Employment Law Basics for Small Business

Federal Employment Laws That Apply to Small Businesses

Federal employment laws have different applicability thresholds based on your number of employees. With even one employee, you must comply with the Fair Labor Standards Act (FLSA) for minimum wage and overtime, the Equal Pay Act prohibiting gender-based wage discrimination, the Immigration Reform and Control Act (I-9 verification), federal tax withholding and reporting requirements, and OSHA workplace safety standards. These are the baseline obligations that apply the moment you have a single person on payroll.

At 15 employees, Title VII of the Civil Rights Act kicks in, prohibiting discrimination based on race, color, religion, sex, and national origin. The Americans with Disabilities Act (ADA) also applies at 15, requiring reasonable accommodations for employees with disabilities. The Genetic Information Nondiscrimination Act (GINA) prevents using genetic information in employment decisions. At 20 employees, the Age Discrimination in Employment Act (ADEA) adds protection for workers 40 and older. At 50 employees, the Family and Medical Leave Act (FMLA) requires up to 12 weeks of unpaid, job-protected leave for qualifying medical and family situations.

These thresholds mean that very small businesses are exempt from some federal anti-discrimination laws, but that does not mean they can discriminate freely. Nearly every state has its own anti-discrimination law that covers smaller employers. California's Fair Employment and Housing Act applies to employers with five or more employees. New York's Human Rights Law applies to employers with four or more. Several states and cities have laws that apply to employers with even one employee. Always check your state and local requirements, because the state threshold is almost always lower than the federal one.

Wage and Hour Requirements

The FLSA sets the federal minimum wage at $7.25 per hour, but 30 states plus Washington D.C. have set higher minimum wages. California's minimum wage is $16.00 per hour in 2026. Washington state is $16.66. New York City is $16.00. If your state minimum wage is higher than the federal rate, you must pay the higher amount. For ecommerce businesses hiring remote workers in multiple states, you pay the minimum wage of the state where each worker is located, not the state where your business is headquartered.

Overtime under the FLSA requires paying non-exempt employees 1.5 times their regular rate for hours worked over 40 in a workweek. California adds daily overtime: 1.5x for hours over 8 in a day and 2x for hours over 12. The classification of workers as exempt or non-exempt is based on their job duties and salary, not their job title. To qualify for the most common exemptions (executive, administrative, professional), the employee must be paid on a salary basis at or above the salary threshold ($58,656 per year as of 2026 under federal rules, higher in some states) and must perform exempt duties as the primary component of their job.

Misclassifying a non-exempt employee as exempt to avoid paying overtime is one of the most common and costly employment law violations. The Department of Labor can recover two years of back wages (three years for willful violations) plus an equal amount in liquidated damages, effectively tripling the unpaid overtime amount. Employees can also file private lawsuits and class actions, which is where the largest settlements occur. If you have any doubt about whether a position qualifies for exemption, consult an employment attorney or classify the position as non-exempt.

Hiring Practices

Employment law governs what you can and cannot do from the moment you post a job listing. Job postings must not contain language that discriminates against protected classes. "Looking for a young, energetic team member" discriminates on age. "Must be a native English speaker" may discriminate on national origin if the job does not actually require native-level English. Focus job descriptions on the actual skills, qualifications, and experience needed for the role.

During interviews, avoid questions about age, race, religion, marital status, pregnancy, disability, national origin, or genetic information. These questions, even if asked casually, create evidence of discriminatory intent if the candidate is not hired. Stick to questions about the candidate's qualifications, experience, availability, and ability to perform the essential functions of the job. You can ask "Can you work the scheduled hours for this position?" but not "Do you have children who might affect your availability?"

Background checks are legal but regulated. The Fair Credit Reporting Act (FCRA) requires written consent from the candidate before running a background check, and you must follow a specific adverse action process if you decide not to hire based on the results. Several states and cities have "ban the box" laws that prohibit asking about criminal history on the initial job application. Some states restrict the use of credit checks for employment decisions except in specific industries.

Once you decide to hire, provide a written offer letter that includes the position title, start date, compensation (hourly rate or salary), pay schedule, employment status (full-time or part-time), at-will employment statement (if applicable in your state), and reporting structure. On the employee's first day, complete the I-9 form (verifying identity and work authorization), collect a W-4 for tax withholding, and provide required notices about workplace rights. Every state has its own list of required new-hire notices, and failing to provide them is a per-employee violation.

Anti-Discrimination and Harassment

Federal and state laws prohibit discrimination in all employment decisions, including hiring, firing, promotions, pay, assignments, training, and benefits, based on protected characteristics. The protected classes under federal law include race, color, religion, sex (including pregnancy, sexual orientation, and gender identity following the Bostock v. Clayton County ruling), national origin, age (40 and over), disability, and genetic information. State laws frequently add protections for marital status, political affiliation, military status, and other characteristics.

Harassment is a form of discrimination. Sexual harassment receives the most attention, but harassment based on any protected characteristic is illegal. Harassment becomes legally actionable when it is severe or pervasive enough to create a hostile work environment, or when it involves a quid pro quo exchange (such as conditioning a promotion on sexual favors). A single incident can be severe enough to constitute harassment if it is extreme, such as a physical assault or a racial slur from a supervisor.

Your defense against harassment claims starts with prevention. Establish a written anti-harassment policy that defines prohibited conduct, provides multiple reporting channels (so victims are not forced to report to the person harassing them), prohibits retaliation against reporters, and describes the investigation process. Several states, including California, New York, Illinois, and Connecticut, require sexual harassment prevention training for all employees, with training requirements ranging from one to two hours annually.

Remote Worker Compliance

Ecommerce businesses frequently hire remote workers, which creates compliance complexity because employment law follows the worker, not the employer. If your LLC is registered in Texas but you hire a customer service representative who works from home in California, California's employment laws govern that worker. This includes California's minimum wage, overtime rules, meal and rest break requirements, expense reimbursement requirements, and paid sick leave mandate.

The practical implications are significant. California requires employers to reimburse employees for necessary business expenses, including a reasonable portion of their home internet and phone bills if used for work. New York, Illinois, and several other states have similar reimbursement requirements. Many states require paid sick leave that accrues at varying rates. Some states have mandatory disability insurance that the employer must fund. Each state where you have employees creates a separate set of compliance obligations.

You also must register as an employer in every state where you have employees, withhold that state's income taxes, pay into the state's unemployment insurance fund, and carry workers' compensation insurance as required by that state. For a small ecommerce business with remote workers in three or four states, the administrative burden is manageable with a payroll service like Gusto, Rippling, or ADP, which handles multi-state tax withholding and filing. For businesses hiring across many states, a Professional Employer Organization (PEO) can serve as the employer of record and handle all state-specific compliance.

Termination and Separation

Most states follow at-will employment, meaning either party can end the employment relationship at any time, for any reason (or no reason), as long as the reason is not illegal. Illegal reasons include retaliation for reporting harassment or safety violations, discrimination based on a protected characteristic, exercising a legal right like taking FMLA leave, and whistleblowing. Montana is the only state that requires cause for termination after a probationary period.

Even in at-will states, proper documentation protects you from wrongful termination claims. Before terminating an underperforming employee, document the performance issues with specific examples and dates, provide written warnings that clearly state the expected improvement and the consequence of failure, give the employee a reasonable period to improve (typically 30 to 90 days depending on the issue), and document any coaching, training, or support provided. This paper trail demonstrates that the termination was based on legitimate performance reasons, not discrimination or retaliation.

When conducting the termination, prepare the employee's final paycheck. Some states, including California, require the final check to be provided on the day of termination for involuntary separations. Other states allow a short grace period, typically the next regular payday. The final check must include all wages earned through the last day of work, plus any accrued and unused vacation or PTO if your state requires payout (California, Illinois, and several others do). Failing to provide a timely final paycheck triggers waiting-time penalties in states like California, where the penalty is one day's wages for each day the check is late, up to 30 days.

Provide a separation letter outlining the effective date, any continuation of benefits (COBRA notification is required for businesses with 20 or more employees), return of company property, and the status of any ongoing obligations like confidentiality agreements. If you offer severance in exchange for a release of claims, have an employment attorney draft or review the severance agreement, since improperly drafted releases may not be enforceable.

Essential Documentation

Maintain personnel files for every employee containing their offer letter, W-4 and I-9 forms (store I-9s separately from personnel files), signed acknowledgment of the employee handbook, performance reviews and disciplinary records, compensation history, and any signed agreements (confidentiality, non-compete, IP assignment). Federal law requires retaining employment records for at least three years after separation, and some records (like I-9 forms) must be retained for three years after hire or one year after separation, whichever is later. State requirements vary, with some states requiring retention for up to seven years.

Create an employee handbook even if you only have one or two employees. The handbook should cover your anti-harassment policy, equal employment opportunity statement, at-will employment acknowledgment, paid time off and leave policies, expense reimbursement procedures, data privacy and acceptable use policies, dress code (if applicable), and remote work policies. The handbook establishes consistent expectations and provides a documented basis for disciplinary action if employees violate the policies. Update the handbook annually to reflect changes in law and company policy, and have every employee sign an acknowledgment each time it is updated.