Compliance Spotlight

Keeping you informed of regulatory changes for you and your clients is as important as it gets, and following all the changes in 2025, 2026 will, again, be a significant year for state and federal updates. This blog aims to highlight key changes and developments you may want to monitor.

Please note, regulations can change rapidly. This blog is for informational purposes only. For legal advice, consult your legal representative directly.

January 2026

With President Donald Trump’s return to office and increasingly assertive state legislatures, 2025 promised—and swiftly delivered—regulatory fireworks, which forced employers and HROs to navigate a wide spectrum of complex developments.

Throughout the year, PrismHR’s Compliance Spotlight tracked and unpacked many of the key HR and payroll compliance themes shaping the HR outsourcer landscape.

So what’s ahead for 2026? Early signs suggest a year of evolution rather than revolution. Previously enacted requirements will take effect, rules and processes will solidify around 2025’s headlining changes, and states will continue to build off each other’s regulatory frameworks.

As year-end processing for 2025 wraps up, here’s a look back at five major themes we spotlighted last year and critical updates HROs need to know for 2026.

5 Compliance Areas to Continue to Keep an Eye on in 2026

1. Immigration Enforcement

Recap: January 2025’s Legal Forecast highlighted the incoming administration’s forthcoming ramp up on immigration enforcement and increase in I-9 audits. As detailed in the forecast, this surge not only reinforced the continued need for compliant I-9 practices in and of themselves, but also signaled the potential for state-level countermeasures to protect workers—particularly in California.

What’s New: On Oct. 12, 2025, California enacted SB 294, the Workplace Know Your Rights Act, which, per the legislative summary, is designed to educate workers “in the event there is an immigration raid at the workplace.” By Feb. 1, 2026, and annually thereafter, employers must disseminate a standardized informational notice to all employees and subsequent new hires. By March 30, 2026, employers must also facilitate employee designation of an emergency contact in the event of arrest or detainment.

HRO Considerations: Service providers play a critical role in client compliance through the technology platforms they deploy. Ensure your system supports the new contact designation requirements and revisit the longstanding federal electronic I-9 regulations as we discussed in the April 2025 Blog Post “6 Ways You Can Help Your Clients Stay in I-9 Compliance.”

2. OBBBA

Recap: July 2025’s Compliance Spotlight summarized the numerous payroll, benefits and tax-related provisions of the One Big Beautiful Bill Act (OBBBA), which was probably the most impactful legislative development in the United States last year. This included a review of “No Tax on Tips,” “No Tax on Overtime,” “Trump Accounts” and more. December’s edition explored the late-breaking transitional relief for 2025 tips and overtime reporting via IRS Notice 2025-62 and IRS Notice 2025-69.

What’s New: The IRS continues to refine its approach on various provisions while slowly releasing new guidance.

• Notice 2025-68, released on Dec. 2, 2025, in part clarifies the $2,500 employer Trump Account contribution, is an annual (not lifetime), per employee (not dependent) limit.
• Draft 2026 W-2 Instructions, released on Jan. 16, 2026, allows employers to report up to two occupation codes for tipped employees, which was a change from the original draft.
• Fact Sheet FS-2026-01, released Jan. 23, 2026, reiterates prior guidance on “no tax on overtime,” including that only Fair Labor Standards Act (FLSA) overtime eligible (nonexempt) employees may claim the deduction.

HRO Considerations: With most transitory relief for “no tax” reporting extending only to 2025, details and precision begin to matter more in 2026. As the IRS releases additional updates and guidance, watch for both time and labor and payroll providers to expand their functionality to meet the heightened need.

3. Sick and Safe Time

Recap: August 2025’s Compliance Spotlight reviewed a series of state and local sick-leave amendments recently enacted throughout the U.S. While most of these changes took effect in 2025, notably, as of Jan. 1, 2026:

• Pittsburgh increased its accrual rate and annual accrual limit.
• Connecticut reduced its employee count threshold to 11 from 25, subjecting more in-state employers to the sick-leave mandate.

What’s New: In October 2025, New York City amended its Earned Sick and Safe Time Act (ESSTA), via Int 0780-2024, with changes set to take effect Feb. 22, 2026. The amendments not only expand the list of permissible reasons to use sick and safe time, but also entitle employees to 32 hours of unpaid leave annually. This unpaid time must be frontloaded upon hire and at the start of each year as defined by the employer, and must be provided in addition to existing paid sick and safe time required in New York City.

HRO Considerations: New York City ESSTA requires employers to provide accrual, use and balance information to employees each pay period, either on wage statements or electronically. While most HR and payroll platforms already support this disclosure, unpaid time may be displayed under a generic “Paid Time Off” heading by default. But, language matters. To avoid employee confusion and mitigate unintended risk, ensure all unpaid time is accurately identified as unpaid.

4. Federal Rulemaking & Administrative Guidance

Recap: A major development in 2024 was the U.S. Supreme Court’s dismantling of the Chevron Doctrine, which long afforded federal agencies broad deference in statutory interpretation. In its wake, the current deregulation-oriented administration further throttled agency output. However, in 2025, a steady stream of significant rulemaking, guidance and executive orders still continued to address gaps left by congressional inaction and ambiguity. September 2025’s Compliance Spotlight explored this trend and examined the IRS’s finalized rules on Secure 2.0’s mandatory Roth Catchup requirements.

What’s New: On Jan. 5, 2026, the U.S. Labor Department issued four new FLSA and two new Family and Medical Leave Act (FMLA) opinion letters. Notably:

• FLSA 2026-1 explains that the FLSA “does not require an employer to classify as exempt an employee who meets the requirements of an exemption.” If the employer does not claim the exemption, the employee must be paid overtime and compensated at or above the minimum wage under the FLSA.
• FLSA 2026-2 reiterates that performance bonuses that are not in the sole discretion of an employer must be included in an employee’s regular-rate overtime premium calculation. This includes bonuses with some modicum of employer discretion if they are tied to pre-established criteria.
• FLSA 2026-4 explains that, when determining whether more than 50% of an employee’s compensation comes from commissions (for purposes of the FLSA Section 7(i) overtime exemption), tips are only counted as compensation to the extent an employer claims a tip credit. The opinion letter distinguishes mandatory service charges, which classify as commission, from bona fide tips, which do not.

HRO Considerations: The highlighted opinion letters come on the heels of other related state and federal guidance, broadening the narrative on each topic:

• Employee FLSA classification is central to the IRS position on no tax on overtime, which seemingly prohibits the deduction for employees voluntarily classified as nonexempt.
• The Illinois Supreme Court ruled last year that, under state law, performance bonuses do not need to be tied to hours worked to be included in an employee’s regular rate of pay.
• In light of the OBBBA’s No Tax On Tips requirement, the IRS has also regularly reminded employers that service charges are not tips, despite industry practices.

5. Paid Family Medical Leave

Recap: October 2025’s Compliance Spotlight examined the state and federal PFML requirements taking effect Jan. 1, 2026, and beyond. This includes IRS Rev. Rul. 2025-4, which, in part:

• Classifies employer pickup contributions of the employee portion of state PFML premiums as wages subject to federal income and employment taxes.
• Designates a portion of state payments of medical-leave benefits as third-party sick pay, which thereby imposes new tax and reporting requirements on both states and employers.

Other significant PFML developments include the kickoff of Minnesota’s new program and Oregon’s pivot to Professional Employer Organization (PEO) reporting flexibility as detailed in June 2025’s “PEO Regulatory Push-Pull by the Numbers” blog post.

What’s New: To accommodate state implementation concerns, the IRS issued Notice 2026-6 on Dec. 19, 2025, delaying third-party sick pay tax and reporting obligations until 2027. In response, Colorado and Massachusetts have already indicated they will defer any related administrative changes until next year.

HRO Considerations: Third-party sick pay reporting will likely require enhanced coordination between HROs, employers and state agencies. Accordingly, the delayed implementation provides service providers with valuable lead time to clarify roles and responsibilities and assess process and platform needs once state guidance is finalized.

What regulatory changes occurred last year? See what we were tracking in 2025.

Chris Babigian is PrismHR’s compliance strategy manager. He earned his J.D. from Boston University School of Law with a concentration in tax law and spent five years in private practice before joining PrismHR in 2014. Since then, he has focused on translating complex payroll and HR regulatory requirements into practical software solutions.