Compliance Corner: Payroll Updates from Q1 2025
As we move further into 2025, several key legislative changes and updates are taking effect that could significantly impact your payroll processes.
From changes to paid sick leave laws, new tax structures, and more, here’s a comprehensive overview of all the recent state and federal changes to be aware of as you work to stay compliant and avoid penalties.
State Compliance Updates
Connecticut
Effective January 1, 2025, significant changes were made to the Connecticut Paid Sick Leave statutes. Here’s a summary of the key updates:
Employee Threshold Changes
- The current threshold of 50 employees has been reduced to 25 employees.
- This threshold will further decrease to 11 employees in 2026 and to 1 employee in 2027.
Expanded Reasons for Use
Two additional qualifying reasons for paid sick leave have been added:
- Closure of an employer’s business or a family member’s school or place of care by order of a public health official due to a public health emergency.
- Determination by a health authority, employer, or healthcare provider that the employee or a family member poses a risk to public health.
Exemption Changes
- The exemptions for manufacturers and non-profit organizations have been fully removed.
- A limited exemption remains for certain construction industry employers participating in multi-employer health plans under a collective bargaining agreement (CBA), and seasonal workers employed 120 or fewer days per year.
- Self-employed individuals remain exempt from this law.
Accrual and Usage Updates
- Paid sick leave will now accrue at a rate of 1 hour for every 30 hours worked, up to 40 hours per year.
- Employees may begin using paid sick leave after 120 days of employment, but accrual begins on the first day of employment.
Documentation and Notice Requirements
- Advanced notice is no longer required for the use of paid sick leave.
- Employers may no longer require documentation to justify the use of covered paid sick leave.
- Employers must notify employees of these changes in writing at the time of hire. A poster must also be displayed in both English and Spanish.
Recordkeeping Requirements
Employers must maintain records for three years, including:
- Total hours worked by each employee during the calendar year
- Hours of paid sick leave accrued or provided to each employee
- Hours of paid sick leave used by each employee during the calendar year
If records are maintained electronically, employee consent is required.
For additional information and resources on this change, visit the Connecticut Paid Sick Leave website.
Louisiana
Louisiana has enacted an Emergency Rule, effective January 1, 2025, introducing significant changes to its individual income tax structure by transitioning from a graduated tax system to a flat tax rate.
Under the new system:
- A flat tax rate of 3% is applied to all taxable income, regardless of filing status.
- The standard deduction amounts have been increased to provide greater tax relief:
- $12,500 for single filers
- $25,000 for married couples filing jointly
With Louisiana transitioning to a flat 3% income tax rate effective January 1, 2025, updates to Form L-4 reflect these changes. Employers are expected to provide updated versions of the form to employees as soon as it becomes available.
Action Items for Employers and Employees
- Employers: Distribute the updated Form L-4 to all employees and ensure that the correct withholding amounts are applied based on the new 3% flat tax rate.
- Employees: Complete the revised Form L-4 and submit it to your employer to ensure accurate state income tax withholding under the new tax structure.
For additional information and resources on this change, visit the Louisiana Department of Revenue website.
Illinois
Phasing out Subminimum Wage
On January 21, 2025, a new law went into effect requiring Illinois to phase out the subminimum wage for workers with disabilities by 2030. A new task force will be created and required to provide the plan for the removal of the subminimum wage by July 1, 2025.
The subminimum wage allows employers to pay certain categories of employees, including employees with disabilities, less than the statutorily required minimum wage. Illinois joins a growing number of states to phase out the subminimum wage.
State Supreme Court Ruling
On January 24, 2025, the Illinois Supreme Court issued a ruling confirming that certain performance-based bonuses, such as seniority bonuses, KPI bonuses, and success-sharing incentives, should be incorporated into the regular rate of pay when calculating overtime pay. This ruling follows federal requirements.
Under federal regulations, performance bonuses are excluded from the regular rate of pay only if they are deemed gifts or have the nature of a gift. Federal courts have consistently held that performance bonuses, when tied to factors like hours worked, efficiency, or productivity, must be included in the regular rate for overtime pay purposes, as outlined in 29 U.S.C. § 207(e)(1) (2018) and 29 C.F.R. § 778.212(b) (2019).
Read the ruling in full here.
Washington, DC
On July 1, 2025, Washington, DC’s minimum wage will increase from $17.50 to $17.95. The tipped minimum wage will also increase on that date, from $10.00 to $12.00, as part of the District’s requirement to phase out the tipped minimum wage.
Earlier in 2025, DC originally announced the minimum wage would increase to $18.00, but has since updated their notice to correct the amount to $17.95.
Michigan
Minimum Wage
Michigan enacted a new minimum wage law that immediately went into effect. As of February 21, 2025, Michigan’s minimum wage increased from $10.56 to $12.48. The minimum wage will continue to gradually increase until it hits $15.00 in 2027. After 2027, the minimum wage will be subject to inflation-based increases.
Earned Sick Time Act Changes
Michigan also enacted House Bill 4002, modifying the state’s Earned Sick Time Act. The law became effective on February 21 as well. Michigan will require employers with at least 1 employee to accrue one hour of paid earned sick time in a year.
Employers may (but are not required to) front-load 72 hours of paid sick leave at the beginning of the year. Employees are also entitled to carry over unused sick leave to the following year, but employers can set a cap on the carryover at 72 hours.
The new law loosened requirements for small businesses, defined as those with 10 or fewer employees for at least 20 calendar weeks in the current or preceding calendar year. Small businesses may set a limit so that employees can only take 40 hours of sick leave in a year, but they can set a higher limit if they choose.
Small businesses may also front-load the 40 hours to their employees. The carryover cap is likewise set at 40 hours. The provisions for small businesses become effective October 1, 2025.
South Dakota
Effective January 1, 2025, the minimum wage for non-tipped employees in South Dakota is $11.50 an hour. The minimum wage for tipped employees is $5.75 an hour.
Federal Updates
ACA Changes
Recently enacted legislation made changes to employer obligations under the Affordable Care Act.
- Employers do not need to provide written copies of the 1095-C to individuals. Instead, employers can provide a notice on their website that individuals can receive a copy of their form upon request. If an employee requests the 1095-C, the employer must provide it within 30 days after the request.
- Employers may use an individual’s name and date of birth instead of the individual’s TIN for Part III of the 1095-C.
- Applicable large employers who receive a Letter 226-J assessing an Employer Shared Responsibility Payment have at least 90 days to respond instead of the previous 30-day time limit.
- The IRS now has a 6 year statute of limitations period to impose an Employer Shared Responsibility Payment. This statute of limitations is effective for returns due after December 31, 2024, and replaces the IRS’s former position that no statute of limitations existed under Section 4980H.
Department of Labor Opinion Letter
On January 14, 2025, the Department of Labor (DOL) released an opinion letter about the interplay between FMLA leave, state family medical leave programs, and employer-provided paid time off.
The Family and Medical Leave Act (FMLA), a federal law, allows employees to take 12 weeks of unpaid time off for a qualifying reason. FMLA also allows employers to require employees to use employer-provided paid time off during the FMLA leave.
In the opinion letter, the DOL looked at whether an employer can require an employee to take paid time off when the employee is on FMLA leave and is receiving benefits through a state paid family medical leave program.
The DOL concluded that an employer cannot require an employee to take paid time off while also receiving benefits through a state paid family medical leave program because the leave is not unpaid—-the employee is receiving partial pay through the state program. If, however, the state benefits end before the FMLA leave, then the employer is allowed to require paid time off.
An employee, however, can elect to use their PTO during FMLA leave while receiving benefits through their state program and should discuss this arrangement with their employer.
While the DOL opinion letter does not have the force of law, it shows the position the agency will likely take as part of any audit or enforcement action. Also, because state family medical leave programs vary by jurisdiction, employers should consult with their legal counsel to determine if their policies meet state and federal guidance.
Reminders
- Many states release updated versions of their W-4s at the start of the new year. Make sure your new employees are using the latest versions.
- Do you have employees located in Delaware or Maine? Confirm you are set up to withhold for new employer and/or employee contributions.
- Delaware employers need to enroll in the state’s Labor First system.
- Maine employers can enroll here.