Legislators on both sides of the aisle are interested in modifying some of the rules, but so far efforts to amend the law remain in committee in the House of Representatives by February 21, 2025.
What about ESTA and employees outside of Michigan if their employer is Michigan-based?
There is no specific guidance yet on that exact situation. What we know is that if an employee is eligible for ESTA leave, or has a bank of accrued ESTA leave and switches to another entity within the same family of companies, that ESTA leave should be going with them.
Now, if they are also moving out of state in connection with that transfer, it’s a gray area whether or not that ESTA leave should translate into something else based on leave laws in their new home state, and whether or not it should stay with them.
An important note, if the employee is located in Michigan, even if the employee is remote and their employer is located outside of Michigan, the employee is still covered under ESTA.
Wrapping Up
There is still a lot of gray area around elements of ESTA and IWOWA, and every organization’s needs will be different based on their policies and practices. We can’t recommend enough that your HR, legal counsel, and leadership teams work hand-in-hand to determine the best course of action for you as an employer and for your employees.
Also, make sure that you stay aware of any changes that may occur before or after the regulations go into effect on February 21, 2025.
A final reminder: The above was prepared for a general information presentation given on October 1, 2024. It does not provide and is not intended to constitute legal advice. It may no longer be up to date as of your reading.
About HR Collaborative
HR Collaborative is a professional services firm that helps businesses grow their most valuable asset: their people. We transform organizations through high-impact HR consulting, staffing, and recruiting services, powered by our community of fractional HR professionals. Contact us.
About Varnum LLP
Varnum labor and employment attorneys understand the importance of human resource management and development in your business strategy. We have built a practice that responds quickly to your needs, looks for practical, cost-effective business solutions and holds to sound human resource principles.
Our lawyers stay abreast of legal compliance issues so that when you call us with a question or are faced with a complex HR situation, we will provide the answer and assist in finding a suitable resolution. With one of the most experienced labor and employment practices in the region, we provide counsel and representation on a full range of labor and employment issues, from day-to-day counsel and advice to employment litigation defense. Learn more at varnumlaw.com.
Ashleigh Draft
Ashleigh Draft is an attorney on Varnum’s Labor and Employment Practice Team. She is experienced in workplace investigations, defending clients in labor arbitrations, and successful resolution of employment-related disputes. She also advises clients on compliance with federal and state labor and employment laws and other workplace matters, including effective employee handbooks and policies, discrimination, disability accommodation, and wage-hour issues.
616.336.6627
aedraft@varnumlaw.com
Francesca Parnham
Francesca Parnham is an attorney at Varnum and supports Varnum’s Litigation and Labor and Employment Practice Teams. She is a skilled researcher with experience in a wide variety of labor and employment litigation matters, including before the National Labor Relations Board.
616.336.6654
flparnham@varnumlaw.com
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The best way to prevent harassment from happening in your organization is by understanding, leading, and asking.
How an Executive Search is Different for Nonprofits
Leadership changes can be frightening and stressful times for any organization, but for nonprofits, finding a new executive director can be especially difficult. With different budgets and governance structures than…
HR Factors to Consider When a Merger is at Stake
Mergers and acquisitions can generate very strong and very mixed feelings for everyone in a company. Excitement, anxiety, resistance, and enthusiasm are all valid, and could be felt to varying…
The Right Leader for Non-profits
Managing the Leader’s Transition Picture this. You’ve just been appointed the Board Chair for a respected and beloved non-profit organization in your community. You’ve envisioned a year worth of comfortable…
What to Look For in a Grand Rapids Human Resources Provider
For businesses, it’s a good time to be in Grand Rapids. Data from the U.S. Bureau of Labor Statistics reported that the Grand Rapids metropolitan area was the fastest growing…
How Executive Search Consultants can Help Find Your Next Leader
One of the most important and daunting responsibilities of nonprofit governing boards is finding a new leader for the nonprofit organization. Your board must build consensus on what they need…
HR Tips for Office Social Media Management
As of September 2017, a jaw-dropping 30% of time spent online for all digital consumers is spent on social media websites. For employers, that number may be worrying. While social…
HR Training Tips: 4 Danger Signs to Address in Employees
When you have a great team of employees, work is easier and more fun. Everything gets done a little faster, and the work environment feels fresh and exciting. Of course,…
How is Your Bench Strength?
Leading organizations, just like leading athletic teams, have solid depth of talent in their ranks. Be it a corner office or an offensive line, if you don’t have well-prepared team…
3 Questions Business Leaders Should Ask About HR
Business owners often don’t know what goes on behind the door to the human resources department. But the actions of your human resources team can have a huge effect on…
The Difference Between Talent Management Services and Talent Acquisition
The phrases “Talent Acquisition” and “Talent Management” are often used interchangeably, despite the fact that they serve different purposes with regard to hiring and developing employees. It’s a shame these…
6 Tips to Help Improve Company Culture
In any company, a clearly defined business culture is crucial to the productivity of its employees. Without an easy-to-understand set of expectations, it can be difficult for people to work…
The Top 4 HR Department Myths, Busted
You might hear a lot of things about what human resources is as well as what it isn’t, but how do you separate fact from fiction? What are HR professionals…
Why Your Entire Team Should Be Involved in the Hiring Process
For many years, the human resources team and the hiring manager managed the entire process of hiring new employees. It makes sense because they have to hire, train, and monitor…
The Employee Handbook’s Impact on Culture
We tend to look at employee handbooks as a book of rules. But it doesn’t have to be all about compliance. A handbook should be the tool that explains everything…
How to Encourage Job Retention With Today’s Millennial Workforce
Recent studies show that millennial workers of today are moving jobs more than ever, causing challenges for those invested in the future business planning and growth initiatives of an organization.…
Performance Reviews Aren’t Dead
We’ve heard it all before: “Performance Evaluations are dead.” There are a lot of valid reasons; they take too long, they don’t actually change performance, and so on. But there…
How a Commitment to Lifelong Learning Impacts Performance
If you log onto Facebook around the country in the coming days, you’ll see picture after picture of elementary to high school students heading off for their first day of…
Leadership in a VUCA World
Volatility, Uncertainty, Complexity, and Ambiguity, or VUCA, is an idea introduced by the U.S. Army War College in 1987 to describe and prepare for the post-Cold War world. Since then,…
5 Tips to Help Motivate Your Leadership Team
You have a leadership team with tremendous potential, but maybe you’ve noticed they may have gone a bit stagnant in growing and developing as leaders. You might be thinking you…
If HR Is the Magic Pill, Why Aren’t More Businesses Swallowing It?
The role of HR in business has never gotten as much attention as it does today. Oh sure, business researchers and consultants have been touting the importance of management since…
