US employment compliance guide
Hiring US employees is a key benefit of incorporating a US business, but how do you do it compliantly? With federal, state, and local regulations to consider, this can be a complicated task — especially for first-time founders.
In this article, we'll explain how to hire American employees while maintaining compliance with all relevant regulations. If you don't yet have a US business entity, click here to start the incorporation process with Firstbase.
Federal and state compliance
All employers operating in the U.S. are required to comply with federal employment laws. Additionally, each U.S. state can opt to pass additional laws with even higher standards than the federal requirements. Some counties and municipalities even have their own rules on top of the federal and state ones.
- Any state-specific compliance is based on the state(s) where your business is operating, regardless of where the business entity is registered.
- If you have remote employees, you’ll also have to comply with state and local requirements that apply to the place where they do their work.
For example, if your corporation or limited liability company (LLC) is registered in Delaware, but the business has an office in Florida, then you must comply with Florida employment laws. If you have remote employees who work in another state, you’ll have to follow applicable employment laws for their home state when it comes to those individuals.
Wage and hour rules
In the U.S., workers must be paid in a manner that complies with the Fair Labor Standards Act (FLSA), which is a wage and hour law. Beyond this federal law, most states also have additional wage and hour requirements:
- Minimum wage - The U.S. has a federal minimum wage — currently $7.25 per hour. However, most states have a higher minimum wage, as does the District of Columbia.
- Overtime - Federal law requires U.S. employers to pay overtime (OT) of at least 1.5 times their hourly rate to certain employees who work more than 40 hours in a workweek. In a few states, employers have to pay OT after eight hours in a day.
- Exempt/non-exempt - The FLSA OT requirement applies to employees who are non-exempt from overtime requirements. Some positions qualify as exempt from overtime if specific requirements are met.
These are just a few of the many FLSA provisions and state-specific wage and hour concerns that U.S. employers need to be aware of and comply with. This aspect of compliance can significantly impact wage expenditures and payroll, but there are a number of other payroll matters you’ll need to be prepared to deal with as a U.S. employer.
Payroll compliance considerations
Processing payroll and maintaining payroll records can be very complex, especially if you have remote employees working in multiple states. Many states have unique payroll requirements — employers with employees in those states are responsible for complying with all such requirements.
- Federal income tax withholding - U.S. employers must withhold and file federal income taxes on behalf of all of their employees.
- Federal Insurance Contributions Act (FICA) filings - Employers must withhold and pay their portion of FICA taxes to the federal government via payroll. These contributions go to Social Security and Medicare; employees pay half and employers pay half.
- Unemployment compensation (UC) - Each state has its own UC program, so employers must set up UC accounts and properly file UC payments in each state.
- Benefits premiums - For employees who participate in workplace benefits, their portion of the premiums is collected via payroll deductions.
There are other important compliance obligations related to payroll, including several end-of-year tax filings. For example, employers must also provide employees with a W-9 statement of their annual earnings, which employees use to file their federal income taxes. Similar requirements apply where state income tax is required.
Employment status and recordkeeping requirements
Before a new employee can be added to the payroll, employers have to gather, organize, and store quite a bit of specific information. Employers must maintain certain employee records for active and terminated employees, as well as meet other key administrative requirements.
- Form I-9 - U.S. employers must verify each new employee’s identity and right to work in the country via Form I-9. Failure to properly complete and store these forms can result in fines and penalties.
- E-verify - Many employers are also required to use the federal government’s E-verify system in addition to Form I-9. Even for those who do not have to do so, using E-verify is considered a best practice.
- State payroll notifications - Some states require employers to notify state agencies when an employee has been hired or terminated from employment.
- Unemployment Compensation (UC) responses - After an employee leaves a company, the individual may file a UC claim in their state. If a claim is filed, the employer may have to respond or participate in a hearing.
Equal Employment Opportunity compliance
Compliance concerns aren’t all related to properly paying employees and keeping appropriate records. In addition to applicable state and local laws, there are a number of federal laws focused on ensuring that everyone has equal employment opportunity (EEO). These include the Civil Rights Act (CRA), Americans With Disabilities Act (ADA), and Age Discrimination in Employment Act (ADEA).
The EEO laws all prohibit workplace discrimination, including harassment, on the basis of one or more protected characteristics. Note that many states impose more stringent requirements than federal law.
Employers cannot use information about the characteristics protected under any of the EEO laws to make employment decisions, such as (but not limited to) hiring, pay, promotion, access to training, and more. Further, employers are required to ensure that the workplace is free from both quid pro quo sexual harassment and hostile environment harassment.
Making sense of leave laws
U.S. leave laws also pose a unique challenge, some of which relate to EEO laws. Federal law does not require employers to provide employees with paid vacation, holidays, or sick leave, but most employers do offer at least some paid time off. There are some situations in which federal law obligates employers to provide unpaid leave, like with the Family Medical Leave Act (FMLA). The FMLA requires covered employers to allow eligible employees up to 12 weeks of unpaid leave if they or an immediate family member experience a serious health condition, or if they become parents.
Many states also have sick leave laws, some of which do require a certain amount of paid sick leave. Some also have their own family medical leave requirements that are more strict than what is required under federal law.
Navigating the complexity of U.S. employment law
As you can see, there is a lot to consider in relation to U.S. employment law compliance. And this doesn’t even cover everything — for example, some states have specific compliance training requirements, and workers’ compensation coverage varies by state. That’s one reason why so many expanding companies decide to partner with an outsourced HR provider like Justworks.
How Justworks can help
- Access to technology-based HR tools for employee onboarding, recordkeeping, and tracking important business metrics related to the workforce.
- Automated direct deposit payroll processing that can be linked to time tracking and bookkeeping tools.
- Compliance support for payroll and tax compliance, as well as other key aspects of employment law relevant to your company and employees.
- Access to high-quality employee benefits that will allow your companies to compete for top talent with businesses that have long been established in the U.S.
For an out-of-country company expanding into the U.S., there’s no better way to navigate the country’s complex, ever-changing employment laws.
Firstbase users can access two free months of Justworks. What are you waiting for? Click here to activate this exclusive offer.