Grandfather Clauses: Five Questions Employers Should Ask When New Employment Laws Take Effect

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January 1 and July 1 are two dates often highlighted on employers' calendars. These dates mark the beginning and midpoint of the calendar year and frequently serve as the effective dates for new state workplace laws.

This year was no exception. On July 1, numerous state laws affecting employers became effective. In Virginia, Senate Bill 637 removed the small business exemption from the Virginia Human Rights Act (VHRA), making employers with five or more employees now subject to the anti-discrimination law. In Indiana, House Bill 1302 relaxed certain restrictions relating to the employment of minors and eliminated the requirement that employers register with the State Department of Labor before employing minor employees. In Tennessee and Virginia, legislators continued a growing national trend toward restricting noncompete agreements, with Tennessee now prohibiting noncompete covenants for employees earning less than $70,000 annually and Virginia expanding existing restrictions to now cover healthcare professionals.

When reviewing newly enacted employment laws, employers naturally focus on the substantive provisions which define the new legal obligations imposed by the law. However, buried within the text is another statutory provision that can be equally as important: the grandfather clause.

What is a Grandfather Clause?

A grandfather clause is a provision in a statute or regulation that permits an existing practice to continue despite the enactment of a new law or rule that would otherwise prohibit or restrict that practice. For employers, grandfather clauses commonly arise in connection with laws governing employee benefits, restrictive covenants, compensation programs, and other workplace policies and practices. Similar provisions may also appear in other areas of law, including zoning and land-use regulations.

Although grandfather clauses serve a common purpose, they are not always drafted alike. Some grandfather clauses are broad, others are narrow, and many contain conditions that are not immediately apparent from a quick reading of the law. For employers, these provisions frequently raise practical questions about compliance, workforce management, and long-term planning. The following considerations can help employers navigate those issues.

Question 1: Does the New Law Actually Contain a Grandfather Clause?

When new employment laws take effect, employers often focus on the substantive changes created by the legislation. If those changes appear significant, there can be a natural tendency to assume that the legislature provided some type of transition period or exemption for existing policies and practices. That assumption is misplaced.

States are not required to include grandfather protections when enacting new laws. Although some legislatures attempt to minimize disruption by preserving certain pre-existing employment practices, others apply the new requirements immediately to all covered employers.

Accordingly, employers should not assume that grandfather exemptions are available simply because the new law significantly disrupts the status quo or makes timely compliance a challenge. Instead, employers should carefully review the law to determine how the new requirements apply to the employer and whether a grandfather clause exists to protect pre-existing workplace practices from the law's reach.

Fortunately, grandfather clauses are usually easy to identify. Legislatures often draft them as standalone provisions with clear language indicating an intent to preserve pre-existing arrangements (e.g., “Nothing in this Act shall affect . . .” or “This Act shall not apply to . . .”). Although the precise wording may vary, these provisions generally make it clear when existing policies, practices, and agreements are exempt from the requirements of the new law.

Question 2: Does the Grandfather Clause Apply, and Can You Prove It?

The existence of a grandfather clause does not automatically mean an employer qualifies for the exemption.

In many cases, eligibility depends on whether the policy, practice, or agreement affected by the new law existed before the cut-off date specified in the enactment (typically January 1 or July 1). In rare cases, eligibility may also depend on workforce demographics or some nuanced condition identified by the statute. As such, employers should carefully review the entire grandfather provision when determining whether the exemption applies.

Just as importantly, employers must also be prepared to prove that their existing employment practices qualify for grandfather status. Employers should retain records establishing when the policy, practice, or agreement was implemented or executed, whether it remained continuously in effect, and whether any material changes were made over time. Careful recordkeeping is often the strongest defense against a future challenge to an employer's claimed grandfather status.

Question 3: Is Exercising the Grandfather Exemption the Right Business Decision?

Once an employer determines that an existing (otherwise noncompliant) employment practice is protected by a grandfather clause, the employer must consider whether use of the exemption is a sensible business decision.

In some situations, exercising the exemption may be advantageous. Existing employees may welcome the ability to keep their current benefits, policies, or workplace arrangements, and employers may prefer to avoid the disruption associated with immediate changes. Exercising the exemption may also provide additional time to evaluate the practical impact of the new law and consider making more broad operational changes down the road.

On the other hand, exercising the grandfather protection may create unique workplace challenges. Because these exemptions are generally defined by a cutoff date, workers hired after that date may be granted rights that do not similarly extend to grandfathered employees (such as freedom from a noncompete restrictive covenant in Virginia). This can complicate policy administration and create friction between employees. As workforce turnover occurs, it may make more sense to replace the exempted practice with an arrangement that is compliant with current laws and applied uniformly to all employees. These are important considerations employers must evaluate prior to making any decision about the exemption.

So while grandfather status can be valuable, employers must still carefully consider the pros and cons of maintaining the affected employment practice prior to making any decisions.

Question 4: Should Grandfathered Policies Be Maintained Indefinitely or Phased Out Over Time?

Once an employer decides to exercise its exempt status under a grandfather clause, a natural follow-up question arises: how long should the exempt, pre-existing practice be maintained?

Some employers choose to maintain the protected arrangement for as long as the grandfather protection remains available. Other employers may determine that a gradual transition to the new legal framework is the better long-term approach. In many cases, a phase-out strategy allows employers to take advantage of the legislature's grandfather protection while ultimately achieving uniformity across the workforce as time progresses and compliance with the new restrictions becomes simpler.

That said, employers must understand that statutory grandfather protections do not eliminate future uncertainty. A grandfather clause that exists today may be narrowed, modified, or removed in a future legislative act. In addition, as employee turnover occurs, employers may find that maintaining the arrangement for a shrinking segment of the workforce is costly.

For these reasons, employers should consider early on whether a phase-out strategy makes sense. If the long-term objective is to align employment practices for all employees, a phase-out plan is appropriate. Affected employees should be notified in advance and provided a clear timeline of the phase-out process, including a tentative deadline for completion. At all times, employees should understand what changes are expected, when those changes will occur, and how the transition will affect them.

Question 5: How Can You Protect and Preserve Exemption Status?

Assume an employer has located a grandfather clause in a stringent new law, correctly determined it applies to his business, and developed a gradual phase-out plan to eventually bring the exempted practice into compliance with the new law. What must be done to ensure that grandfather protection is not inadvertently lost during this process?

Protection under a grandfather clause frequently comes with strings attached. Employers should not assume that grandfather status, once obtained, will continue automatically. In many cases, the relevant law identifies specific actions that may jeopardize the exemption, such as materially modifying the protected policy or practice, renewing the grandfathered agreement, or otherwise altering the existing arrangement in a manner inconsistent with the statute's requirements. Some employment laws go a step further by requiring employers to take affirmative measures to preserve the exemption, such as notifying a state agency of the preexisting arrangement and expressly electing grandfathered treatment. Failure to comply with those requirements may result in the employer forfeiting the exemption and becoming subject to the new legal framework.

For these reasons, employers should carefully review the conditions attached to any grandfather clause before making changes to the policy, practice, or agreement that is otherwise exempted. A seemingly routine modification may have unintended legal consequences and bring the employer back within the scope of the new law’s requirements.

Conclusion

Grandfather clauses can provide valuable flexibility when new employment laws take effect, but they are rarely as simple as they appear. Employers should ask five questions before relying on any grandfather protection: Does the law contain a grandfather clause? Does it apply to your business, and can you prove it? Is maintaining the grandfathered practice the right business decision? Should the practice be phased out over time? And what must be done to preserve the protection in the interim?

By carefully evaluating these five important questions, employers can better understand their rights and obligations when legislative changes occur. Because grandfather provisions often contain nuances that are not immediately apparent, employers should consult with legal counsel before relying on the exemption as the basis for important workplace decisions.