Small Business Payroll and Labor Laws: What You Need to Know to Stay Compliant

If your business employs full- or part-time workers or hires contractors, you need to know your legal obligations. Federal and state laws are designed to protect employees, ensure a safe workplace and prevent discrimination—and most of these rules apply just as much to small businesses as big corporations.

The potential penalties are also the same and can have a much larger impact on a small company.

What Are State and Federal Labor Laws?

A network of payroll and labor laws regulate many aspects of employer/employee relations. Some laws specify minimum wages, family leave policies, workplace standards and the right to collective bargaining. Others prohibit discrimination in hiring and compensation, require accommodations for disabled employees, dictate work rules for minors and regulate the relationship between companies and their contractors.

Many states have their own labor and payroll laws, and in some cases, the state versions provide greater protections for employees. Where this occurs, state laws usually take precedence over federal laws. For example, if the minimum wage in a state is higher than the federal rate, the state minimum wage applies. And if a state or local law provides more protections for workers than federal law, the employer is obligated to provide the protections mandated by state and local governments.

Why Are These Payroll and Labor Laws Implemented?

Payroll and labor laws aim to define employee and employer rights. Generally, the intent is to provide a safe workplace and ensure that employees and contractors are hired, treated and compensated fairly.

• The National Labor Relations Act promotes collective bargaining.
• The Family and Medical Leave Act allows an employee to take unpaid time off to attend to a family medical need.
• The Fair Labor Standards Act defines a minimum wage and standards for overtime pay. It also covers employment of children under the age of 16.
• Laws enforced by the Equal Employment Opportunity Commission protect employees from hiring and workplace discrimination based on race, color, religion, sex, national origin, age, disability and genetic information.
• The Occupational Health and Safety Act defines standards to ensure safe working conditions.

How Do Payroll and Labor Laws Work?

Various agencies administer and enforce payroll and labor laws. The Wage and Hour Division of the Department of Labor (DOL) administers the Family and Medical Leave Act and the Fair Labor Standards Act, including child labor laws.

Other laws are enforced by independent federal agencies created for that purpose. The National Labor Relations Board (NLRB) enforces the National Labor Relations Act, while the Equal Employment Opportunity Commission (EEOC) enforces anti-discrimination laws, and the Occupational Safety and Health Administration (OSHA) defines standards for providing a safe workplace.

These agencies have the ability to level fines against companies that don’t comply.

Who Do Labor Laws Impact?

Some laws affect every business, regardless of size. Others cover only businesses that have reached a certain size threshold, defined by number of employees or gross receipts. Many of these laws have exemptions or special rules for specific industries or types of employees. The table below summarizes which companies and industries are covered by specific laws.

What Payroll and Labor Laws Do I Need to Know As a Business Owner?

The payroll and labor laws that may affect your business are summarized below. Further information on each law is available on the respective agency websites.

As companies grow, they may find a human resources management system valuable for staying compliant.

National Labor Relations Act (NLRA)

The NLRA was passed in 1938 to protect the rights of employees and employers, encourage collective bargaining and ensure that businesses can continue operating during industrial unrest. The law gives employees the right to freely form and join unions. Any two or more employees can join forces to advocate for improved pay, benefits or working conditions. All parties must collectively bargain in good faith.

Strikes are protected under certain circumstances. If employees strike to protest unfair work conditions, the employer must restore those workers to their jobs when the strike is settled. If employees strike to obtain better pay, hours or working conditions, the employer can replace the striking employee, but must give the employee equivalent work, when available, after the strike ends.

The NLRB is the enforcement agency and investigates and resolves disputes over labor practices.

Family and Medical Leave Act (FMLA)

The FMLA entitles eligible employees to up to 12 weeks of unpaid leave to attend to family medical needs. Reasons for granting the leave include the birth or adoption of a child or the serious illness of an employee or an immediate family member. Family members of an injured servicemember are entitled to 26 weeks.

Although the employee is not required to be paid during the leave, the employer must continue to provide health insurance and must restore employees to their previous or equivalent positions upon return.

Any private-sector company that employs 50 or more workers during at least 20 weeks of the year is covered by this law. The law also covers all government agencies and schools, with no minimum number of employees.

The FMLA covers part-time, full-time, seasonal and temporary workers. Exceptions include employees working outside the U.S. There are some other restrictions: For example, an employee must have worked at the company for at least 12 months before taking leave and must work at a location where the employer has 50 or more employees within a 75-mile radius.

Fair Labor Standards Act (FLSA)

The FLSA imposes a minimum wage for all hours worked, as well as standards for overtime pay. Broadly speaking, the FLSA applies to companies that have revenue of at least $500,000, plus some other employees and organizations such as hospitals, schools and government agencies.

Since July 2009, the federal minimum wage has stood at $7.25 an hour. If a state’s minimum wage is higher than the federal rate, the state rate applies. If a state has no minimum wage, or its minimum is lower than $7.25, the federal rate applies. For employees who receive tips, employers must pay at least $2.13 an hour or the difference between the tips and $7.25, whichever is greater.

Overtime pay at the rate of time-and-a-half must be paid to employees who are hourly, or nonexempt from FLSA rules, and work more than 40 hours a week.

Many companies and employees are exempt, however, from either the minimum wage rule, the overtime rule or both. Exempt groups include executive and professional employees, seasonal workers and some caregivers.

To find out whether your employees are covered, the DOL recommends contacting the DOL Wage and Hour Division office in your state.

Child labor laws, which are part of the FLSA, limit the number of hours and types of jobs minors can perform. The intention of the law is to protect people under the age of 18 from dangerous work and to allow time for schoolwork. Youths who are 16 or 17 years old can work unlimited hours in non-hazardous jobs. Children who are 14 and 15 can work outside of school hours except in mining, manufacturing and other hazardous jobs.

Beyond these general guidelines, there are special circumstances and variations depending on the industry and the age of the worker. If your company employs young workers, the DOL’s YouthRules! website has resources for youth, parents, employers and educators.

Equal Employment Opportunity Laws (EOE)

The EOE laws, administered by the EEOC, cover all employees whether full-time, part-time, seasonal or temporary—even those who are not U.S. citizens. There are five EOE laws, each specifying areas where discrimination is banned in hiring, firing and other areas of employment:

• The Civil Rights Act of 1964 bans discrimination in race, color, religion, sex and national origin during any aspect of employment, from hiring to firing. In addition, employers must make reasonable accommodations to allow employees to practice their religion.
• The Age Discrimination in Employment Act of 1967 prohibits discrimination against people over 40.
• The Americans With Disabilities Act, passed in 1990, prohibits discrimination against employees with disabilities. The law offers tax credits to help eligible small businesses make reasonable accommodations to enable disabled employees to carry out their jobs.
• The Equal Pay Act of 1963 requires that women be paid equal wages to men for equal work.
• The Genetic Information Nondiscrimination Act, passed in 2008, added genetic information to the list of banned bases for discrimination. Further, employers may not obtain information from genetic tests of employees or their immediate families.

Occupational Safety and Health Act (OSHA)

Passed in 1970, OSHA defines and enforces standards for safe working conditions in the private sector. Some standards apply specifically to construction, maritime, oil and gas, health care, and agriculture.

General standards, which apply to most businesses, stipulate practices designed to provide clean work areas, as well as safe access to and from those work areas. Employers are required to train employees to perform their work safely. Other general standards state that the workplace should be properly ventilated and the employee protected from excessive noise. There are also standards for safe handling of hazardous materials.

How Do I Maintain Compliance with Payroll and Labor Laws?

For most of these laws, the employer’s responsibility is not only to follow the law, but also to educate employees about their rights. For example, employers are required to post the provisions of the FMLA and FLSA and the steps by which an employee can file a complaint. The EEOC and OSHA also require employers to educate employees, and along with the DOL, provide free posters for this purpose.

Some laws require the employer to keep records.

For example, under the FLSA, employers must maintain records about the hours each employee worked for three years. The employer does not need to submit those records to the DOL, unless asked. Employers with more than 100 workers must submit an annual report to the EEOC that provides data about ethnicity, race and gender of employees.

OSHA requires all employers to report all work-related deaths and serious injuries. In addition, most companies with more than 10 workers are required to record all work-related illnesses and injuries, although some small businesses in “low-risk” industries, such as retail, are exempted from this requirement.

What Happens If My Business Violates One of These Labor or Payroll Laws?

Part of an employer’s responsibility is to provide information for employees on how to file complaints when the employee believes the employer has violated the law. If an employee files a complaint, an employer is not allowed to retaliate against the employee.

An employer who is found to have violated a payroll or labor law can face penalties or lawsuits. Depending on the law and the violation, the employer may be fined or even, in some cases, face imprisonment.

Payroll and Labor Law Resources

The DOL, NLSA, EEOC and OSHA maintain websites that explain the substance of the laws and provide guidance to employers on complying with the laws. Where employers are required to display information about the law, freely downloadable posters in multiple languages are provided.

In addition to these websites, each agency also has regional offices that employers can call or visit to get answers on individual coverage.