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Legal and Legislative Updates on the Corporate Transparency Act and Overtime Exemption Rule

Michigan business owners have been closely following two significant federal developments that came into effect this year: the Corporate Transparency Act (“CTA”) and the U.S. Department of Labor’s (“DOL”) final rule (“Final Rule”) on overtime exemptions under the Fair Labor Standards Act (“FLSA”). These changes have far-reaching implications for businesses across the state, requiring careful consideration and strategic planning to ensure compliance.

However, recent legal and legislative challenges to both the CTA and the Final Rule have raised questions about their future. While these challenges may offer a glimmer of hope for businesses seeking relief from the new requirements, it’s crucial to understand that, as of now, Michigan business owners are still obligated to comply with both the CTA and the Final Rule. In this article, we’ll dive into the background of these developments, explore the current state of the challenges against them, and provide practical insights to help you navigate this complex landscape.

Background on the Corporate Transparency Act 

The Corporate Transparency Act, passed by the U.S. Congress in 2021, aims to combat illicit activities such as money laundering, terrorist financing, and tax fraud by requiring certain business entities to report their “beneficial ownership” to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury. The CTA applies to both domestic and foreign companies that meet specific criteria, with some exemptions for larger companies, publicly traded entities, and certain regulated businesses.

Under the CTA’s Final Rule, issued by FinCEN on September 29, 2022, a “beneficial owner” is defined as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25 percent of its ownership interests. Reporting companies must file beneficial ownership information reports with FinCEN, providing details such as the beneficial owner’s name, birthdate, address, and identification document information. The deadline for compliance depends on when the company was created or registered: those formed before January 1, 2024, have one year from that date to file their initial reports, while those formed after January 1, 2024, have 90 days from their creation or registration to file. Starting in January 1, 2025, new businesses will have 30 days from their creation or registration date to file.

Background on the DOL Final Rule

On April 23, 2024, the U.S. Department of Labor released its long-awaited Final Rule, which significantly alters the overtime exemption thresholds under the Fair Labor Standards Act. The Final Rule raises the minimum salary for exemption from overtime pay for executive, administrative, and professional employees from the current level of $684 per week ($35,568 annually) to $844 per week ($43,888 annually) starting July 1, 2024. On January 1, 2025, this threshold will further increase to $1,128 per week ($58,656 annually).

Additionally, the Final Rule increases the minimum total annual compensation level for “highly compensated employees” from $107,432 to $132,964 effective July 1, 2024, and to $151,164 effective January 1, 2025. The DOL projects that the 2025 increase alone will impact three million workers, making millions of previously exempt employees eligible for overtime pay.

Current Court Challenges to the CTA

The Corporate Transparency Act has faced several legal challenges since its enactment. In the most significant case to date, National Small Business Association v. Yellen, the U.S. District Court for the Northern District of Alabama ruled on March 1, 2024, that the CTA is unconstitutional. The court held that the CTA’s reporting requirements exceed congressional authority under the Constitution, rejecting the government’s arguments that the CTA is justified under foreign affairs powers, taxing powers, and the commerce clause. However, the court’s injunction against enforcement of the CTA applies only to the specific plaintiffs in the case. The government has appealed the ruling to the U.S. Court of Appeals for the Eleventh Circuit, with oral arguments scheduled for the week of September 16, 2024.

Several other lawsuits challenging the CTA have been filed in the wake of the Alabama decision, including in Michigan. In Small Business Association of Michigan v. Yellen, filed on March 26, 2024, the plaintiffs echo the arguments made in the Alabama case and additionally assert violations of the Fourth Amendment (illegal search without a warrant) and Fifth Amendment (unconstitutional vagueness). Another lawsuit, William Boyle v. Yellen, filed on March 15, 2024, in the Federal District Court of Maine, closely resembles the Alabama case, as does a lawsuit filed in late May by the National Federation of Independent Business in the United States District Court for the Eastern District of Texas.

Current Court Challenges to the DOL Final Rule

The Department of Labor’s Final Rule on overtime exemptions has also come under legal fire. According to reporting by Bloomberg, as of June 11, 2024, four lawsuits have been filed challenging the DOL’s authority. In Plano Chamber of Commerce v. U.S. Department of Labor, filed in the U.S. District Court for the Eastern District of Texas, a coalition of business groups alleges that the DOL “acted arbitrarily, capriciously, and otherwise not in accordance with the law” when issuing the new rule.

This lawsuit, and others, contend that the DOL failed to adequately justify the significant policy change, did not properly consider the reliance interests of the regulated community, and did not meaningfully evaluate reasonable alternatives—all in violation of the Administrative Procedure Act. The plaintiffs seek to overturn the Final Rule and obtain an injunction blocking its enforcement. However, even if an injunction is issued in this or other cases, it’s uncertain how broad its impact will be.

Legislative Challenges to the CTA

In addition to the legal battles playing out in the courts, the Corporate Transparency Act has also faced challenges on the legislative front. Two bills have been introduced in Congress this year, aimed at either providing relief to businesses covered by the CTA or repealing the Act entirely.

The first bill, the Small Business Red Tape Relief Act of 2024, seeks to ease the burden on entities subject to the CTA. The proposed legislation would require FinCEN to report to Congress on a quarterly basis the number of beneficial ownership information initial and updated reports filed, providing greater transparency and oversight of the CTA’s implementation.

The second bill, the Repealing Big Brother Overreach Act, takes a more aggressive stance, calling for the complete repeal of the Corporate Transparency Act. Supporters of this bill argue that the CTA imposes excessive compliance burdens on small businesses and infringes upon privacy rights.

Despite these legislative efforts, it remains unclear whether either bill will gain significant traction in Congress this year—particularly given that it’s an election year. 

Conclusion

As Michigan business owners navigate the complex landscape of federal laws and regulations, it’s crucial to stay informed about the latest developments surrounding the Corporate Transparency Act and the Department of Labor’s Final Rule on overtime exemptions. While legal and legislative challenges to these measures offer a glimmer of hope for those seeking relief, it’s essential to understand that, as of now, Michigan businesses are still required to comply with both the CTA and the Final Rule.

To ensure compliance and minimize potential liabilities, Michigan business owners should consult with experienced legal counsel. An attorney well-versed in these matters can provide tailored guidance based on your company’s unique circumstances, help you navigate the intricacies of the CTA and Final Rule, and keep you apprised of any relevant updates in the legal and legislative landscape.

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