Michigan’s ESTA and IWOWA Overhaul: What Employers Need to Know Now

Big changes just happened in Michigan! Late on February 20, 2025, lawmakers approved last-minute updates to the Earned Sick Time Act (ESTA) and the Improved Workforce Opportunity Wage Act (IWOWA). Governor Whitmer signed them into law right after midnight, making them effective immediately on February 21, 2025. This means employers need to act fast to stay compliant.

What Changed?

Earned Sick Time Act (ESTA): A New Era for Sick Leave

The updated ESTA replaces the Paid Medical Leave Act (PMLA) and brings significant changes to sick leave requirements for Michigan employers. Here’s what you need to know:

1. Who Needs to Provide Paid Sick Leave?

  • Large Employers (10+ employees): Must provide up to 72 hours of paid sick leave per year, effective immediately.

  • Small Employers (1-9 employees): Must offer up to 40 hours of paid sick leave per year, effective immediately.

  • Delayed Compliance for Small Businesses: Businesses with 10 or fewer employees have until October 1, 2025, to comply. New businesses (hiring their first employee after February 21, 2025) get a three-year compliance window.

2. Adjustments to Employer & Employee Definitions

  • Exemptions added for:

    • Employees under 18 years old.

    • Unpaid interns, trainees, independent contractors, and workers setting their own schedules.

  • No clear exemption for nonprofits in the final draft, so check with LEO for clarification.

3. Sick Leave Accrual & Caps

  • Employees earn 1 hour of sick leave for every 30 hours worked.

  • Annual caps:

    • Large employers (10+ employees): 72-hour limit with a 72-hour carryover cap.

    • Small employers (≤10 employees): 40-hour limit with a 40-hour carryover cap.

  • Employers can frontload sick leave (e.g., provide the full 72 or 40 hours upfront) to simplify tracking—a practical option for payroll efficiency.

4. Wage Rules & Sick Leave Usage Updates

  • “Normal hourly wage” clarified: Base pay only, excluding overtime, bonuses, commissions, and tips.

  • New hires can be required to wait 120 days before using ESTA time.

  • Termination payout is optional: If sick leave is paid out at termination, it doesn’t need to be reinstated upon rehire.

  • Leave can be offered in 1-hour increments or match the smallest tracked absence increment.

  • The “one PTO bucket” rule is removed—vacation and ESTA leave can now have separate policies.

5. Documentation & Reinstatement Adjustments

  • Employers requiring documentation for absences over three days must receive it within 15 days.

  • Rehire reinstatement period reduced from six months to two months, unless sick leave was paid out at termination.

6. Compliance & Penalties

  • The rebuttable presumption of retaliation is removed—employers are no longer assumed guilty if an employee claims retaliation.

  • Private right of action removed: Employees cannot file lawsuits directly under ESTA; enforcement is handled by the Michigan Department of Labor and Economic Opportunity (LEO).

  • Employers can discipline for misuse of sick leave.

  • Fines:

    • Failure to comply: Up to 8x the employee’s hourly wage.

    • Retaliation: Up to $1,000 per violation.

7. Required Notices & Policy Updates

  • Provide written sick leave policies at hire and to all employees within 30 days.

  • Wait five days before enforcing any policy changes.

Key Takeaway: Small businesses get breathing room, and frontloading simplifies compliance, but most employers must act fast—especially larger ones.

Improved Workforce Opportunity Wage Act (IWOWA): Wage Updates

Michigan’s minimum wage and tipped wage rules have also been revised:

Minimum Wage Updates

  • Effective February 21, 2025: $12.48 per hour (up from $10.56/hour as of January 1, 2025).

  • Future Increases:

    • $13.73/hour on January 1, 2026.

    • $15.00/hour on January 1, 2027.

    • Adjustments based on the Midwest Consumer Price Index (CPI) starting in 2028.

Tipped Wage Updates

  • Effective February 21, 2025: $4.74/hour (38% of $12.48), with tips ensuring total wages reach at least $12.48/hour.

  • Gradual Increase: Tipped wage will rise by 2% annually, reaching 50% of the minimum wage ($7.50/hour) by 2031.

  • Enforcement: Employers failing to meet minimum wage requirements for tipped employees face a $2,500 fine per violation.

Key Takeaway: The minimum wage hike is immediate, but the tip credit phase-out is gradual, easing the transition for hospitality businesses.

What Employers Need to Do Now

These changes demand quick action to avoid penalties. Here’s your roadmap:

Small Employers (≤10 employees)

  • ✅ No immediate action required; compliance deadline is October 1, 2025.

  • ✅ Consider dropping the previously expected 32 hours of unpaid sick leave if not already implemented.

Large Employers (10+ employees)

  • ✅ Act immediately: Update payroll to $12.48/hour (non-tipped) and $4.74/hour (tipped), effective February 21, 2025.

  • ✅ Review and update sick leave policies—choose accrual or frontloading, revise handbooks, and notify employees.

  • ✅ Post the updated LEO notice (available soon) and maintain records for at least three years.

  • ✅ Note: LEO audits won’t start for 30 days, but don’t delay compliance.

Most changes are optional and designed to ease administration, but compliance is critical.

Helpful Resources

Nikki Daley