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Updated Oct 20, 2023

10 Local Legislative Issues Small Businesses Should Be Watching

States and municipalities often write their own laws that expand upon federal regulations or a lack thereof. Which ones affect your business?

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Adam Uzialko, Business Strategy Insider and Senior Editor
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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The news cycle is often hyper-focused on policy developments at the federal level, easily creating blind spots for small business owners at the state and local levels. While federal rules and regulations are critical, they do not diminish the importance of state and local regulations. Entrepreneurs and small business owners must be just as aware of their own state legislatures and municipal governments as they are of the U.S. Congress and White House.

Cities and states primarily operate independently of the federal government, albeit within the confines of federal law, and can act to pass new regulations and measures regardless of what Congress is doing.

Mike Trabold, compliance director at Paychex, told us that entrepreneurs must remain aware of what’s going on in the broader regulatory environment. “A lot of states and cities [are starting] to gear up to make some changes for [deregulation] they anticipate at the federal level.”

Many cities and states have enacted rules to either compensate for or mirror federal policies. Here’s a look at some of the most significant trends in states and cities across the country and what entrepreneurs should understand about each.

Minimum wage increases

One of the most common local and state policies in recent years has been to increase the minimum wage. While the federal minimum wage today stands at $7.25 per hour, it is significantly higher in many states and cities. Some cities have a minimum wage of $15 per hour or more. Wage increases have been mandated by New York City, Chicago, and San Francisco, to name a few.

As the federal minimum wage remains unchanged, more city and state increases should be expected, said Carol Wood, people operations director at employee scheduling software company Homebase.

“With the absence of any federal minimum wage increases, it’s likely we’ll see more attempts to increase the minimum wage locally or eliminate the tipped minimum wage,” she said.

Since minimum wage laws depend on the state – or even the city – where your business is located, business owners must stay abreast of changes and initiatives regarding the minimum wage.

Did You Know?Did you know
While minimum wage affects small businesses directly, there may be benefits associated with increasing workers' pay. Still, small businesses have to find ways to absorb the cost.

Tipped employee pay

Before 2022, employers could take a wide variety of tax credits on employee tips. A new final rule from the Department of Labor (DOL) has changed that. Under this rule, employers can claim credits only on “work that produces tips as well as work that directly supports tip-producing work.” However, supporting work doesn’t qualify for tax credits if performed for too long.

Another new DOL final rule penalizes employers that unlawfully withhold employee tips.

It remains to be seen whether states and cities follow suit with similar laws. However, at the outset of 2022, California’s state legislature was pushing bills concerning wage theft. Unlawfully withholding tips certainly falls under wage theft, and California’s actions on this topic could portend a general trend toward local wage regulation.

Did You Know?Did you know
If you inadvertently withhold an employee's overtime, you'll need to issue retro pay as soon as possible, or it may be considered wage theft.

COVID-19 vaccination

In November 2021, the Occupational Safety and Health Administration (OSHA) detailed its COVID-19 vaccination policies for employers. These rules require employers with at least 100 employees to ensure that all employees are vaccinated or taking weekly COVID-19 tests. They also require unvaccinated employees to wear masks, and they mandate paid time off (PTO) policies for employees to receive vaccinations during work hours.

OSHA has also required healthcare facilities that accept Medicare and Medicaid to fully vaccinate all their staff members. This rule and the 100-employee rule cover 101 million Americans. In response, many states have stepped in to either ban or enforce such COVID-19 vaccine mandates, though federal law will supersede any bans. However, the U.S. Supreme Court may be poised to strike down the new OSHA requirements.

Did You Know?Did you know
If your business employs 100 or more people, your whole team must be vaccinated against COVID-19 or take weekly COVID-19 tests.

Data privacy and security

The European Union’s General Data Protection Regulation is coming ashore. California adopted its own version of a consumer data privacy law, the California Consumer Privacy Act. These laws aim to protect consumer data collected by companies by imposing rules about transparency, data sharing and consumer data management.

In some cases, businesses that collect consumer data could be on the hook for compliance issues if a third-party company mishandles that data on their client’s behalf. This has led to an influx of requests to small businesses from their clients that are subject to the laws, even if they themselves do not collect consumer data.

“Small businesses are getting requests from big companies asking them how they’re complying with rigorous cybersecurity rules, and that’s been a challenge,” Trabold said. “A lot of SMBs [are] not always well suited to comply with [these rules].”

As states and cities adopt more data privacy and security measures, businesses will have to become increasingly aware of each measure in jurisdictions where they do business. These laws typically cover the users in a given region, so even if your company doesn’t operate there, it will be on the hook for any user data it collects from IP addresses in that location.

Being aware of the rules and how strict they might be is essential to avoiding hefty fines.

Did You Know?Did you know
While most business owners understand the importance of cybersecurity, many businesses fail to use data security software.

Sexual harassment policies and training

In the wake of the #MeToo movement, states and cities are rapidly expanding regulations surrounding sexual harassment training and policies. New York and Delaware are among the states that have passed laws with specific training requirements, while New York City and other cities have moved to tighten policies surrounding aspects like disclosure, channels through which to escalate complaints and tighter penalties for violating sexual harassment policies.

“We’ve seen a bunch of states either pass or contemplate some very specific, targeted incremental regulatory requirements related to [sexual harassment],” Trabold said. “That’s a trend that has started to snowball a little bit and have a direct impact on businesses.”

Pay equity legislation

Under the Obama administration, the Equal Employment Opportunity Commission issued new federal requirements for pay equity and salary reporting by businesses. The measure required companies with 100 or more employees to submit pay data based on their workers’ W-2 earnings. In 2017, the pay data collection rules were suspended for review by the Office of Management and Budget, and the pay data issue came to a permanent end in 2020.

Still, pay equity legislation has moved forward at the local and state levels. States such as California, Maryland, Massachusetts, New York and Oregon have passed laws expanding employer obligations and penalties regarding equal pay, especially surrounding gender pay disparities. These laws often impact smaller businesses more than the federal rule change would have, Trabold said.

“At the federal level, reporting was only for [businesses with] 100-plus employees, but a lot of the state- and local-level [laws] are really for all businesses,” he said. “It’s [often] a pretty low threshold, so most or all businesses will have to do this type of reporting.”

Healthcare reform

Healthcare reform is a topic long discussed on Capitol Hill, but Republican efforts to “repeal and replace” the Affordable Care Act (ACA) have thus far stalled. Whether spurred by the uncertainty of federal action or just the general complexity of healthcare policy, lower layers of government are often spearheading projects of their own.

“There’s tremendous ambiguity [on healthcare policy] at the federal level,” Trabold said. “States in reaction and anticipation are going out and doing their own things that employers might have to react to or be aware of.”

These laws and proposals have included attempts to gain greater latitude regarding ACA mandates, such as in Massachusetts; proposals to shore up markets, as in Minnesota and Alaska; and proposals for single-payer healthcare systems, often touted by the progressive wing of the Democratic Party. Integral to these efforts is Section 1332 of the ACA, which allows states to apply for waivers from specific ACA requirements; waivers are intended to encourage experimentation and innovation in healthcare policy.

State collection of online retailer sales tax

In June 2018, the U.S. Supreme Court decided, in South Dakota v. Wayfair, to close a sales tax loophole that disallowed states from collecting sales tax from out-of-state online retailers that sold products in those states. Brick-and-mortar retailers long maintained that the rule granted an unfair advantage to online retailers, and the Supreme Court ruled in their favor.

As a result, many states have been considering how they will collect sales taxes from out-of-state online retailers, and in an environment where every revenue stream is needed by governments at every level, businesses that sell online should rest assured that collections will occur.

“If you’re an entrepreneur with an online sales presence, that whole sales tax piece could be very, very impactful,” Trabold said. “Most states right now are evaluating how they’ll administer it, and what we’re seeing is that [sales tax on out-of-state online retailers] is a tempting revenue source for states.”

Some states, Trabold added, might set thresholds under which an online retailer would not be subject to state sales taxes. Other states might not. For those small businesses that sell out of state over the internet, state policies that arise surrounding South Dakota v. Wayfair will be crucial to keep an eye on.

E-commerce sales tax compliance tips include becoming familiar with online sales tax laws, finding a point-of-sale system that tracks tax liabilities, and tracking each state's payment deadlines.

State retirement plans

With the announcement that the Treasury Department would wind down the Obama administration’s myRA retirement saving initiative, concerns around the dearth of Americans’ retirement savings were renewed. State retirement plans have been cropping up as an avenue to provide access to retirement savings accounts to employees who don’t have a 401(k) plan or the ability to open an IRA.

“There is no traction at [the] federal level around workplace savings programs, so a lot of states have their own plans,” Trabold said.

So far, 14 states and two cities have passed some kind of retirement savings legislation. Oregon, Illinois and California have passed Roth IRA programs. Vermont adopted a multiple-employer plan called the Green Mountain Secure Retirement Plan, and Seattle and New York City have enacted savings programs as well.

“Talk around retirement plans has slowed a little bit [because of] some movement at the federal level about potential legislation that would make it easier for small businesses to start retirement plans,” Trabold added. “In D.C., there might be some agreement on it, so some states might take a wait-and-see attitude. So there’s a temporary hiatus, but it’s definitely worth keeping an eye on.”

Max Freedman contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.

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Adam Uzialko, Business Strategy Insider and Senior Editor
Adam Uzialko, senior editor of Business News Daily, is not just a professional writer and editor — he’s also an entrepreneur who knows firsthand what it’s like building a business from scratch. His experience as co-founder and managing editor of a digital marketing company imbues his work at Business News Daily with a perspective grounded in the realities of running a small business. Since 2015, Adam has reviewed hundreds of small business products and services, including contact center solutions, email marketing software and text message marketing software. Adam uses the products, interviews users and talks directly to the companies that make the products and services he covers. He specializes in digital marketing topics, with a focus on content marketing, editorial strategy and managing a team.
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