Employment Laws Every Small Business Should Know: Complete Guide

Federal Laws That Apply to Every Employer

Fair Labor Standards Act (FLSA)

The FLSA applies to virtually every business with at least one employee and establishes four core requirements. Minimum wage: the federal minimum is $7.25/hour, but 30+ states and many cities set higher minimums (up to $16.28/hour in Washington state and $20/hour in some California jurisdictions). You must pay whichever rate is highest among federal, state, and local minimums. Overtime: non-exempt employees must receive 1.5 times their regular rate for all hours worked beyond 40 in a workweek. California and a few other states also require daily overtime (1.5x after 8 hours in a single day). Recordkeeping: you must maintain accurate records of hours worked and wages paid for every non-exempt employee for at least 3 years. Child labor: restrictions on employing workers under 18, with specific rules about hours, times of day, and hazardous occupations.

The most common FLSA violation is misclassifying non-exempt employees as exempt to avoid paying overtime. To qualify as exempt, an employee must be paid a salary of at least $684/week ($35,568/year), and their primary duties must fit within the executive, administrative, professional, computer, or outside sales exemptions as defined by the Department of Labor. Simply paying someone a salary does not make them exempt. If their duties do not meet the exemption criteria, they are non-exempt and entitled to overtime regardless of their compensation structure. FLSA violations trigger back pay for all underpaid wages plus liquidated damages equal to the underpaid amount (effectively doubling your liability), plus attorney's fees. The statute of limitations is 2 years for standard violations and 3 years for willful violations.

Employment Tax Obligations

Every employer must withhold federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) from employee paychecks, match the employer portion of Social Security and Medicare (7.65% total), deposit withheld taxes and employer contributions on the IRS-mandated schedule, file quarterly Form 941 returns, and file annual Form 940 (federal unemployment tax) and W-2s. Failure to deposit payroll taxes is the most aggressively enforced tax violation. The IRS Trust Fund Recovery Penalty allows the IRS to assess the full amount of unpaid employee withholdings personally against any "responsible person" (typically the business owner or anyone with authority over financial decisions), piercing the corporate veil of LLCs and corporations. This means the owner personally owes the unpaid taxes even if the business is bankrupt. The payroll setup guide covers these obligations in detail.

Form I-9 Employment Eligibility Verification

Every employer must verify the employment eligibility of every new hire using Form I-9 within 3 business days of the employee's start date. The employee completes Section 1 on or before their first day of work, and the employer reviews the employee's identity and work authorization documents and completes Section 2 within 3 business days. Acceptable documents are listed on the I-9 form itself: List A documents (which prove both identity and work authorization, such as a U.S. passport) or a combination of a List B document (identity, such as a driver's license) and a List C document (work authorization, such as a Social Security card). You must accept any valid, unexpired document from the lists; requesting specific documents or more documents than required is a form of discrimination. Retain I-9 forms for 3 years after the hire date or 1 year after the employment ends, whichever is later. I-9 violations range from $252 to $2,507 per form for technical errors and up to $25,076 per form for knowingly hiring unauthorized workers.

Federal Laws That Activate at Employee Thresholds

Federal employment laws do not all apply from day one. They activate as your business reaches specific employee counts, creating a compliance ladder that grows with your company.

1+ employees: FLSA (wage and hour), EPPA (lie detector restrictions), USERRA (military service protections), OSHA (workplace safety), and all payroll tax obligations.

15+ employees: Title VII of the Civil Rights Act (prohibits discrimination based on race, color, religion, sex, and national origin), ADA (Americans with Disabilities Act, requiring reasonable accommodations for qualified individuals with disabilities), GINA (Genetic Information Nondiscrimination Act), and the Pregnancy Discrimination Act. These laws apply to the hiring process, employment decisions, compensation, and termination.

20+ employees: ADEA (Age Discrimination in Employment Act, protecting workers 40 and older), COBRA (requiring continuation of health insurance coverage for terminated employees), and additional Title VII provisions.

50+ employees: FMLA (Family and Medical Leave Act, requiring up to 12 weeks of unpaid, job-protected leave for qualifying reasons), ACA employer mandate (requiring affordable health insurance coverage or paying a penalty), and EEO-1 reporting (annual filing of workforce demographic data with the EEOC).

100+ employees: WARN Act (requiring 60 days notice before plant closings or mass layoffs) and mandatory EEO-1 reporting.

State Laws: Often Stricter Than Federal

State employment laws frequently provide greater protections than federal law, and when state and federal laws conflict, you must comply with whichever is more protective of the employee. This creates a complex compliance landscape, especially for businesses with remote employees in multiple states.

Anti-discrimination laws with lower thresholds. While federal Title VII applies at 15 employees, many states apply anti-discrimination protections starting at 1 employee (California, New York, New Jersey, Connecticut, Maine, Vermont, and others). Some states protect additional characteristics not covered by federal law: sexual orientation and gender identity (protected in 23+ states), marital status, political affiliation, and off-duty conduct.

Paid leave mandates. Over 15 states and dozens of cities require paid sick leave, with provisions varying from 24 hours per year (Arizona) to 40 hours per year (Connecticut, Oregon). California, New York, New Jersey, Washington, Massachusetts, Connecticut, Oregon, and Colorado mandate paid family and medical leave programs funded through payroll taxes. These state programs provide paid leave benefits that go beyond the unpaid leave guaranteed by federal FMLA.

Wage and hour rules. State minimum wages range from $7.25 (matching the federal minimum in states without their own minimum wage law) to $16.28 in Washington and $16.00 in California. Some states require overtime pay after 8 hours in a day (not just 40 hours in a week), mandate meal and rest breaks (California requires a 30-minute unpaid meal break for shifts over 5 hours and a paid 10-minute rest break for every 4 hours worked), and have stricter rules about tip credits, final pay timing, and pay stub requirements.

Salary transparency. Over 10 states (California, Colorado, Connecticut, Maryland, Nevada, New York, Rhode Island, Washington, and others) and many cities require salary ranges in job postings, prohibit asking about salary history, or both. These laws affect your job descriptions and interviewing practices.

OSHA: Workplace Safety

The Occupational Safety and Health Act applies to nearly every employer and requires you to provide a workplace free from recognized hazards that are causing or likely to cause death or serious physical harm. For ecommerce businesses, this primarily affects warehouse and fulfillment operations: proper material handling procedures, safe storage practices, adequate ventilation, fire safety, and ergonomic workstation setup. For office and remote workers, OSHA obligations are minimal but still exist, primarily around ergonomic workstations and emergency preparedness.

Businesses with 11+ employees in most industries must maintain OSHA injury and illness records (Form 300 log). Businesses with 250+ employees must electronically submit injury data to OSHA annually. OSHA penalties for serious violations range from $1,036 to $15,625 per violation, with willful violations reaching $156,259 per violation.

Staying Compliant as You Grow

Create a compliance calendar that tracks your filing deadlines: quarterly payroll tax returns, annual W-2 and 1099 filings, state unemployment reports, OSHA logs, and any state-specific reporting requirements. Your payroll provider handles most tax filings automatically, but you are ultimately responsible for compliance. Set a reminder to review your compliance obligations whenever you cross an employee threshold (15, 20, 50 employees) because each threshold triggers new legal requirements.

Consider engaging an employment attorney for a one-time compliance audit when you hire your first employee, when you cross the 15-employee threshold, and when you expand into new states. An audit costs $500 to $2,000 and identifies compliance gaps before they become violations. This is dramatically cheaper than the fines, lawsuits, and settlements that result from unknowing noncompliance. For ongoing compliance support, HR platforms like Gusto, Rippling, and Zenefits include compliance alerts and resources as part of their service, and organizations like SHRM (Society for Human Resource Management) provide compliance guides and updates for members ($229/year for professional membership).