Federal & State Labor Laws Employers Need to Know
This article is part of a larger series on How to Do Payroll.
Federal labor laws and related state laws affect all businesses with employees. They govern workforce practices such as overtime, minimum wage, on-call pay, employee breaks, sick leave, hiring minors, and preventing discrimination. Labor laws provide workers with protections and also contain enforcement and reporting requirements, including rules on how long to keep payroll records.
Additionally, most labor laws prohibit retaliation against an employee who reports a concern or violation. Adhering to employer compliance with labor laws can help you avoid thousands of dollars in fines.
State Employment Laws
Keep in mind that the full list of labor laws is long (federal and state), but we’ve compiled those that are most likely to impact small businesses. Nearly every US state has labor laws that affect businesses that employ workers in that state. Companies located in just one state can typically learn about these laws by searching the government website for that state, or by attending a local HR or labor law seminar.
However, multistate employers may find it nearly impossible to keep up with state-by-state rules. In that case, we recommend working with an HR payroll service that uses software programmed to include all federal and state labor laws, keeping you compliant.
Need help doing payroll? Use our state payroll directory for guidance specific to your state..
Common Federal Labor Laws
As with state laws, federal employment laws can also change suddenly. If managing compliance in-house, we recommend you or your HR manager schedule regular time to check for any new or pending activity; you can also opt to hire or partner with an HR provider that will stay abreast of changes for you.
Download our list for the most common federal labor laws that impact small businesses, plus links to each website for more information.
Fair Labor Standards Act (FLSA)
The FLSA is the overarching labor law that all businesses need to know. Its basic principle is to ensure employees are paid fairly. The law requires you to pay overtime for certain employees—based on classifications referred to as exempt or nonexempt.
At the federal level, overtime is calculated at 1.5 times an employee’s regular hourly pay rate for all hours over 40 worked in a week. The FLSA also mandates federal minimum wage with exceptions in a few industries, like agriculture, railroads, and education. Many states and cities require businesses to pay a higher minimum wage or calculate overtime more generously.
The current federal minimum wage is $7.25 per hour—yet California is one state with minimum wage rates that vary by city (up to $15 per hour). And it has a significant number of additional laws that protect workers by providing, for example, mandatory paid sick leave.
FLSA compliance issues—such as misclassifying salaried and hourly employees, failing to pay overtime, having inconsistent pay practices such as missing paydays, or paying men and women differently for the same job—can plague small businesses.
Immigration and Nationality Act (INA)
INA ensures that your workers have the right to work in the US. It’s why you need to complete I-9 forms within three business days of onboarding your new employees. Verification is determined by reviewing a passport, driver’s license and Social Security card, or other nonimmigrant visas. If you’re not using a payroll program to handle this for you, we highly recommend signing up for the E-Verify program, which is managed by the Department of Homeland Security.
For more information visit our article on how to complete the I-9 form correctly.
Forgetting to complete employee I-9 forms within the three days allocated can result in problems down the line should your employees not actually be eligible to work in the US. Some employers also make the mistake of keeping I-9s in the employee’s personnel file, when they should instead be kept in a separate I-9 folder in case your business is audited by ICE.
Federal Insurance Contributions Act (FICA)
FICA requires you to withhold Social Security and Medicare taxes from your employees’ wages, and you must also contribute a matching amount of these taxes per employee. Your role as an employer is to collect the employee’s share of the tax from their earnings and provide quarterly payments to the IRS.
FICA works by taking a percentage of your employees’ income that you match and send to the government. For example, if Joel earns $2,000 a month, you’ll collect 6.2% of his income for Social Security and 1.45% for Medicare, match it, and send it in as a quarterly tax payment using IRS Form 941.
The most common mistakes made are missing quarterly tax payments, misclassifying employees as exempt, and calculating tax payment amounts incorrectly. All can result in penalties against your business, in addition to having to pay back pay with fines double that amount.
FICA does not come into play when you hire independent contractors such as self-employed freelance or gig workers.
Occupational Safety & Health Administration (OSHA)
OSHA is both the act and the agency that governs workplace safety and health. This can range from bedbugs affecting hotel workers to printer fumes causing respiratory concerns.
OSHA regulates safety and health conditions in the workplace. All employers have a general duty under this act to provide a safe, clean, and hazard-free workplace—which may include establishing an emergency exit plan in an office and setting up an eye-wash station near where chemicals are stored. In addition, like most federal laws, employees have the right to file complaints without fear of retaliation.
If you have more than 10 employees, annual OSHA reporting is required and any injuries should be reported annually between February and April. Therefore, it’s a good idea to conduct a monthly safety check on things like electrical outlets, computer wires, and other potential safety hazards.
For small businesses, most OSHA-related issues are caused by unsafe employee practices, such as employees standing on chairs, leaving desk heaters plugged in, or not wearing protective gear. Safety training can prevent these risks, and many insurance providers can help by offering training resources.
Title VII of the Civil Rights Act
Title VII prohibits discrimination in employment and hiring practices. The current list of protected classes include race, color, sex, creed or religion, national origin or ancestry, genetic information, age, veteran status, citizenship, and physical or mental disabilities.
All businesses, regardless of size, should comply with anti-discrimination as a best practice. Title VII has expanded greatly over the years to be more inclusive of all Americans and their right to employment.
Any business with 15 or more full-time employees must comply with Title VII. Additionally, many states’ versions of this law also include gender identity, financial status, and sexual orientation, and a few states require that annual training be provided to all employees. It’s best to check the anti-discrimination laws in your state as they’re likely to be more inclusive.
To prevent hiring bias, consider training managers on how to avoid discrimination, and use structured interviews. Training, including sexual harassment prevention, can help your team focus on work-related traits and help you create an inclusive workforce, free of discrimination.
Americans With Disabilities Act (ADA)
The ADA added extra protection for people with physical and mental disabilities to Title VII when it was passed in 1990. While pregnant women are protected under a different law, pregnancy and childbirth are also treated as a temporary disability and protected by the ADA as well.
The ADA prohibits private employers, governments, recruiting agencies and labor unions from discriminating against qualified candidates with disabilities in job application procedures, hiring, firing, advancement, compensation, job training, and other employment processes. The ADA is only enforced for employers with 15 or more employees, but we recommend that all businesses comply.
Complying with the ADA includes providing a reasonable accommodation to support a disabled person (or a current employee who becomes disabled). For example, if a vision impaired candidate is a perfect fit for your customer service job and needs a $150 special keyboard to input caller data, that would constitute a reasonable accommodation.
In contrast, if a person in a wheelchair wanted to work for you but your accounting office is located up three flights of stairs, the construction of an elevator would not be a reasonable accommodation for your small business as it could be deemed a financial burden. Perhaps, you could allow them to work from home instead.
Family and Medical Leave Act (FMLA)
The FMLA is a federal labor law requiring employers to offer unpaid, job-protected leave to eligible employees for the birth or adoption of a child or the serious illness of the employee or a spouse, child, or parent.
FMLA requires you to protect the job of an employee who is out on leave for up to 12 weeks. It also allows up to 26 weeks for the same protection for an injured or ill military service person or for the family members caring for a military service person. Any employer who has 50 or more employees must provide FMLA. However, in some states, family leave laws are more comprehensive and may apply to employers with as few as five full-time workers.
Only employees who have a year of service are eligible for FMLA and there’s typically a policy and an application process they need to use. For example, if your new hire of three months requests six weeks of FMLA for non-work related knee surgery, you can decline the leave request under the FMLA.
Learn how to develop an FMLA-compliant maternity leave policy, which is the most common situation you’ll likely face as a small employer. Keep in mind that new dads have many of the same FMLA rights.
Fair Credit Reporting Act (FCRA)
The FCRA allows an employer to obtain an applicant’s or employee’s consumer report for employment related purposes if it (1) gives the applicant or employee a written disclosure notifying them that a consumer report may be obtained; and (2) obtains written authorization from that person. Some states have similar laws for pre-employment drug testing.
Equal Pay Act (EPA)
The EPA requires that men and women be given equal pay for equal work at a business. It is the content of the job and the work responsibilities, not job titles, that determine whether jobs are roughly equal.
Uniformed Services Employment and Reemployment Rights Act (USERRA)
USERRA is a federal labor law from 1994 that protects military workers’ jobs. It establishes the length of time that a person may be absent from work for military duty, such as active duty and guard duty, while retaining reemployment rights. This law can protect someone for up to five years.
Consumer Credit Protection Act (CPPA)
The Consumer Credit Protection Act (CPPA) applies to employers that manage wage garnishments and limits the percentage amount of pay that can be garnished from a worker’s paycheck. If you have employees with garnishments from liens, student loans, or child support, you will want to make sure you are in compliance.
Federal Labor Laws if You Provide Benefits
If you provide employee benefits or have over 50 full-time equivalent (FTE) employees (requiring you to provide benefits), you will need to understand the following federal labor laws. Your benefits provider should guarantee compliance with these laws, and it is good to understand how they work.
Comprehensive Omnibus Budget Reconciliation Act of 1985 (COBRA)
COBRA is the law that requires the option for continuation of health insurance for employees who have been fired or laid off for any reason from a business. Only businesses that offer employee benefits need be concerned with COBRA. If you provide medical insurance and have 20 or more employees, you must also comply with COBRA, and some states, like California, offer extended COBRA benefits.
When an employee is terminated and about to lose their employer-sponsored healthcare coverage, COBRA kicks in to provide them continued health insurance coverage they can pay for themselves.
Health Insurance Portability and Accountability Act (HIPAA)
HIPAA is a health insurance and medical privacy law that protects employee’s privacy regarding any health information. It often requires you to train workers who handle sensitive employee data. HIPAA’s rules cover everything from medical information privacy to the coverage you need to provide and the timeframe you need to provide it in—if you offer health insurance.
If you provide benefits, you need to comply with HIPAA, no matter the size of your employee base. In addition, if an employee discloses personal medical information to you or your managers, it’s important you safeguard that private information.
Make sure your personnel files and medical insurance information is password protected or kept in a locked cabinet. Train managers to keep employee personal information private. Even something as simple as a manager publicly discussing information shared in a doctor’s note can put your business at risk of a HIPAA violation.
Employee Retirement Income Security Act (ERISA)
ERISA provides rules for employers offering pension, retirement, or welfare benefit plans for their employees, such as a 401(k). The law regulates qualified versus unqualified retirement plans, the conditions behind them, when you can make pretax payments, and more.
If you provide a 401(k) or other type of retirement plan, including an HSA, you will need to comply with ERISA regardless of your company size or contribution amount.
As you review the federal labor laws above, be aware that your state may have more restrictive rules, offer greater protection for employees, or have enacted local laws with which your small business must also comply.
Benefits of Federal & State Employment Law Compliance
It may seem obvious that your business needs to comply with labor laws. However, in case you’re thinking about skirting the rules by paying employees “under the table” or maintaining discriminatory hiring practices, there are some things to consider.
The primary benefits of complying with federal, state, and local labor laws include:
- Risk mitigation: Reducing the risk of labor law audits, fines, and penalties alone is the best reason to stay compliant with federal, state, and local labor laws. Fines are often based on the number of workers affected multiplied by the number of days your business is out of compliance. It doesn’t take many fines and penalties to bankrupt a small business.
- Strong employment brand: It’s common for current and former employees to leave reviews about your company online. Job seekers read those reviews and aren’t likely to want to work for a company that breaks the law. Compliance helps you remain an employer of choice.
- Great reputation: Consumers are often aware of how employers treat their workers, and many won’t do business with firms that practice illegal and discriminatory behaviors.
- Low turnover: By complying with labor laws, you’ll likely increase employee retention and reduce turnover. That can save you thousands of dollars a year per retained employee.
Note that maintaining compliance requires that you educate yourself and managers about labor laws while establishing policies that need to be maintained and enforced. Whether you choose to manage HR on your own with software or hire consultants or legal advisers, there are costs involved in compliance because labor laws change regularly at federal, state, and local levels.
And while annual HR compliance audits take time, they are necessary to identifying and rectifying problems proactively. You’ll want to do your own audits to find issues well before a federal or state agency shows up to do its audit of your employment practices.
Who Labor Laws Impact
Labor laws are applied differently based on company size, often adding enforcement and reporting requirements for larger employers. Other laws provide exceptions for workers in certain industries—like farm labor and live-in domestic employees. As examples, the minimum wage is lower for businesses whose employees earn tips. In fact, a lower minimum wage can be paid to students and those with limited productivity due to a disability such as Down syndrome.
Here are examples of how federal labor laws impact business of various sizes:
- Employers with one or more employees must abide by the FLSA in terms of overtime pay, equal pay, and employing minors and should provide regular pay at fixed intervals.
- Businesses that generate over $500,000 in annual revenue must abide by FLSA minimum wage, with few exceptions.
- Firms with 10 or more employees must provide OSHA safety and incident reports.
- Employers with 15 or more employees must abide by anti-discrimination laws, including providing reasonable accommodations for disabled employees.
- Employers with 20 or more employees must prevent discrimination based on age and must comply with COBRA if they provide health insurance benefits.
- Employers with 50 or more FTEs must offer health insurance to workers and make family medical leave available to qualified individuals, i.e., new parents.
- Employers with 100 or more employees must give employees 60-days’ notice for layoffs or closure; they must also file EEO surveys showing worker demographics.
- Employers with 250 or more employees must file ACA paperwork electronically.
What’s important to note as you view the list of labor laws is that many states build upon these federal labor laws by adding their own compliance criteria.
For example, the Family Medical Leave Act (FMLA) applies to employers with 50 or more workers, but in more than 10 states, some of this leave must be made available to employees as paid time off (PTO). As a business, you must comply with whichever law (state or federal) is more favorable to the employee.
Federal labor laws are the broad term for the laws that US businesses with employees must follow. Enforcement of these laws varies by company size, such as those with 15 employees or more. However, it is recommended that small business owners do their best to comply with these laws in order to be supportive of employees and maintain a strong reputation as a business owner.