Editor’s Note: Mr. Austin is a member of the Labor and Employment Section of Ward and Smith, P.A.

RALEIGH – Employment is regulated by a complex weave of sometimes redundant federal and state laws. Spared from compliance with the major discrimination laws such as Title VII and the Americans With Disabilities Act which do not apply to employers with fewer than 15 employees, as well as the Age Discrimination in Employment Act which does not apply to employers with fewer than 20 employees, the small employer still must be aware of a wide array of legal requirements. This article offers a sample of laws that no start-up business, no matter how small, can ignore.

Workers’ Compensation

Workers’ compensation laws are among the most frequently overlooked employment laws for start-ups. In a typical scenario, two friends incorporate their new business, perhaps even understanding that having three employees triggers the obligation to obtain workers’ compensation coverage. What they often do not understand is that when the principals either choose to incorporate or form a limited liability company and they elect to be treated as employees, they then also will be counted as employees for purposes of workers’ compensation coverage. So, if the threshold under the applicable workers’ compensation law is three employees, when the two friends hire their first employee, they become subject to the law – and uninsured if they did not immediately obtain workers’ compensation insurance. The jurisdictional number may vary in neighboring states (e.g., three or more employees in North Carolina, four or more employees in South Carolina). Failure to obtain coverage not only exposes the small employer to potentially bankrupting liability for workers’ compensation benefits, but also to potential penalties including individual liability of the principals themselves.

Negligent Hiring and Background Checks

Every employer has a duty to select competent employees which sometimes is said to be for the purpose of protecting members of the public who come "into contact with the employment situation." Within this zone of protection may be customers, vendors, and other members of the general public who the employee meets in the course and scope of the employment.

Elements of a claim for negligent hiring typically are said to be: (1) a specific wrongful act by the employee; (2) the employee’s incompetence or unfitness for the job; (3) the employer’s actual or constructive notice of the employee’s incompetence or unfitness; and (4) injury resulting from the employee’s incompetence or unfitness. To demonstrate reasonable care the prospective employer should conduct a background check.

Former employers may provide only verification of the employee’s past employment and other marginally helpful facts such as the start and end dates of employment. Fortunately, criminal records are now relatively easy to obtain which facilitates an in house background check. Increasingly, however, employers look to an outside agency to perform the investigation. In those cases, the process is regulated by the Fair Credit Reporting Act. A publication by the Federal Trade Commission, "Using Consumer Reports: What Employers Need to Know," is available at www.ftc.gov/bcp/conline/pubs/buspubs/credempl.htm.

Federal Occupational Safety and Health Act

The federal Occupational Safety and Health Act ("OSHA") will apply to virtually every employer. OSHA regulations include the so-called "general duty clause" which requires the employer to furnish employees with employment that is free from recognized hazards likely to cause death or serious injury. In addition, OSHA imposes numerous sets of industry-specific regulations, which are published in OSHA’s "General Industry Standards." Employers that are covered by OSHA are subject to inspection which may result in citations, fines, and even criminal penalties.

The law also imposes record keeping requirements on employers that have more than ten employees. These covered employers must maintain a log of occupational injuries and illnesses, known as an "OSHA Form 200." Additionally, the employer must prepare an individual report known as an "OSHA Form 101" for each such recordable occupational injury or illness,  which generally must be completed within six working days after the accident or onset of illness.

An accident which results in death or the inpatient hospitalization of three or more workers must be reported verbally to the OSHA office that has jurisdiction over the location where the accident occurred. The report must be made within eight hours after the accident, or within eight hours after the time that any agent or employee of the employer is informed of the accident.

Uniformed Services Employment and Reemployment Rights Act

The Uniformed Services Employment and Reemployment Rights Act ("USERRA") protects applicants and employees who serve in the military from employment discrimination. USERRA also affords reemployment rights to protected individuals who have completed military service or training.

USERRA has a number of aspects, most notably the employer’s general duty to reemploy a returning employee to his or her former job or, alternatively, to a position of like seniority, pay, and status. An individual who has been separated from service dishonorably, or was discharged for other bad conduct, may be disqualified from USERRA’s protection.

An exception will be made for the employer if re-employment of a veteran would impose an undue hardship on the employer. USERRA however, does not provide easily navigated safe harbors for this and other exceptions, and requires close analysis of the facts and law in any given case. In short, USERRA is a law that is full of nuance and particularity. Decisions that have to be made about employment of veterans should be guided by legal counsel versed in this law.

Immigration Reform and Control Act

Under the Immigration Reform and Control Act ("IRCA"), it is unlawful for an employer to knowingly hire or continue to employ an alien who is not authorized to work in the United States. IRCA created the I-9 Form verification mechanism for employers in order to enforce compliance. Employers must complete a Form I-9 for every new employee. Employers must retain the Form I-9 for a period of three years after the date of hire or one year after employment is terminated, whichever is later. IRCA’s I-9 requirements, as well as the prohibition on unauthorized employment, apply to all employers regardless of size.

IRCA prohibits not only unauthorized employment, but also discrimination based on citizenship-status and national origin. The anti discrimination provisions of IRCA apply to employers with four or more employees. These IRCA prohibitions apply to discrimination in the hiring process or during the I-9 document review. Employers should not make assumptions based on ethnicity, language, country of origin, or immigration status, and should not adopt "citizens only" hiring policies. Hiring policies should be applied consistently to all applicants, and employers should not treat certain applicants differently because the applicants look or sound foreign.

Wage and Hour Laws

Federal and state wage and hour laws also apply to small employers. The federal law regulates minimum wage ($5.85 per hour) and overtime (time and one-half for all hours worked over 40 in the workweek).

Additionally, state laws may require the employer to notify employees verbally or in writing at the time of initial hire of the employee’s promised wages and the day and place for payment. State law also may regulate what deductions and withholdings can be taken from paychecks. These laws typically impose harsh penalties on employers who overwithhold pay or hold back an employee’s paycheck altogether.


While some employment laws afford a little leeway to early stage or other small businesses, the downside risk of noncompliance with the laws that do apply can be very costly if not catastrophic to the business. As smart as our "Three Guys" or "Mom and Pop" may be, they are unlikely to achieve compliance without knowledgeable legal counsel.

© 2007, Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. William Joseph Austin, Jr. practices in the Labor and Employment Section, where he concentrates his practice in workers’ compensation and employee benefits. Comments or questions may be sent to wja@wardandsmith.com

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance of fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.