Employment Laws

It would be impossible in less than a whole treatise to provide a small business owner with a complete description of all the federal, state and local laws, constitutional amendments, executive orders, administrative regulations, case law and common law, etc., that affect employment issues. Even large companies and organizations with full-time human resource and in-house legal staffs have to work diligently to remain current on all employment law developments and most have relationships with specialized law firms to keep them current and compliant. To make this point completely, consider, for example, there are thirty-nine separate Federal Constitutional Amendments, Laws and Executive Orders that deal solely with employment discrimination-only one aspect of employment law. On top of federal laws and acts that govern employment (in the broadest sense) each State has its own set of laws and regulations (see below). Finally, if that is not enough, "common law" provides the basis on which employees may challenge employment actions and decisions that affect an employee.

To further emphasize this point, here is a list from one state (similar to those of other states) of the laws/acts that govern employment matters:

  • Minimum Wage
  • Work Hours & Overtime
  • Wage Payment (frequency, methods, direct deposits, etc.)
  • Pay on Termination
  • Deductions from Wages
  • Public Holidays
  • Payroll Records & Reports
  • Child Labor Laws
  • Family/Medical Leave
  • Payment for Jury Duty
  • Payment for Court Appearances
  • Emergency Response Leave
  • Military Leave/Re-Employment Rights
  • Organ/Bone Marrow Donation Leave
  • Free Speech Protection
  • Job References
  • Employee Liability for Losses
  • Genetic Information
  • Personnel Files & Medical Records
  • Social Security Number Protection
  • Labor Relations Act (Union Recognition & Bargaining)
  • Discrimination in Employment Act
  • Emergency Telephone Calls for Employees
  • Polygraph Test for Employees
  • Criminal History Records
  • Drug Testing
  • Plant Closings
  • Workers Compensation Retaliation Prohibition
  • Whistleblower Protection

On top of federal and state laws, there is also "common law" which can be used by an employee to file a lawsuit against an employer. In an employment setting, the most likely legal theory applications would fall under these categories:

  • Wrongful Termination
  • Breach of Contract
  • Negligent Hiring/Supervision
  • Retaliation for exercising a legally protected act (i.e., free speech, making a workers' comp claim, complaining about discrimination and/or sexual harassment, etc.)

The point of this litany of ways to challenge anything you do in an employment setting is to let you know that just because you are a small business owner, you are not exempt (because of the number of employees you have) from meeting the legal requirements of most employment decisions. Also, because of the myriad of duplicative and ever-changing federal, state and even local laws that cover employment, it would be extremely difficult to generate a fifty-state list that shows how many employees a business/company must have to be covered by specific employment laws, rules and regulations.


So, what is a small business owner to do, faced with the need to comply with all applicable laws and the reality of limited resources (people, money, time, expertise)?

As has been attempted in previous articles, there are things you can do to avoid getting into legal trouble in employment matters.

  • Outsource your payroll function so that a third-party assumes responsibility for all laws related to taxes, tax payments, withholdings, paying minimum wage, making state and local employee reports, provision for overtime payments, etc.
  • Get connected with a good employment or labor lawyer who knows you and your business-someone you can readily access when something in employment arises for which you are ill-prepared to know the "state-of-the-law's" finer requirements
  • Follow the HR processes suggested in earlier articles as they are both good business and HR practices and they will tend to keep you out of most legal trouble (see discussion below)
  • Do not discriminate in any employment decision (hiring, pay, benefits, promotion, work assignment, discipline, discharge, etc.), because of a person's race, color, religion, sex, gender, ethnicity, national origin, age, disability, pregnancy, marital status, veteran status, etc.
  • Do not allow sexual harassment to occur in your workplace
  • Be careful about how you decide when an employee meets the exemption guidelines of the federal/state "exempt" worker classification under the Fair Labor Standards Act (FLSA)
  • Provide workers' compensation coverage for all your employees who might suffer a work related injury or illness
  • Provide a safe workplace and abide by all federal and state occupational health and safety act requirements
  • Make certain that the people you hire have the right to legally work in the United States pursuant to the Immigration Reform & Control Act

Let's talk about each of these suggestions in more detail.

Outsource Payroll

Outsourcing the basic payroll function is usually not costly and varies depending on the services and reports that you want. For basic services (print & distribute checks, keep tax records and calculate tax payments, provide year-end W2's), the cost ranges from $1.00 to $4.00 per check issued. You can always add other services if you have a requirement for them. Type "outsource payroll" in your search engine to get specific information and even online cost quotes.

Connect with a Good Lawyer

Your small business owners' local gatherings should be a good source for a recommendation for a local lawyer who specializes in labor and employment laws. You can also search online, but it is recommended that you get the name of an attorney from someone you trust and respect.

Follow Good HR Processes

In the previous eight articles, a number of HR processes have been suggested. Following the suggested HR processes will help your business be viewed favorably in terms of what can be accomplished and how your employees are treated.

If you follow the suggested human resources processes, not only are they good business practices, but they can help keep you out of legal trouble.

It was suggested that you adopt basic HR policies and provide a copy of these policies to all your employees. If you do this and then apply HR policies consistently, reasonably and equitably to all your employees, you will have taken the first basic step in terms of complying with the myriad of labor and employment laws.

A recruiting, selection and hiring process was outlined. If followed, it will significantly help you avoid "discrimination" claims when hiring a new employee. This process suggested that, prior to vetting any potential employment candidates you:

  • Clearly define what you need and want
  • Determine the "market rate" for this position
  • Decide how you will attract the right applicants
  • Detail the process you will use to "test/select" from among your applicants
  • Know what you must do to legally hire a new employee in terms of verifying if they have the right to legally work in the United States

Again, if you follow the process, you are making important decisions about things on which you might be challenged well before you have even reviewed the first resume/candidate. If challenged, having the ability to show that certain decisions were made before you commenced the hiring process will provide you with a first line of defense against any claim (unless the decision made was blatantly against existing employment laws).

Legally required benefits were discussed including the requirement to pay federal and state taxes, provide workers' compensation insurance and pay overtime consistent with the Fair Labor Standards Act.

A Performance Management process was suggested. If followed, not only will it provide the positive benefits of helping to train and equip your employees to do more and to do better, but performance management is also shown to be the precursor for dealing with employee-performance issues and problems that might arise. If the performance management process is followed, it will generate a "paper trail" that shows how you have dealt with the performance issue should your treatment of the employee ever be questioned by a third party.

The subject of Discipline was discussed and a five-step disciplinary process was suggested. This process will also help you create a paper trail that could be very valuable in defending your activities and decisions should the disciplinary action you have taken ever be challenged (assuming, of course, that you fairly, consistently and reasonably applied the five-step process to your employees). Also suggested having a dialogue with the "disciplined" employee to explore the possibility of amicable separation "terms" in exchange for a settlement and release agreement (thus avoiding the possibility of a legal challenge).

Do Not Discriminate in Any Employment Decision

Discrimination in employment is forbidden for a wide-range of "protected groups" (race, color, religion, sex, gender, ethnicity, national origin, age, disability, pregnancy, marital status, veteran status). Discrimination can be claimed for any treatment of an employee that "feels" different to that employee because of their protected group status, including employment actions like hiring, pay rates, benefits, promotions, work assignments, selection for over-time work, disciplinary actions, ratings on performance reviews, discharge, etc.

In "civil rights" law through a number of court cases, once a complaining, protected-class employee (or candidate for employment) makes a "prima facie" case (i.e., "I've worked here longer, my education is the same, my performance reviews are the same and yet the non-protected class person got the promotion and not me" - assuming all these assertions are true), the burden of proof shifts to the employer to prove that he/she had a good, legally defensible, definitive reason to choose the non-protected class employee over the protected-class employee for the promotion.


There are some exceptions to this general advice, such as a "bona fide occupational qualification." For example, if you need a female actress to play the part in a play, you can "discriminate" on the basis of sex. Also, for those employees with a disability (and this is very broadly interpreted by the courts), they have to be able to perform all the key functions required to get or do that particular job. If they cannot, you don't have to give them the job (or promote them to it). However, the disabled employee can request a "reasonable accommodation" which means that he/she can do the job with a few minor changes that cost you (the employer) little or nothing to implement and the "reasonable accommodation" does not result in a substantial disruption to how you conduct your business. Thus, there are some exceptions, but remember that it will cost you a great deal of time and money to defend against any claim of discrimination. You will be much better off staying out of the courts and away from administrative agencies which have pre-court complaint resolution procedures (i.e., the Federal Equal Employment Opportunity Commission).

Do Not Allow Sexual Harassment

What is sexual harassment? For most federal/state laws and agencies, sexual harassment has been defined as follows:

Sexual harassment means any unwelcomed sexual advances or requests for sexual favors or any conduct of a sexual nature when:

  • Submission to such conduct is made either explicitly or implicitly a term or condition of an individual's employment;
  • Submission to or rejection of such conduct by an individual is used as the basis for employment decisions affecting such individual; or,
  • Such conduct has the purpose or effect of substantially interfering with an individual's work performance or creating an intimidating, hostile or offensive working environment.

Examples of Sexual Harassment include: unwelcomed sexual advances; suggestive or lewd remarks; unwanted hugs, touches, kisses; requests for sexual favors; retaliation for complaining about sexual harassment; derogatory or pornographic posters, cartoons or drawings; AND MOST LIKELY, inappropriate e-mails that contain such material.

If any of these things are happening in your place of business (including the Internet and/or using other cyberspace devices), it is highly recommended that you stop such practices immediately, document the discussion you had with the offending employee and spell-out the consequences if such behavior happens again. In heinous situations, it may be appropriate to terminate the offender immediately. The "bottom line" is that you cannot afford to allow such behavior to continue because if you do, you are in essence condoning it and are just as guilty as the offender for letting it continue.

Make Certain Salaried Employees Are Exempt From Overtime Payments

The United Stated Department of Labor, Wage & Hour Division, enforces the Fair Labor Standards Act (FLSA), portions of which define which employees are to be paid for overtime in a workweek (working more than 40 hours) and which are exempt from the overtime provisions of FLSA. The employee "types" that are exempt from overtime pay are categorized as executive, administrative, professional, computer, outside sales, and highly compensated employees who are paid on a "salaried basis."

The "salaried basis" test must be met first. Being paid on a "salary basis" means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee's work. An exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. Furthermore, deductions from pay are permissible only when an exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability. Consequently, when you pay someone on a salaried basis, except for extreme circumstances, to maintain their FLSA overtime exemption you must pay them their full salary unless they take time off for strictly personal reasons.

To meet the Executive exemption, all of the following must be met:

  • Salary of at least $455.00/week
  • Primary duty is to manage the business or a major division/department of the business
  • Direct the work of at least two or more full-time employees
  • Have the authority to hire and fire

To meet the Administrative exemption, all of the

  • Salary of at least $455.00/week
  • Primary duty is office or non-manual work
  • Employee's primary duties include exercise of discretion and independent judgment on matters of significance

The Professional exemption has two categories: learned professionals and creative professionals.
To meet the learned professional exemption the following

  • Salary of at least $455.00/week
  • Primary duty is to perform work requiring advanced knowledge-work that is predominantly intellectual requiring the exercise of discretion and judgment (e.g., Accountant)

To meet the creative professional exemption the following

  • Salary of at least $455.00/week
  • Primary duty is performing work requiring invention, imagination, originality, and "talent" in a recognized field of artistic or creative endeavor

To meet the Computer exemption, all of the following

  • Salary of at least $455.00/week or paid on a fee basis at a rate of not less than $27.63 per hour
  • Must be a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field performing these duties:
  • Application of system analysis technologies and procedures, including consulting with users to determine hardware, software, or systems functions specifications
  • The design, development, analysis, creation, testing, or modification of computer systems or programs including prototypes, based on user or systems design specifications
  • The design, documentation, testing, creation or modification of computer programs related to machine operating systems, or
  • A combination of the aforementioned duties, the performance of which requires the same level of skill

For the Outside Sales exemption, the following must be

  • Primary duty must be to make sales or obtain orders or contracts for services or the use of facilities for which a consideration is paid by the client or customer, and
  • The employee must be customarily and regularly engaged away from the employers place of business

For the Highly Compensated exemption, the employee must perform office or non-manual work and be paid a total annual compensation of $100,000.00 per year or more that

It is important to make certain the employees you are exempting from overtime payments meet these requirements. If your exemption is ever successfully challenged, you will be liable for back-pay with interest for the entire time that the employee worked for you in a capacity that you deemed was exempt and therefore did not pay overtime for hours worked in excess of forty in a workweek.

(Author's Note: I have been involved in several cases where the "exempt" employee, following termination, filed a complaint with the DOL. One such employee had kept a personal, weekly diary of his time worked for each week and what he did at work over a five-year time period. The DOL initially ruled in the employee's favor {subsequently reversed on appeal} and the company was ordered to pay a huge number of "overtime hours" at time and one-half with interest

To have a bona fide exemption under FLSA, all of the tests for each exemption must be met. Simply paying someone more than $455.00/week does not, in and of itself, protect you from having to pay time and one-half overtime.

If you have any questions or are unsure about the exemption status of one of your employees, contact the U.S. Department of Labor, Wage & Hour Division, and ask for an "opinion letter" on the specific employee's exempt status.

Have Workers' Compensation Insurance

State workers' compensation laws ensure that an employee who is injured as a result of an accident on the job or who contracts a disease as a result of performing her/his job, will receive compensation and medical benefits. EVERY STATE requires that employers purchase workers' compensation insurance or apply to be self-insured for this liability. The workers' compensation system has been established to keep workplace accidents/illness from being adjudicated in court in return for providing state-mandated benefits for compensation and medical treatment for work-related illnesses or injuries.

Not only for workers' compensation insurance purposes, but also for occupational health and safety compliance, it is very important that a report of injury be completed any time there is a workplace accident, injury or illness.

All state laws that govern the administration of workers' compensation and establish the payment levels for lost work time as well as medical treatment are different, so it is highly recommended that you contact your state's workers' compensation office to request up-to-date requirements for the state(s) in which you have employees working. Some states have very stiff penalties, for either not being self-insured (in accordance with each state's requirements) or not purchasing and having a current and in-force workers' compensation insurance policy, up to and including a criminal violation.

Some states exclude sole proprietorships from this requirement if there are no other employees besides the principal owner. Likewise, some states exempt certain partnerships/LLCs from having to provide for workers' compensation insurance if there are no employees other than partners and members of the LLC. Please check with your state's workers' compensation office to verify if these two exemptions exist in the states in which you have employees.

Have a Safe Workplace

Maintaining a safe workplace and work environment is a fundamental, good business practice. Again, in most states, all employers are covered by Occupational Safety and Health legislation in addition to the Federal Occupational Safety & Health Act (OSHA). The Federal OSHA defines a covered employer as any "person employed in a business affecting commerce who has employees."

The Act assigns OSHA two regulatory functions: setting standards and conducting inspections to ensure that employers are providing safe and healthful workplaces. OSHA standards may require that employers adopt certain practices, means, methods, or processes reasonably necessary and appropriate to protect workers on the job. Employers must become familiar with the standards applicable to their establishments and eliminate hazards.

Compliance with standards may include implementing engineering controls to limit exposures to physical hazards and toxic substances, implementing administrative controls, as well as ensuring that employees have been provided with, have been effectively trained on, and use personal protective equipment when required for safety and health, where the above controls cannot be feasibly implemented. Employees must comply with all rules and regulations that apply to their own actions and conduct. Even in areas where OSHA has not set forth a standard addressing a specific hazard, employers are responsible for complying with the OSHA Act's "general duty" clause. The general duty clause states that each employer "shall furnish… a place of employment which is free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees."

OSHA regulations are very detailed and voluminous. As a small business owner, it is highly unlikely that you will have the resources in-house to know and understand the detail of what is required of you based on the nature of your business unless you are a highly specialized firm dealing with a hazardous technology (i.e., providing services to the nuclear power industry that include testing samples of spent fuel rods).

Because you will have workers' compensation insurance, often that insurance company will have in-house expertise on Federal/State OSHA requirements for your business based on your business' "Standardized Industry Code" (SIC). As one of the services they provide their insured's, your workers' compensation insurance company may provide a specified number of "free" hours of consulting on workers' compensation and OSHA technical matters.

In most cases, unless you are in a highly regulated business, following common sense safety and health practices will probably suffice for your business. Probably the most common activity in which employees of a small business will engage is the operation of motor vehicles to go to client sites or to deliver product to customers. If you have company-provided vehicles, it will behoove you to do monthly safety inspections of your vehicle(s) and to keep maintenance records up-to-date in case there is ever a work related accident or injury involving a motor vehicle. Also, as was discussed in earlier articles, requiring an annual Dept of Motor Vehicles' infraction report by your employees is probably a good practice in which to engage if you want to show that you are doing what you can to insure a safe working environment for all your employees.

Make Certain the People You Hire Have a Legal Right To Work in the United States

The Department of Homeland Security is responsible for making certain that all persons employed by any employer in the United States have the legal right to work in the United States. To fulfill this part of their function, Homeland Security requires each employer to document that each new employee can show that they have such legal status. As such, each employee, as a condition of employment, must complete something commonly referred to as a Form I-9. As an employer, each small business owner is responsible for making certain that each employee completes an I-9 no later than at the time of hire and is responsible for examining the evidence of identity and employment authorization within three business days of the date employment begins. The employer must record in a part of the I-9 form the document title, the issuing authority, the document number, the expiration date of such document (if any) and the date employment begins, and sign and date the certification to that effect. Employers must maintain a copy of the completed I-9 form in their business records and it is strongly suggested that a photocopy of the original document(s) presented by the prospective employee be made and maintained with the completed I-9 form.

In addition, a majority of states now require employers verify an employees eligibility to work in the United States using an internet-based system called eVerify (www.uscis.gov/e-verity). The system compares the information from the Form I-9 to the data from the U.S. Homeland Security and Social Security Administration records to confirm employment eligibility.

Because the process as well as the requirements to complete the Form I-9 have and will probably continue to change from time-to-time, copies of the I-9 forms and instructions may be downloaded from the U.S. Citizen and Immigration Services website: www.uscis.gov/forms or may be ordered by calling the USCIS at 800-464-4218.