How Hiring Employees Increases Your Legal Risks
When hiring a new worker, companies have two choices: bring a new employee on board or hire an independent contractor. One of the main benefits of having employees is that you have much more control over the work they do. You can train them how you want, specify the hours they work, and require them to work only for you.
But the ability to have more control over employees comes with risks and costs. Unlike independent contractors, employees are entitled to benefits like unemployment insurance, workers’ compensation, and health insurance. Employees also have myriad legal protections under state and federal employment laws. If an employer does not follow these laws, they could be subject to legal action such as a discrimination, wage and hour, or workplace safety lawsuit that results in financial losses and reputational harm.
Hiring Trends: Contract Workers on the Rise
Contract work surged during the pandemic and shows no signs of slowing down. According to the human resources platform Gusto, the ratio of contractors per employee has increased by nearly 50 percent since 2017. Across every industry, companies now hire approximately one contractor for every five employees. By 2030, it is estimated that contractors and freelancers will comprise half of the country’s workforce.
Contractors allow workforces to remain agile and respond in real time to economic conditions. Employers can use contract workers to scale up or down as needed in response to disruptions, layoffs, hiring surges, and new business models and systems. This flexibility can be particularly valuable during economic uncertainty (e.g., the pandemic). As businesses adapt to labor shortages, supply chain issues, inflation, and a slowing economy, the agility that contractors offer is likely to keep them in demand.
However, despite the rise of contract workers, they are not appropriate for all businesses and all situations. In contrast to gig economy workers who may simply be moonlighting for extra money, dedicated freelancers tend to be concentrated in fields that require specialized skills.
Businesses are still hiring plenty of employees, as the latest jobs report shows. In June 2022, nonfarm payroll employment rose by 372,000. Notable job gains were seen in professional and business services, leisure and hospitality, and health care, says the Bureau of Labor Statistics.
Laws To Be Aware of When Hiring Employees
Many companies today hire both contract workers and employees. While it is crucial for companies to avoid misclassifying employees as independent contractors, it is equally important to understand the laws that provide employee protections. Worker protection laws generally can be grouped into a few major legal areas.
Equal Opportunity Employment
Equal Opportunity Employment (EEO) laws prohibit employers from discriminating against their employees—and job applicants—on the grounds of age, disability, ethnicity or national origin, genetic information, pregnancy, race or color, religion, and sex. Federal EEO laws include:
- Title VII of the Civil Rights Act of 1964
- The Pregnancy Discrimination Act
- The Equal Pay Act of 1963
- The Age Discrimination in Employment Act of 1967
- The Americans with Disabilities Act
- The Genetic Information Nondiscrimination Act of 2008
These laws are enforced by the US Equal Employment Opportunity Commission (EEOC), which has the authority to investigate employment discrimination claims and pursue legal action against employers. Remedies may include compensatory and punitive damages, as well as the requirement that the employer stop any discriminatory practices. Victims of alleged discrimination may also bring private lawsuits under federal EEOC laws.
Wage and Hour
The primary law of the land when it comes to wage and hour practices is the Fair Labor Standards Act (FLSA), which regulates the following areas:
- Federal minimum wage
- Federal overtime law
- The forty-hour work week
- Employee time and pay records kept by employers
- Child labor provisions
The US Department of Labor (DOL) enforces the FLSA. Violations may result in prosecution that leads to recovery of back wages, fines, and even criminal prosecution.
The Family and Medical Leave Act (FMLA) is also in the jurisdiction of the DOL. This law gives twelve weeks of paid leave for specified family and medical reasons, such as the birth of a child, caregiving, and a serious health condition. During the twelve-week period, a covered employee is entitled to continuing health insurance coverage and job protection.
If an employer denies a legitimate FMLA leave request, refuses to reinstate an employee after they leave, retaliates against an employee for requesting leave, or otherwise does not comply with the FMLA, the DOL may bring legal action to compel FMLA compliance. Employees may also bring a private civil action to recover lost wages and other damages.
Employee benefits are part of an employment compensation package. Some benefits are at the discretion of the employer—and some are not. Certain benefits are legally required, including the following:
- Social Security and Medicare (i.e., FICA payroll tax contributions)
- Unemployment insurance
- Workers’ compensation insurance
- Health insurance (for companies with 50+ full time employees)
- Family and medical leave (FMLA protections)
The Affordable Care Act (ACA) regulates employer-provided healthcare. It specifies that applicable large employers (ALEs) that do not offer adequate and affordable coverage to full-time workers may be subject to an IRS assessment.
If you do provide health coverage to eligible employees, they must have continued access to their health plan for a period of time after they leave the job. This is covered by the Consolidated Omnibus Budget Reconciliation Act (COBRA). Information that is obtained through an employer-sponsored group health plan is subject to confidentiality provisions found in the Health Insurance Portability and Accountability Act (HIPAA). And if you choose to offer an employee pension program, it must comply with the Employee Retirement Income Security Act (ERISA).
Workplace safety laws are often associated with dangerous professions such as construction and trade work. However, all professions are afforded safe working conditions thanks to the Occupational Safety and Health Act, which is overseen and enforced by the Occupational Safety and Health Administration (OSHA), which is part of the DOL.
Employers are required to comply with all applicable OSHA standards. This includes the general duty to keep workplaces free of serious recognized hazards. Workplace accidents can trigger workers’ compensation claims, but they can also lead to OSHA investigations and fines ranging from $14,500 to $145,000 per violation. OSHA has the authority to conduct inspections without advance notice, but employers have the right to obtain inspection warrants before OSHA enters a worksite.
Other Considerations: State Laws and the Applicability of Laws
Not all businesses are subject to all federal worker protection laws. The applicability of some laws can depend on the number of employees or other criteria. For example,
- employers with fifteen or more employees are typically covered by EEOC laws, but for age discrimination cases, the threshold is twenty employees;
- companies with fifty or more employees (including full-time equivalent employees) are subject to the ACA;
- employers with ten or fewer employees are partially exempt from OSHA record-keeping requirements; and
- the FLSA applies to employers with annual sales totaling $500,000 or more, while employers with fewer than two employees are exempt.
As these examples show, you need to be clear on what federal laws you are—and are not—compelled to follow. But the challenge does not end there. In addition to federal worker protection laws, state laws can impact your business, too. One of the biggest is your state’s workers’ compensation law (workers’ compensation is handled at the state level; there is no federal law or agency). States may also have labor laws (e.g., minimum wage and paid rest period laws) that are stricter than federal laws. Disability insurance is not mandated at the federal level, but if your business is based in California, Hawaii, New Jersey, New York, or Rhode Island, you are legally required to provide disability benefits to employees.
State laws may not only provide stronger protections than federal laws, but they may also give employees the option to sue and recover compensation. At the same time, states can have laws—like an at-will employment law—that work to an employer’s advantage.
Taking stock of the state and federal employment laws that apply to your business is the first step in crafting a compliance strategy. The next step is formulating workplace policies that reflect applicable laws and keep you legally compliant. These responsibilities fall within the domain of a company’s human resources department. However, there can be times when human resources require outside assistance from an attorney for matters such as hiring, firing, employee contracts, company policies, and defense against lawsuit and administrative claims. Smaller companies may lack a formal human resources department and rely on management to establish and enforce legal policies.
The delicate nature of employment matters, combined with ever-changing laws, can create situations that demand the assistance of a lawyer. If you think you are in over your head on a particular policy or issue, our legal team is here for you. Contact us to discuss your situation and learn how we can help.
 Liz Wilke, Contractor Hiring Surges During the Pandemic. What Does It Mean for the Business Workforce?, Gusto (Dec. 14, 2021), https://gusto.com/company-news/contractor-hiring-surges-during-the-pandemic-what-does-it-mean-for-the-business-workforce.
 Yuki Noguchi, Freelanced: The Rise of the Contract Workforce, NPR (Jan. 22, 2018), https://www.npr.org/2018/01/22/578825135/rise-of-the-contract-workers-work-is-different-now.
 The Employment Situation—August 2022, Bureau of Labor Statistics, U.S. Dep’t of Labor, https://www.bls.gov/news.release/pdf/empsit.pdf.
 Wage and Hour Division, Misclassification of Employees as Independent Contractors, U.S. Dep’t of Labor, https://www.dol.gov/agencies/whd/flsa/misclassification.
 Laws Enforced by EEOC, U.S. Equal Emp. Opportunity Comm’n, https://www.eeoc.gov/statutes/laws-enforced-eeoc.
 Fair Labor Standards Act Advisor, U.S. Dep’t of Labor, https://webapps.dol.gov/elaws/whd/flsa/screen74.asp.
 Determining of an Employer is an Applicable Large Employer, Internal Revenue Serv. (Nov. 23, 2021), https://www.irs.gov/affordable-care-act/employers/determining-if-an-employer-is-an-applicable-large-employer.