HR 101 - Employment Law Basics

What Every Small Business Owner Should Know

Since the 1960’s, the number and complexity of laws relating to the area of employment have mushroomed.  Prior to 1960, the Fair Labor Standards Act and National Labor Relations Act and their administrative obligations were the major compliance issues for personnel departments.

For government contractors, the Office of Federal Contract Compliance Programs (the Committee on Government Contracts under Presidents Eisenhower’s administration) grew considerably after the passage of the Civil Rights Act of 1964. The body of laws that deal with discrimination, benefits, health, privacy and safety developed after this date as well. 

With the development of this legislation, it was inevitable that the resulting complexity and costs associated with these laws would create the need for an industry that would help ease the burden of compliance and administration for the small business owner. Enter the professional employer organization or PEO. So, what laws shape the employment function and how do PEOs assist client companies with these obligations? A number of state and federal laws govern the employment function.  Let’s review the federal laws that significantly impact employers.

Fair Labor Standards Act - FLSA

The Act requires minimum wage and overtime pay and also defines which employees are “exempt” from overtime pay requirements.  It also establishes requirements for counting and keeping records of hours worked and sets forth restrictions on child labor which cover employees who are under age 18.  The wage and hour provisions require that all “nonexempt” employees be paid at least the federal minimum wage and overtime pay of 1.5 times the regular rate for all hours worked in excess of 40 hours.

Incorrectly classifying an employee as exempt, failing to pay overtime, or other violations leaves an employer open to fines and penalties that include back pay and/or liquidated damages.  In addition, there may be double the amount of back pay and civil monetary penalties assessed by the United States Department of Labor and attorney fees, if a private lawsuit is filed.  Under the FLSA, both companies and individual owners can be held liable for violations.  In addition to federal statutes, there are also state laws that govern pay issues, some of which impose additional requirements that provide employees with more protection than the FLSA.

The Equal Pay Act of 1963

This Act prohibits sex-based wage discrimination between men and women and requires equal pay for equal work.  The Equal Pay Act applies to all employers covered by the FLSA. Both the FLSA and the Equal Pay Act are administered by the United States Department of Labor.  Claims involving equal pay may also be brought to the EEOC.

Title VII – Title VII of the Civil Rights Act of 1964

Title VII and subsequent amendments prohibit companies with 15 or more employees from discriminating against employees or job applicants on the basis of race, color, national origin, religion, sex, and pregnancy, including childbirth or related conditions.  Employers may not discriminate against any individual with respect to any terms or conditions of employment including but not limited to recruiting, employment compensation, promotion, training and disciplinary action.  Employers are responsible for maintaining a workplace free of harassment for all protected classes. Charges of discrimination are filed at the Equal Employment Opportunity Commission and if they are not resolved may result in lawsuits. 

Age Discrimination in Employment Act – ADEA

The Age Discrimination in Employment Act prohibits companies with 20 or more employees from discriminating against individuals age 40 or older in any terms, privileges or conditions of employment including benefits.  ADEA complaints are filed with the EEOC.

Occupational Safety and Health Act - OSHA

The Occupational Safety and Health Act of 1970 requires employers to provide “safe and healthful working conditions for working men and women.”  OSHA requirements include compliance with regulations concerning safety standards, standards for specific industries and recording and reporting occupational injuries and illness.  The Occupational Safety and Health Administration is part of the Department of Labor.

Employee Retirement Income Security Act of 1974 – ERISA

This federal law governs employee welfare and pension plans (e.g., 401(k) plans) established and maintained by employers and/or union sponsors.  ERISA is administered by the Department of Labor.  Plan sponsors must administer ERISA benefit plans solely in the interest of the plan participants.  Among other things, sponsors must satisfy requirements that help ensure the prudent management of welfare and pension plans.

• To disclose welfare and pension benefit information and availability;
• To file annual reports with the DOL; and
• To mange and administer benefit plans as prudent experts.

Employers may be liable for violations of ERISA, including the failure to promptly deposit 401(k) contributions into the plan’s trust, the failure to provide benefits as promised under company plans and failure to administer plans prudently. ERISA also requires employers to provide participants with updated information about changes in the plan’s terms and benefits. 

Consolidated Omnibus Benefits Reconciliation Act of 1985 – COBRA

COBRA requires companies with 20 or more employees that maintain group health plans to offer continuation coverage after certain events that would otherwise cause loss of such coverage (e.g., an increase in premiums, a reduction of benefits and changes in terms and conditions of coverage).  These events include termination of employment (voluntary or involuntary), reduction in hours worked, divorce or legal separation, death, ceasing to be a dependent child under the terms of the plan and other life events.  Employers may charge individuals the full cost of the coverage; that is, the employer and employee portions of the cost, plus a 2% administrative fee.  Generally, continuation coverage lasts for 18 or 36 months, depending on the reason for the loss of coverage. Employers must timely notify employees of their right to COBRA continuation coverage.  Both the DOL and the Internal Revenue Service enforce COBRA provisions.

Immigration Reform and Control Act – IRCA

Under the Immigration Reform and Control Act, employers may hire only persons who are authorized by law to legally work in the United States.  Employers are required to inspect and verify documentation that establishes both the identity and employment authorization of each new employee regardless of circumstance. 

The I-9 is the form used to document eligibility to work in the United States, and employers are required to maintain each I-9 form on file for at least three years, or one year after employment ends, whichever is greater.  Failure to obtain or to maintain I-9’s and/or the hiring of individuals who are not authorized to work in the United States can result in fines and criminal penalties. Immigration and Customs Enforcement, a division of Homeland Security and the Department of Labor, oversee the enforcement of IRCA. 

Health Insurance Portability and Accountability Act – HIPAA

Among other things, HIPAA requires health care providers and employer-sponsored group health plans to protect personally identifiable health information.  HIPAA restricts how these covered entities can use and disclose patient and employee personally identifiable health information, such as medical records.  HIPAA also requires credit for prior health coverage when pre-existing condition exclusions apply and prohibits discrimination in enrollment and in premiums based on health-status-related factors in group health insurance benefits.  It guarantees availability and renewability of health insurance coverage for small employers.

Fair Credit Reporting Act – FCRA

The Fair Credit Reporting Act sets the conditions for use of consumer reports for employment purposes.  Outside contractors that conduct background investigations including private investigators and attorneys are also subject to these regulations.  The Act also regulates the circumstances under which consumer reporting agencies can be used to provide information that will be used in making hiring, promotion, transfer, and other employment decisions.

Family and Medical Leave Act – FMLA

FMLA requires that companies of 50 or more employees provide up to 12 weeks of unpaid, job protected leave to an eligible employee (within 75 miles of an employee’s worksite who has worked for at least 1250 hours during any 12-month period) for the birth, adoption of a child, or placement of a foster child, caring for a spouse, son, daughter or parent with a serious health condition or the employee’s own serious medical condition. Stringent record keeping and eligibility requirements often result in administrative issues for employers.

Americans with Disabilities Act – ADA

The Act prohibits companies with 15 or more employees from discriminating against qualified individuals with disabilities in job application procedures, hiring, termination, advancement, compensation, job training, and other terms, conditions, and privileges of employment.  Employers have a duty to make reasonable accommodations for qualified applicants or employees with a disability. The Act is administered by the EEOC. 

When You Walk Through a Storm…

As long as this federal statutes list is, it is not inclusive of every federal law that governs the employment area.  As mentioned previously, there are also state laws that may provide even greater rights to employees than the federal statutes. The list also does not include state unemployment or Workers’ Compensation regulations.

When viewed in their entirety, it is evident that many small and medium-sized companies face a major administrative challenge.  Many small businesses do not have an HR professional in their organization.  Employers who do have a Human Resources Department often use the rule of thumb that a company needs one HR professional for every 100 employees. 

In a company that employs fewer than 100 people there is often only one full time person who is designated to oversee the entire Human Resources function.  You might think that 50-to-100 employees does not seem like a large number, but the HR person must be knowledgeable in all areas outlined above, including the state laws governing unemployment insurance and workers’ compensation. This compliance workload is only one part of the HR responsibility which includes: employee relations, recruiting, payroll, benefits administration, training and often safety.

So, what is a small business owner to do in the face of this regulatory burden?  A PEO exists to offer the small business owner relief from the pressures of compliance and administration.  Along with the expertise and experience to address all of the federal and state compliance issues, a PEO also offers best practices for the full range of Human Resources issues. Furthermore, a co-employment relationship with a PEO can help small-to-medium-sized business with services and programs of a full-service HR department. A PEO partners with small business owners to help solve HR-related problems and challenges.     

As you know, since the 1960’s the number and complexity of laws relating to the area of employment have mushroomed.  Prior to 1960 the Fair Labor Standards Act and National Labor Relations Act and their administrative obligations were the major compliance issues for personnel departments.