2026 Michigan Labor And Employment Law Update: Wage Increases, Sick Leave, Contract Limits, And Key Legislative Risks For Employers

Takeaways

• Michigan employers face steadily rising minimum wages, the phase-out of the tip credit, and temporary tax relief on tips and overtime through 2028.
• A Michigan Supreme Court decision reshapes how courts evaluate shortened limitations periods in employment agreements, putting common handbook provisions at risk.
• Michigan's Earned Sick Time Act now applies broadly and will soon reach unionized workforces as collective bargaining agreements expire.
• Proposed legislation could dramatically expand pay transparency, mandate formal job descriptions, and reclassify many independent contractors as employees.
• Non-competes and right-to-work laws are once again in legislative flux, requiring employers to monitor Lansing closely in 2026.

As we enter 2026, Michigan employers should be aware of several Michigan employment laws that continue to have a major impact on employers, and some possible employment laws.

Michigan Minimum Wage Updates and No Tax on Tips

The Michigan Improved Workforce Opportunity Wage Act ("IWOWA") went into effect on February 21, 2025. It raised the minimum wage and tip-credit minimum for Michigan employees pursuant to the table below:

Further, in mid-October, Michigan Governor Whitmer signed a law stating that Michigan will not levy its 4.2% income tax on income obtained from tips or overtime. The tax cut is effective through the 2028 calendar year.

Employers with hourly workers should be aware of the increasing minimum wage and tip credits and speak with their employment counsel regarding the payroll implications, if any, of the tax break on tips and OT wages.

Contractually Shortened Limitations Periods: The Rayford Decision

On July 31, 2025, the Michigan Supreme Court upended how Michigan courts analyze the permissibility of contractually shortened limitations periods. The Plaintiff, a CNA, sued her former employer several years after her claims for race and gender-based harassment and hostile work environment accrued. In Michigan, the normal statute of limitations for employment discrimination claims under the Elliott-Larsen Civil Rights Act is three years. Most federal claims must be preceded by a complaint filed with the Equal Employment Opportunity Commission within 180 days of the incident. The Rayford Plaintiff, however, signed an "Employee Handbook Acknowledgement" shortly after beginning her employment, which contained a contractual provision shortening the limitations period to bring an employment-related claim to 180 days. Many employers have their employees and/or applicants agree to similar contractually shortened limitations periods.

The Michigan Supreme Court reevaluated the then-existing standard for such contractually shortened limitations periods, under which Michigan courts deferred to unambiguous contracts, including such shortened limitations periods, so long as a traditional contract defense did not apply. In reconsidering this standard, the Court emphasized the adhesive nature of employment contracts: prospective employees are left with the limited options of signing the agreement on their employer's terms or not being employed.

Accordingly, the Court opined, the review of contractually shortened limitations period requires a reasonableness determination. Under the new standard, if a challenged employment agreement is adhesive, Courts must look to the following factors in determining whether a shortened limitations period is reasonable: (1) the claimant has sufficient opportunity to investigate and file an action, (2) the time is not so short as to work a practical abrogation of the right of action, and (3) the action is not barred before the loss or damage can be ascertained.

The Rayford Court did not issue a ruling on whether the contractually shortened limitations period in that case, requiring all employment-related claims to be brought within 180 days of their accrual, satisfied the newly announced standard. Dykema is monitoring the remanded case. Employers whose handbooks, agreements, or contracts contain contractually shortened limitations periods should speak to their employment counsel about the implications, if any, of the Rayford decision.

Michigan's Earned Sick Time Act

Michigan's Earned Sick Time Act ("ESTA") went into effect on February 21, 2025. ESTA applies to virtually all employees in the state and mandates employers provide at least one hour of paid sick time for every 30 hours of an employee's work.

Employers are permitted to front-load paid sick time in an amount not less than 72 hours instead of administering sick time through the Act's accrual method. Employers should consult Dykema's ESTA Blog Post and speak with their employment attorney regarding nuanced ESTA questions, for instance, combined versus separated PTO banks, paid sick leave for part-time employees, and carry-over and payout issues.

Employers should note that while ESTA did not apply to employees working under active collective bargaining agreements as of February 21, 2025, it will apply to those employees when their collective bargaining agreements expire. Employers with unionized workforces should thus be aware of the impact of ESTA on future collective bargaining efforts.

Keep a Lookout for Possible Legislation in Lansing

Employers will want to keep an eye out for some possible 2026 employment laws that Michigan legislators have been discussing and could be signed into law in 2026.

HB4406 would amend Michigan's Payment of Wages and Fringe Benefits Act to require employers, upon request of an employee, to provide wage information for similarly situated employees covering a period of up to three years prior to the date of the request. HB4406 defines "similarly situated employees" to mean (1) employees who are within the same job classification as the employee requesting the information, or (2) employees whose duties are comparable in skill, effort, responsibility, working conditions, and training to those of the requesting employee. "Wage information" would include salary and wages, as well as information concerning bonuses, overtime, and other forms of compensation paid by the employer.

SB142 would amend Michigan's Bullard-Plawecki Employee Right to Know Act to require employers with more than five employees to create and maintain a job description for each position. The job description must include all of the following: a list of the essential duties and responsibilities of the position; a description of the skills, training, and effort required of the position; working conditions; a schedule under which the job is performed; and salary information, including any applicable pay scales. Under the proposed legislation, employers must provide job descriptions to any employee upon request and to applicants during the recruitment, hiring, or promotion process.

SB6 proposes amendments to the Payment of Wages and Fringe Benefits Act that would alter how Michigan law distinguishes between employees and independent contractors. Michigan currently utilizes the common law or IRS test, which looks to: behavioral control factors (i.e., instructions and scheduling), financial control factors (i.e., payment schedules and payment of expenses), and relationship factors (i.e., right to discharge and extent of integration). The legislation proposed in the State Senate adopts the "ABC test," which would distinguish an independent contractor from an employee based on three criteria: (1) the individual is free from control and direction of the payer, (2) the individual performs work that is outside the usual course of the payer's business, and (3) the individual is customarily engaged in an independently established trade, occupation, or business or the same work performed by the individual for the payer. This test also differs from the "economic realities test," which looks to the following six factors: opportunity for profit or loss, investment by the worker, permanence of the relationship, the payer's control over the worker, whether the worker's work is a core part of the business, and the worker's skill and initiative.

To satisfy the ABC test, each of the three elements must be met. The first two elements are high hurdles to clear. Employers who wish to argue that a worker is an independent contractor must successfully demonstrate that the worker is free from their direction and control. Further, the worker must be conducting work that is outside the course of the employer's business to be considered an independent contractor. The more closely related the worker's work and the employer's business are, the more likely the worker is to be considered an employee, not an independent contractor, under the ABC test.

Employers need to be aware of the differences between the common law test currently governing the distinction between employees and independent contractors and the proposed ABC test. Adoption of the ABC test would lead to a sizable number of independent contractors in Michigan potentially being reclassified as employees. This carries with it enormous impacts concerning wages, benefits, and collective bargaining. Employers who engage independent contractors should thus consult their labor and employment counsel regarding the potential impact of a change in how Michigan distinguishes these workers.

In "right-to-work" states, employees cannot be compelled to join labor unions. Employers in those states are barred from making union membership or the payment of union dues a mandatory condition of employment. "Right to work" legislation is contentiously debated in legislatures across the country. Michigan was a "right to work" state for over a decade prior to that status being repealed by a 2023 law. As such, Michigan employers currently can condition employment on membership in a union. Michigan Senate Republicans have proposed legislation that would return Michigan to a "right to work" state in both the private (SB436) and pubic (SB437) sectors.

Non-compete agreements and legislation limiting their scope are another widely debated area of labor and employment law being discussed in Lansing. Currently, Michigan employers "may obtain from an employee an agreement or covenant which protects an employer's reasonable competitive business interests and expressly prohibits an employee from engaging in employment or a line of business after termination of employment if the agreement or covenant is reasonable as to its duration, geographical area, and the type of employment or line of business..." Proposed HB4040 would amend that law to include a general prohibition on non-compete agreements, with a narrow two-part exception. Under the extremely narrow exception, non-competes would be permissible if: (1) the worker is either: (a) the owner of the business and is selling the business or the worker's full or partial ownership interest in the business, or (b) responsible for the sale of all or substantially all of the business's operating assets; and (2) the agreement: (a) protects only the business's legitimate competitive interests; (b) has a reasonable duration, (c) restricts competition in the only in the relevant market, and (d) restricts competition only to the same type of trade or commerce.

The proposed legislation would not upend the analysis of the reasonableness of the scope, duration, and line of business in the non-compete agreement. But it would significantly reduce the number of employees in the state who can enter valid non-competes. Previously, consideration of the employee's role with the employer fit into the analysis of the employer's reasonable competitive interests. Under the new test, employers would be barred from entering non-compete agreements with virtually all non-executive or high-level managerial employees. While likely to face ample opposition, employers should nevertheless contact their labor and employment counsel to discuss potential ramifications of the bill's passage.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.