Hiring in the U.S.
Employment Law in the United States: An Overview
- At-will employment and termination. Employment in the U.S. is predominantly at-will, meaning employers can terminate their employees at any time without notice or cause, and employees can leave their job at any time without notice or cause. However, there may be exceptions in certain U.S. states or an employment contract is in place (which is the exception).
- Minimum wage. The federal minimum wage is $7.25 per hour. However, many U.S. states have higher minimum wages. For example, New York’s statewide minimum wage is $14.20/15.00 per hour (depending on your location) and Arizona’s statewide minimum wage is $13.85 per hour.
- Working hours. There is no mandatory limit for work hours under U.S. federal law, but the standard workweek in the U.S. is 40 hours. Employees typically work eight hours a day, five days a week.
- Exempt and non-exempt employees. There are two categories of employees under the Fair Labor Standards Act, Exempt and Non-exempt employees. Non-exempt employees are entitled to additional protections, notably a right to overtime pay. Employees may be considered exempt if they are paid a salary, earn at least $684 per week or $35,568 annually, and perform the job duties of one of the exempt professions (administrative, executive, etc.). Highly compensated employees who make $107,432 or more per year are also not required to be paid overtime.
- Overtime. Hourly and non-exempt employees must receive overtime pay at 150% of their regular rate if they work more than 40 hours in a week. Some states have different overtime laws, so qualified employees are subject to whichever state or federal law provides a higher overtime standard.
- Severance. There are no federal requirements for severance pay, but most employers choose to offer it to maintain a positive rapport with former employees and at times support a Waiver and Release of claims. Some states require severance pay in situations related to facility closures or large layoffs.
Payroll Tax in the U.S.
Payroll is more often than not handled by a payroll company, but occasionally by the company’s accountant or bookkeeper.
Once an employee is on payroll, the employer must withhold taxes and make required contributions to government funds. These contributions/deductions go toward federal programs such as social security, Medicare, unemployment, and workers’ compensation. There can be significant, and personal, liability for failure to withhold taxes or make required contributions.
- Social security. Social security provides retirement income for U.S. workers. Employers and employees must each contribute 6.2% of the employee’s wages toward social security.
- Medicare. Medicare is federal health insurance for adults aged 65 or older and younger people who receive disability benefits. Employers and employees must each contribute 1.45% toward Medicare.
- Federal and state unemployment. The Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) provide compensation to workers who have lost their jobs. Most employers pay both federal and state unemployment taxes. The federal minimum taxable wage base is $7,000, and the federal tax rate is 6%. States may set their own minimum taxable wage bases and unemployment insurance tax rates, but employers usually pay between 1% and 8% on the taxable earnings of employees.
- Workers’ compensation. Workers’ compensation insurance covers medical care and payments to employees when they are injured or sick because of their job. Employers pay a percentage of the payroll to workers’ compensation insurance, but the requirements vary in each state.
- Income tax. Employees must pay state and federal taxes on their earned income and those taxes are required to be withheld at the employer level. Federal income taxes are divided into seven tax brackets ranging from 10% to 37%, with higher earners paying a higher percentage. Tax rates also vary from state to state. Some states have a flat-rate income bracket, and others have more tax brackets than the federal level.
Employee Benefits in the U.S.
As with payroll taxes, statutory benefits requirements differ between U.S. states. Statutory benefits in the U.S. are typically low compared to statutory benefits in other countries, but employers should prioritize a comprehensive benefits package to attract and retain top talent.
The federal law does not require employers to offer paid leave to U.S. employees. However, under the federal Family and Medical Leave Act (FLMA), employers with 50 or more employees are required to provide eligible employees with up to 12 weeks of unpaid, job-protected leave per year.
Some states have leave entitlement laws that provide employees with paid, job-protected time off. For example, 16 states require paid sick leave. Additionally, many companies choose to provide various forms of paid leave, such as family leave and vacation, whether or not their state requires it.
U.S. employees will often ask about paid time off during the interview process and upon hiring. It consists of paid vacation time, paid sick leave, and public holidays. There are many ways to create a policy but you need to ensure you meet the federal and state requirements according to where your employee is based.
Social security is a federally mandated benefits program that ensures U.S. employees have income after they retire. Both the employee and employer make social security contributions through payroll taxes. While most states do not impose an additional tax on social security benefits, 11 states in the U.S. have some form of additional social security tax.
Under the federal Affordable Care Act (ACA), companies with more than 50 employees must provide their full-time workers with affordable minimum essential coverage. Smaller companies can purchase insurance through the Small Business Health Options Program.
Some states have additional laws in place to improve employee health insurance. For instance, Massachusetts mandates that employers provide minimum creditable coverage to ensure employees have fair and adequate health plans.
Providing health coverage to employees in multiple states is tricky because health insurance plans and providers vary across states. It's likely your employee will be expecting you to provide them with a sponsored healthcare plan. Some U.S. employees also require their families to be included in their healthcare plan. The U.S. employee healthcare plan is usually formed through a monthly employer contribution and in some cases, the employee will be contributing too.
Although not mandated, employees will ask about a 401(k) plan. A 401(k) plan is a company-sponsored retirement account in which employees can contribute income, while employers may match contributions tax-free. It is similar to a pension plan in the U.K.
Employee vs. Independent Contractor
When hiring in the U.S., understanding the difference between an employee and an independent contractor is crucial. Worker classification impacts the employer and worker in terms of rights, responsibilities, and legal obligations. Here are the key distinctions:
Control and Independence
Employees are under the employer's direction and control. The employer determines how, when, and where the work is performed. Independent contractors, conversely, have more autonomy over their work. They operate as separate businesses, choosing when, where, and how they complete their tasks.
The employer-employee relationship involves a higher level of dependence and long-term commitment, with employees receiving a regular salary or wages and often working on an ongoing basis. Independent contractors engage in short-term or project-based work and manage their own taxes, including self-employment taxes.
Legal and Financial Implications
When hiring employees, employers must comply with various employment laws and regulations. This includes providing workers' compensation insurance, adhering to minimum wage and overtime requirements, and ensuring a safe and non-discriminatory work environment. Independent contractors are not covered by these employment laws.
Liability and Intellectual Property
Employers have more control and ownership over the work produced by employees. Intellectual property created by employees during their employment is usually owned by the employer. Independent contractors, however, generally retain ownership of their work unless specified in a contract.
Misclassifying employees as independent contractors can result in legal and financial consequences for employers. When in doubt, consult with legal experts to ensure proper classification.
Hiring a Foreign Worker
Given foreign workers are not U.S. citizens, they need to obtain a social security number and pay federal, state, and income taxes. Note they are exempt from paying Social Security, Medicare, and federal unemployment taxes.
As long as the worker can provide proof that they’ve applied for a social security number, they are eligible for hire. As soon as they receive their social security card, their employer will need to update their employee records.
Professional Employer Organization (PEO)
PEO relationships are founded on the concept of co-employment. This makes them the employer of record for tax filings, workers’ compensation insurance and benefit programs. Entering into a co-employment relationship with a PEO provides HR related expertise and shifts employment related risks onto the PEO.
While the PEO industry offers many options for workers’ compensation insurance and health insurance coverage, the determination for co-employment is determined by the federal tax ID reporting the employee wages. A co-employment relationship requires the wages to be reported under the tax ID of the PEO.
Safety and Risk Management
Depending on the type of work you do, workers’ compensation insurance coverage can be difficult to obtain and/or a significant expense. Since a PEO can cover your employees under their master work comp policy, they are motivated to keep work comp costs in check. For a PEO, lots of employee claims can cause a high insurance premium, which in turn causes them to have an uncompetitive marketplace offering.
Payroll Processing and Tax Remittance
Payroll administration is a basic function of a PEO and the one most commonly associated with an employee leasing company. This includes variety of payment methods, including payroll check, direct deposit and, in some cases, debit card arrangements. Payroll input methods include phone, fax and the Internet. PEOs support hourly, salary, commissioned tipped and piece-work payment based employees. PEOs provide tax reporting and compliance and filing local, state and federal government paperwork (W2s, W4s, FICA, etc.). PEOs also ensure that all court ordered payments and garnishments are collected and remitted to the appropriate authority. In addition a PEO will ensure that all payroll deductions for insurance or benefits will get the appropriate tax treatment (section 125 pretax) if eligible.
Employee Benefits and Plan Administration
PEO companies can offer employee benefits plans that cover the spectrum of coverage types. Plans are available for HMO and PPO health insurance plans. In addition plans are available for supplemental insurance like vision, long term disability, short term disability and life insurance. Also programs are available for 401K, Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA). Using a PEO can quickly enable your company to get competitive pricing for health insurance and employee benefits.
Human Resources – HR Administration
A PEO will help ensure that your company is compliant with the myriad of rules and regulations related to Human Resources. HR Administration with a PEO ensures that basics like employee handbooks and labor-law posters are in place at your company. A PEO acts as your off-site HR department, offering consultation in the areas of sexual harassment, employment discrimination, FMLA (Family Medical Leave Act), hiring and firing practices and a number of other areas.
Licenses and Requirements
Licenses are required in 35 states. Entities should register with the secretary of state prior to applying for a license. Along with the application, entities are often required to meet a bonding requirement, provide proof of worker’s compensation insurance, and usually a financial statement. For more information, please see the state specific sections below.
While it's challenging to provide a precise figure without specific details, here are some broad areas of costs:
- Setup and Licensing Costs. This includes incorporating your business, purchasing the necessary insurances, obtaining licenses and accreditations (like ESAC and IRS), and other related costs such as net worth requirements ($75,000 in NY).
- Office Space and Equipment. Depending on whether you plan to have a physical office, this can be a substantial cost. You'll need space for your team to work, along with furniture, computers, phones, and other necessary equipment.
- Staffing. As a PEO, you'll need to hire experts in various fields including HR, benefits administration, risk management, payroll processing, and tax compliance. Salaries can vary widely, but you can expect to pay from $30,000 to over $100,000 per year per full-time employee, depending on their role and experience level.
- Software and Technology. A significant part of a PEO's operations is managed through software. You'll need payroll software, benefits administration software, HRIS, and potentially a CRM. This could cost from a few thousand to several tens of thousands of dollars per year, depending on the size of your operation.
- Marketing and Sales. You'll need a well-designed website, marketing materials, and possibly a sales team. You should also consider the cost of digital marketing, SEO, and advertising. Depending on your marketing strategies, this could cost from a few thousand to several tens of thousands of dollars per year.
- Legal and Consulting Fees. You'll likely need legal guidance and might want to hire business consultants, especially when starting up. These professionals can charge hundreds of dollars per hour.
- Working Capital. PEOs often need a substantial amount of working capital, as they typically pay client employees before being reimbursed by the client. This requires a significant amount of liquidity and a robust credit line.
Before you hire employees
1. Make sure you have an EIN (Employer Identification Number) and have registered with the states where you will have employees
Before hiring employees, you need to register your business with federal and appropriate state authorities. The IRS requires every business with employees to have an Employer Identification Number (EIN), a unique nine-digit number used for tax ID purposes.
Additionally, each state has its own registration process for getting a state employer identification number.
2. Set up records for withholding taxes
When you think about how to hire your first employee, you need to take taxes into account. Before you start searching for the right employee, you need to fill out paperwork to pay three different types of withholding taxes.
- Federal income tax withholding. Your new employee needs to complete Form W-4 (Employee’s Withholding Certificate), which asks them how much federal income tax to withhold from their pay. You then submit the form to the IRS.
- Federal Wage and Tax Statement. You’re responsible for filling out Form W-2 for every employee, detailing their earnings and taxes withheld for the year. You need to send a copy to your employees by January 31, covering the previous year. Then send Copy A of the W-2 forms to the Social Security Administration by the last day of February. You can learn more about W-2 and how it’s different from 1099-MISC (for independent contractors) here.
- State taxes. Many states also have a state withholding form.
Businesses should hang on to their employment tax records for six years (or longer in some cases) to support their employment tax filings. Having a good system set up helps you stay organized so you can track your business’s health over time, prepare your tax returns and other financial statements, keep track of deductibles, etc.
3. Define the role you’re hiring for
If you don’t know what you’re looking for, how do you know when you find it? Before you start the process of how to hire employees, figure out what kind of support you need. Make a list of the most important tasks you need help with. Is it someone to help with inventory management, email marketing, or bread baking?
Next, think about what responsibilities you’d like the person in this position to take on in the future. Deciding how much to pay your new employee depends on the kind of work you need done, the role’s seniority, and your budget.
Finally, think about what kind of background and skill set would best serve this role and how much experience is needed.
Once you’ve done this legwork, you’re ready to write a job description. A clear, thoughtful job description helps you hire the right person.
4. Find your candidates
Ask your best employees if they know anyone who might be a good fit for the role. Referrals save you time because they’re already vouched for and can keep you from having to sort through a mountain of resumes.
To find highly qualified, diverse candidates, cast a wider net. Post your job description to job sites like Indeed, Craigslist, or LinkedIn. Include a statement at the bottom of the post that identifies your business as an Equal Opportunity Employer, saying that qualified candidates of all genders, ethnicities, races, sexual orientations, etc. and those with disabilities are strongly encouraged to apply. Instagram is also a great place for job postings.
5. Conduct interviews
You should try to have at least a couple of employees interview the candidates, if possible. Each person who works at your business will approach the interview with different goals, giving you a more balanced assessment.
If you run a larger business, you might think about running interview panels where each interviewer is asked to focus on a specific area during the interview. In that situation, one person might focus on teamwork, while another looks for technical skills. The benefit of this approach is twofold — you get an assessment of a candidate’s very specific skills and your employees feel like they are a part of the process.
Once you know who is interviewing your candidates, you need to think about what everyone is going to ask. You’ll want to go through their work history to make sure they’re qualified, but you’ll also want to ask questions that give you an idea of how they’d interact with the rest of your staff and your customers.
How do they approach problem solving? What’s a specific example of how they’ve solved a work problem in the past? How good are they under pressure? If a client is dissatisfied or angry, how would they handle that situation?
6. Run a background check
Once you’ve chosen a candidate for the role and made an offer, you might want to run a background check. Also known as a pre-employment screening, a background check is an important step to help keep your business, employees, and customers safe. Applicants must always authorize your business to run a background check.
Be aware that there are complex legal requirements and restrictions on background checks, many of which vary by state. Some states restrict the types of criminal history inquiries you can pull and when in the application process you can inquire about a criminal history, while others require that a role meet specific requirements if you are going to pull a credit history. (Some states and cities ban employers from asking about criminal history on job applications altogether). To comply with all of these requirements, businesses usually use a third-party agency to conduct background checks.
There are also regulations on how you can use the information from a background check. For specific guidance or advice on background checks, consult with a legal professional.
7. Make sure they’re eligible to work in the U.S.
It’s your responsibility to make sure all your employees are legally allowed to work in the U.S. If you hire someone who doesn’t have the right employment eligibility, you could face fines, and even criminal penalties.
To help guard against this, here’s how to hire employees who are eligible to work in the U.S.:
- Before or on their first day on the job, your new employee needs to fill out section one of Form I-9, which includes their contact information, Social Security number, and employment eligibility.
- By their third day on the job, they need to show you valid documentation with their ID and employment authorization. This can be one document from List A (such as a U.S. passport or Permanent Resident Card), or one ID from List B (like a U.S. driver’s license) combined with another from List C (such as a Social Security card).
- In most cases, filling out the Form I-9 and reviewing the supporting documents is enough. But if you do business in certain states, you may be required to enroll in the E-Verify program.
- Employers don’t need to send Form I-9 to the federal government, but you do need to keep it on file for three years after the hire date, or for a year after the employee stops working for you, whichever comes later. You can learn more about Form I-9 from the U.S. Citizenship and Immigration Services.
After you hire employees
8. Report your new hires to your state employment agency.
You need to report newly hired and rehired employees to your state’s labor agency. For more information on your state’s requirements, check out the SBA’s New Hire Reporting Requirements.
9. Obtain workers’ compensation insurance
Workers’ compensation insurance requirements for employers vary from state to state. Most states require employers to obtain an insurance policy for workers who are injured or become ill due to a workplace exposure. Be sure to review your state’s requirements and find a policy that suits your business.
10. Go through the full onboarding process
Find a full checklist for onboarding remote and in-person employees here, including:
- Add your employee to internal systems
- Complete new hire paperwork
- Share your employee handbook
- Provide necessary tools
- Start a shadow program
- Send a reference guide
11. Choose a payroll method
After you hire your first employee, you need to set up a system to pay them and take care of payroll taxes. You can do payroll yourself, through an accountant, or through a payroll service.
Many people choose a payroll service to save time and avoid dealing with all the complications surrounding payroll (like taxes). Some payroll services also offer integration with your insurance provider and take care of new-hire reporting, which helps remove those headaches.
But even if you choose to use a payroll service (or outsource payroll to an accountant), it’s good to be familiar with the basics of how it works. There are three parts to payroll: paying employees, paying payroll taxes (to the IRS and your state’s tax agency), and filing tax forms.
Paying employees includes everything from tracking hours worked to calculating tax withholdings and sending checks. Payroll taxes and filings are tasks that usually must be completed every month and quarter, depending on the size of your business.
12. Display workplace posters
The Department of Labor requires that employers post certain notices in their workplace to inform employees of their rights and your responsibilities as an employer. These posters are provided free of charge. Some states have workplace poster requirements that you must follow in addition to the federal requirements. Visit the SBA’s Workplace Posters for specific federal and state posters you need for your business.