Five Employment Law Basics

May 28, 2008


asdamd/photos/stylus/27837-Employment-Law-Basics-250x1.jpg

Photo by iStockphotos

Are you hiring? You'd better get up to speed on state and federal employment laws before you do. From taxes to overtime, there's a wealth of information that all employers must study before recruiting employees.

By: MATT ALDERTON

Approximately 12 years ago, Teresa Tracy owned a restaurant in California with her husband. More than a restaurateur, though, Tracy was also an employment attorney, which made staffing that restaurant at once easy and impossible.

"My husband learned what a nightmare it was to have an employment attorney as a wife," says Tracy, who is coordinator of the Labor and Employment Group at Berger Kahn, a California-based law firm. "He wanted to do many of the things that I'm sure many small business owners want to do, and I had to keep telling him, 'No, you can't do that; no, you can't do that; no, you can't do that.'"

Indeed, Tracy and her husband faced a temptation that's common to many fledgling employers—namely, the temptation to cut corners.

Cutting corners is a big mistake, though, according to attorney James Rosenblatt, president of San Antonio-based Rosenblatt Law Firm and author of Issues Every Business Owners Should Consider. "Don't take shortcuts," he advises. "Do it right the first time."

If you don't, you'll be sorry. After all, cutting through the red tape could mean harming your employees and, in the event of hefty fines or expensive lawsuits, ruining your entire business.

"The cost of not being in compliance can literally cost you your business," Tracy says.

Even if they don't cost you money, shortcuts can certainly cost you your reputation. "Hiring your first employee means the first time someone else out there is going to be taking your business name and representing you to the public," Rosenblatt says. "From a legal perspective, this person is now your responsibility."

In your haste to transition from entrepreneur to employer, take every precaution to protect the company you've worked so hard to build. Here are five questions every new employer should ask and answer:

1. Am I hiring an employee or an independent contractor?

The first decision that new employers must make is whether they're hiring an employee at all. In fact, most employers would rather not; they'd prefer instead to hire an independent contractor, who they can hire without having to comply with employment regulations.

It's not that easy, though, according to Tracy. "The first mistake a lot of people make is the mistake my husband was prepared to make," she says, "which is, 'We can bring somebody on and call them an independent contractor; they're happy, I'm happy and we get out of a lot of the obligations the law would otherwise impose on us.'"

If you want to hire somebody to do a specific job and achieve a specific result, and you don't care how that result is achieved—like you hire a painter to paint your house—you can call your new hire an independent contractor. Otherwise, if you want to control not only the result, but also the process, you've got yourself an employee, and all the legal requirements that come with it.

2. Is my new employee exempt or non-exempt?

Every employer has to decide if his or her employees are exempt or nonexempt when it comes to complying with the FLSA, which is the federal law that governs wages and hours, including issues related to minimum wage and overtime. Exempt employees aren't entitled to FLSA protections while nonexempt employees are.

"It's unlikely that your first employee is going to be exempt," Rosenblatt says. That's because most small businesses' first hires are lower- and entry-level assistants, receptionists and clerical workers, who are almost always nonexempt. Employees who are typically exempt, meanwhile, are those at the executive and professional level who makes more than $23,660 per year.

While exempt employees must be paid a salary, nonexempt employees must record their hours, be paid an hourly wage that's greater than or equal to the federal minimum wage—and, in some cases, state and even city minimum wage—and earn time-and-a-half overtime pay for hours in excess of 40 per week.

3. Do I need to pay employment taxes?

Unless your employees are independent contractors, you must pay employment taxes. To do so, you'll need several forms, including a W-4 form from each of your employees and an Employer I.D. Number (EIN) from the IRS. You'll also need to file an I-9 form with U.S. Citizenship and Immigration Services in order to prove that your employees' are eligible to work—and pay taxes—in the United States.

"The cost of an employee isn't just their wages," Rosenblatt points out. "It's also the taxes we have to pay on them."

Among those taxes are federal income tax withholdings, which must be withheld from each employee's paycheck; Social Security and Medicare taxes, which must be withheld from employee's paychecks and matched by the employer; and federal unemployment tax, which is paid entirely by the employer.

4. Who and how should I hire?

While most federal anti-discrimination laws—including Title VII, which prohibits employment discrimination based on race, color, religion, sex or national origin—don't apply to small employers, there are many state and local laws that do. Small businesses should therefore err on the side of caution when it comes to interviewing and hiring employees.

To be safe, not sorry, Rosenblatt suggests writing a detailed job description for your vacant position and using that—and only that—to guide your hiring process. "The interview process should be about taking that job description and asking questions that relate to it," he says. "Make sure you don’t ask questions based on marital status, sex, race, religion—all those are prohibited topics. If you focus on the requirements of the job you're going to be best protected."

5. Do I have to offer any benefits?

There is a very short list of mandatory benefits that most employers must provide, according to Tracy. Surprisingly, that list doesn't include vacation, retirement plans, health insurance, sick days or even holidays. It does, however, include the Social Security, Medicare and unemployment taxes already mentioned. It also includes workers' compensation, which is insurance given to employees who are injured on the job. It doesn't matter if you have one employee or 100, if you work in an office or a machine yard; if you're an employer, you must provide it.

There are dozens of other laws that govern employment at the local, city, state and federal level. To navigate them, find a business attorney who can read the map, Tracy advises. "There are many laws that apply to businesses that have as few as one employee," she concludes. "You need to know which ones those are, and which ones those aren't. Most business attorneys should be familiar with them."

For more information, consult the U.S. Department of Labor's free Employment Law Guide.

This article is for information purposes only and is not intended as legal advice. To learn more about employment laws in your area, contact your attorney.

Five Employment Law Basics

May 28, 2008


asdamd/photos/stylus/27837-Employment-Law-Basics-250x1.jpg

Are you hiring? You'd better get up to speed on state and federal employment laws before you do. From taxes to overtime, there's a wealth of information that all employers must study before recruiting employees.

By: MATT ALDERTON

Approximately 12 years ago, Teresa Tracy owned a restaurant in California with her husband. More than a restaurateur, though, Tracy was also an employment attorney, which made staffing that restaurant at once easy and impossible.

"My husband learned what a nightmare it was to have an employment attorney as a wife," says Tracy, who is coordinator of the Labor and Employment Group at Berger Kahn, a California-based law firm. "He wanted to do many of the things that I'm sure many small business owners want to do, and I had to keep telling him, 'No, you can't do that; no, you can't do that; no, you can't do that.'"

Indeed, Tracy and her husband faced a temptation that's common to many fledgling employers—namely, the temptation to cut corners.

Cutting corners is a big mistake, though, according to attorney James Rosenblatt, president of San Antonio-based Rosenblatt Law Firm and author of Issues Every Business Owners Should Consider. "Don't take shortcuts," he advises. "Do it right the first time."

If you don't, you'll be sorry. After all, cutting through the red tape could mean harming your employees and, in the event of hefty fines or expensive lawsuits, ruining your entire business.

"The cost of not being in compliance can literally cost you your business," Tracy says.

Even if they don't cost you money, shortcuts can certainly cost you your reputation. "Hiring your first employee means the first time someone else out there is going to be taking your business name and representing you to the public," Rosenblatt says. "From a legal perspective, this person is now your responsibility."

In your haste to transition from entrepreneur to employer, take every precaution to protect the company you've worked so hard to build. Here are five questions every new employer should ask and answer:

1. Am I hiring an employee or an independent contractor?

The first decision that new employers must make is whether they're hiring an employee at all. In fact, most employers would rather not; they'd prefer instead to hire an independent contractor, who they can hire without having to comply with employment regulations.

It's not that easy, though, according to Tracy. "The first mistake a lot of people make is the mistake my husband was prepared to make," she says, "which is, 'We can bring somebody on and call them an independent contractor; they're happy, I'm happy and we get out of a lot of the obligations the law would otherwise impose on us.'"

If you want to hire somebody to do a specific job and achieve a specific result, and you don't care how that result is achieved—like you hire a painter to paint your house—you can call your new hire an independent contractor. Otherwise, if you want to control not only the result, but also the process, you've got yourself an employee, and all the legal requirements that come with it.

2. Is my new employee exempt or non-exempt?

Every employer has to decide if his or her employees are exempt or nonexempt when it comes to complying with the FLSA, which is the federal law that governs wages and hours, including issues related to minimum wage and overtime. Exempt employees aren't entitled to FLSA protections while nonexempt employees are.

"It's unlikely that your first employee is going to be exempt," Rosenblatt says. That's because most small businesses' first hires are lower- and entry-level assistants, receptionists and clerical workers, who are almost always nonexempt. Employees who are typically exempt, meanwhile, are those at the executive and professional level who makes more than $23,660 per year.

While exempt employees must be paid a salary, nonexempt employees must record their hours, be paid an hourly wage that's greater than or equal to the federal minimum wage—and, in some cases, state and even city minimum wage—and earn time-and-a-half overtime pay for hours in excess of 40 per week.

3. Do I need to pay employment taxes?

Unless your employees are independent contractors, you must pay employment taxes. To do so, you'll need several forms, including a W-4 form from each of your employees and an Employer I.D. Number (EIN) from the IRS. You'll also need to file an I-9 form with U.S. Citizenship and Immigration Services in order to prove that your employees' are eligible to work—and pay taxes—in the United States.

"The cost of an employee isn't just their wages," Rosenblatt points out. "It's also the taxes we have to pay on them."

Among those taxes are federal income tax withholdings, which must be withheld from each employee's paycheck; Social Security and Medicare taxes, which must be withheld from employee's paychecks and matched by the employer; and federal unemployment tax, which is paid entirely by the employer.

4. Who and how should I hire?

While most federal anti-discrimination laws—including Title VII, which prohibits employment discrimination based on race, color, religion, sex or national origin—don't apply to small employers, there are many state and local laws that do. Small businesses should therefore err on the side of caution when it comes to interviewing and hiring employees.

To be safe, not sorry, Rosenblatt suggests writing a detailed job description for your vacant position and using that—and only that—to guide your hiring process. "The interview process should be about taking that job description and asking questions that relate to it," he says. "Make sure you don’t ask questions based on marital status, sex, race, religion—all those are prohibited topics. If you focus on the requirements of the job you're going to be best protected."

5. Do I have to offer any benefits?

There is a very short list of mandatory benefits that most employers must provide, according to Tracy. Surprisingly, that list doesn't include vacation, retirement plans, health insurance, sick days or even holidays. It does, however, include the Social Security, Medicare and unemployment taxes already mentioned. It also includes workers' compensation, which is insurance given to employees who are injured on the job. It doesn't matter if you have one employee or 100, if you work in an office or a machine yard; if you're an employer, you must provide it.

There are dozens of other laws that govern employment at the local, city, state and federal level. To navigate them, find a business attorney who can read the map, Tracy advises. "There are many laws that apply to businesses that have as few as one employee," she concludes. "You need to know which ones those are, and which ones those aren't. Most business attorneys should be familiar with them."

For more information, consult the U.S. Department of Labor's free Employment Law Guide.

This article is for information purposes only and is not intended as legal advice. To learn more about employment laws in your area, contact your attorney.