Business Magazine

Legal and Regulatory Considerations in Hiring Employees

Posted on the 05 April 2011 by Dltmontana

A big step for a business owner is hiring the first employees.  Of course there are the financial and operational issues, but what legal and regulatory issues arise? Following is a brief discussion of several considerations:

1. Liability. When a business is operated by a single individual or perhaps a husband and wife team, they might not have formed a corporation, a limited liability company or another limited liability business entity, because of concerns about costs, record keeping, or a belief that any contract or tort liability the business incurred also would be directly attributable to that owner. However, when a business hires an employee, the negligent acts of that employee that injure, or damage the property of, others in the course of that employee’s employment activities are the responsibility of the business. If a limited liability business entity is not the employer, the injured party could sue the owners personally, seeking judgment liens against all of their personal assets. So while insurance is a good idea, so too is creating a limited liability business entity when an employee is hired.

2. Employment Laws.  Many laws become applicable when an employee is hired, and even if only one employee is hired, the employer must be aware of and comply with a variety of federal and state laws, including the Fair Labor Standards Act (requiring, among other things, overtime pay to “non-exempt” employees), Federal and State anti-discrimination and harassment laws, OSHA requirements of reports of injuries and maintenance of MSDS forms, requirements that an I-9 form (regarding authorization to work in the US) must be completed and the file kept on premises, and the employer must comply with laws concerning the use of polygraphs and protection of privacy rights. Federal and State tax laws also require payments of FICA (medicare and social security taxes) and withholdings of other taxes by an employer.  Georgia requires an employer to report to the State New Hire Reporting System all new employees, and compliance with its unemployment compensation laws and regulations. As more employees are hired, Georgia law requires workers compensation insurance (at three or more employees). As the number of employees reaches 11, additional OSHA reporting obligations arise, at 15 certain requirements of the federal Americans with Disabilities Act arise, at 20 employees, laws prohibiting Age Discrimination and requiring records retention under the Age Discrimination in Employment Act, and requiring furnishing continuation insurance coverage under COBRA become applicable.  Finally, at 50 employees the new federal health insurance law (often referred to as “Obamacare”) will become applicable, as will the Family and Medical Leave Act. The foregoing is not an extensive discussion that covers all aspects of every federal and state employment law, but gives an idea of the scope of laws and regulations that become applicable as a business grows.

3. Why Not Classify Everyone Who Works for the Business as an “Independent Contractor”? Unlike under an employee-employer relationship, many of the laws and regulations mentioned above generally don’t apply to independent contractors, such as those requiring withholding for FICA, and payment of overtime, while laws requiring I-9s and workers compensation are only applicable in limited situations.  However, this generally is true only for “true” independent contractors. For example, if a business owner hires an unrelated company to paint its building, such laws generally don’t apply to this owner.  However, many business owners believe that they can classify everyone who works for the company as an “independent contractor”. That is not true. There are many tests of what constitutes an “independent contractor”, with one general test being set out by the IRS (,,id=99921,00.html ).  An employer definitely should consult an attorney before classifying someone who is under the employer’s direction and control, on an ongoing basis, as an independent contractor. The fines and liabilities will accrue over the years, and both the government agency and the affected employee could sue the business owner.

4.  Contractual Protection. Upon the beginning of the employment process, employers generally will require job applicants to sign agreements that, among other things, permit a background check (especially when financial records are being checked). Most employers will require its newly-hired employees to sign agreements, beyond those necessary for payment of taxes, compliance with other laws (such as an I-9 form) and enrollment in benefits plans. Typically the employee will be required to sign an agreement that specifies the type of employment (usually being “at will”) and that the employee will not disclose or use for any non-job related purpose the employer’s confidential information. Under certain circumstances, the employee might be required to sign a non-compete or non-solicitation agreement and an invention assignment agreement. In addition, an employer should have a written statement of its HR policies, specifying such things as if and how vacation pay accrues (under Georgia law, an employer is not required to pay accrued but unused vacation pay upon termination of employment, but this must be specified in writing to be effective) and providing methods for employees to report discrimination or harassment.  Such a written plan document is highly advisable.  Typically the employee will be asked to sign a document acknowledging receipt and understanding of this document. It is most advisable to have these documents signed at the very beginning of the employment; for example, waiting several years and then asking a long term employee to sign a non-compete agreement raises a number of serious practical and legal issues.
Gary R Whitaker



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