Legal Requirements As To The Form Of Agreement
Individual written employment agreements are not required in the United States. Individual written employment agreements are optional and there are no legal requirements regarding the form. However, where employment agreements are used, they may not be contrary to or circumvent applicable federal, state or local employment laws. Most written employment agreements will be governed by the law of the state agreed upon by the parties, which may be the jurisdiction of the company’s principle place of business, the jurisdiction in which the employee works or where the agreement was finalized. Different laws govern the employment contracts of employees represented by labor unions.
- At-Will Employment
The law generally presumes at-will employment, unless altered by contract. At-will employment refers to an arrangement whereby an employer can terminate an employee at any time for any reason (other than an illegal one) or for no reason and an employee is free to leave a job at any time for any reason or no reason without adverse legal consequences. Offer letters are often used to provide the key terms and conditions of employment, instead of an employment agreement, either of which may alter the at-will employment relationship by its terms.
- Independent Contractors
A worker’s status is determined by the worker’s relationship with a hiring business. Among other relationships, workers may have an employer-employee relationship or an employer-independent contractor relationship with a business. There are a variety of tests used to determine whether a worker is properly classified as an employee or an independent contractor, depending on the law at issue. For example, under the Fair Labor Standards Act (“FLSA”), the “economic realities” of the relationship are examined, which include the extent to which the services rendered are an integral part of the principal’s business, the permanency of the relationship, the amount an alleged contractor invests in facilities and equipment, the nature and degree of control by the principal, and the degree of independent business organization and operation. For purposes of taxation, the Internal Revenue Service (“IRS”) looks at factors that fall within three main categories: behavioral control, financial control, and the perceived relationship between the business and the worker. States may apply different tests and requirements to assess whether workers are independent contractors or employees.
If a worker is classified as an employee, the employee is covered by minimum wage, overtime and other similar protections afforded by the FLSA. Moreover, as to employees, employers must withhold income taxes and pay Social Security, Medicare taxes, and unemployment tax on employee wages. In contrast, independent contractors are not afforded protections under the FLSA and businesses do not have to withhold or pay taxes on payments to independent contractors.
Misclassifying workers as independent contractors (rather than employees) can result in a variety of claims from the United States Department of Labor, the IRS, and individual workers, among others, and consequences including, for example, liability for back wages, fines and penalties, employee attorney’s fees, back taxes, class action lawsuits, and employee benefit coverage.
There are no legal requirements to provide trial periods (also referred to as “probationary periods” or “introductory periods”). To the extent a collective bargaining agreement or employment agreement applies, they may provide for a trial period. Trial periods may adversely impact at-will employment status (e.g., eligibility for protections of a law). .
Hours Of Work
- Minors (under age 18)
- FLSA governs when an employer may or may not employ a child, which for purposes of the FLSA is any individual under the age of 18. Under the FLSA, minor employees (under 18 years of age) cannot hold certain jobs, are limited in the total hours per week that they can work, cannot be employed during certain hours, and cannot perform certain types of work. Generally, 14 years of age is the minimum age for employment, with limited exceptions. For minor employees between 14 and 17 there are restrictions with regard to types of work and/or working time. State laws relating to employment of minor employees may provide additional restrictions and limitations, including on hours of work.
- Employee Classifications
- Under the FLSA employees are classified as either exempt or non-exempt from minimum wage and overtime requirements. “Non-exempt” employees are entitled to minimum wage and overtime under the FLSA. Non-exempt employees are entitled to overtime pay at a rate of one and one-half times the regular rate of pay for all hours worked over 40 hours in a workweek. “Exempt employees” are excluded from the FLSA’s minimum wage and overtime requirements. Properly classified exempt employees are not entitled to overtime pay regardless of how many hours they work in a workweek. In general, with certain exceptions, exempt employees must be paid a salary and perform executive, administrative, or professional duties or fit into another exemption under the FLSA. Whether an employee is exempt under the FLSA (or state law) will be driven by the facts and circumstances of the employee’s employment and not the classification assigned to that employee.
- Employment agreements may not be contrary to applicable federal laws (e.g., the Fair Labor Standards Act.). The terms of a collective bargaining agreement and applicable state law may also apply and modify the allowable hours of work. State laws may provide additional overtime rules, such as daily overtime or double-time pay.
Special Rules For Part-time Work
There are no federal laws specifically relating to part-time work, but various federal laws may be impacted by part time work. Under the FLSA, employers must track the hours of all non-exempt employees to determine eligibility for overtime. Since the Affordable Care Act (ACA) requires employers with 50 or more full-time equivalent employees to offer affordable health insurance coverage to employees working at least 30 hours per week (or 130 hours per month) to avoid paying penalties, the ACA requires employers to track the hours of employees to ensure that those working at least 30 hours per week (or 130 hours per month) are timely offered health insurance coverage. Employers must also track hours of part-time employees under Employee Retirement Income Security Act (“ERISA”) to determine whether they become eligible to participate in a qualified retirement plan.
The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments. All employees of certain enterprises (as defined in the FLSA) which have workers engaging in interstate commerce, producing goods for interstate commerce, or handling, selling, or otherwise working on goods or materials that have been moved in or produced for such commerce by any person, are covered by the FLSA.
If the FLSA applies, covered non-exempt workers are entitled to a minimum wage of not less than $7.25 per hour (federal minimum wage as of June 2021) for all hours worked up to 40 in a workweek and overtime pay at a rate not less than one and one-half times the regular rate of pay for hours worked over 40 hours in that workweek.
States and localities may have additional wage and hour laws. Employers must comply with both federal and state/local wage and hour laws. If these laws conflict, employers must apply the law that provides the greatest benefits and protections to employees. For example, if an applicable state law mandates a higher minimum wage than the federal minimum wage ($7.25/hour as of June 2021), then the employer must comply with the higher state minimum wage.
Exempt employees must be paid certain minimum weekly salaries or fees in accordance with the FLSA (federal law). Under the FLSA, the minimum weekly salary to qualify as an exempt employee is $684 per week which equates to $35,568 annually (current minimum salary for exempt employee as of June 2021). The minimum weekly salary to qualify as an exempt employee may be higher under state law.
The terms of a collective bargaining agreement may also apply. Employers may also have certain requirements regarding payroll withholdings that cannot be avoided. It is illegal under federal law to discriminate against employees in any protected classes in terms of pay and benefits.
- Income Tax Withholding
- Employers are required to withhold, deposit, and report federal income tax for most employees.
- Other Deductions and Withholdings
- Employers may be required by state law to make contributions for unemployment benefits, state disability insurance, or paid family leave.
There are no federal statutory provisions regarding holidays and rest periods; however, such terms may be negotiated in an individual employment agreement or a collective bargaining agreement with a union. Additionally, some state laws required meal and rest breaks be provided at prescribed intervals. Moreover, short breaks (lasting about 5 to 20 minutes) may be considered compensable time under federal law and included in the calculation of overtime. Bona fide meal periods (typically lasting 30 or more minutes of uninterrupted time) are not considered work time and are not compensable time under federal law. The terms of a collective bargaining agreement and applicable state law may apply.
The FLSA governs when an employer may or may not employ a child, which for purposes of the FLSA is any individual under the age of 18. Under the FLSA, minor employees (under 18 years of age) cannot hold certain jobs, are limited in the total hours per week that they can work, cannot be employed during certain hours, and/or cannot perform certain types of work. State laws relating to employment of minor employees may provide additional restrictions and limitations. Federal law does not proscribe a maximum age for employment. Employment decisions based on an employee’s or applicant’s age (over age 40) may violate federal law.
Employers with 15 or more employees are subject to the Americans with Disabilities Act, as amended by the ADA Amendments Act of 2008, which became effective on January 1, 2009 (“ADA”). The ADA prohibits discrimination against an individual with a disability in almost every aspect of the employment process, including job applications, hiring, compensation and benefits, and other terms and conditions of employment. An individual with a disability has a physical or mental impairment that substantially limits one or more major life activities. Employers who become aware of a disability must engage in an interactive discussion with the employee to determine if it can provide a reasonable accommodation to the employee to allow the employee to perform the essential functions of his or her job.
The Family and Medical Leave Act (“FMLA”), entitles an “eligible employee” of a “covered employer” to take unpaid, job-protected time off for specified family and medical reasons, including (1) the birth of a child or placement of a child with the employee for adoption or foster care, (2) for an employee’s own serious health condition, (3) to care for a spouse, son, daughter, or parent who has a serious health condition, or(4) for any qualifying exigency arising out of the fact that a spouse, child, or parent is a military member on covered active duty or call to covered active duty status. The FMLA is discussed in more detail in Part 3(i).
Location Of Work/Mobility
There is no federal statutory provision requiring an employee to remain in a particular work location or that precludes an employer from seeking to relocate an employee. Applicable state law and the terms of a collective bargaining agreement may provide other requirements.
Certain employees are entitled to a pension, such as certain public employees, and private employers may establish pensions through contracts or collective bargaining (but such pensions are not otherwise required). Employee pension benefit plans are typically governed by the ERISA, and the regulations related to the statutes.
Parental Rights (Pregnancy/ Maternity/ Paternity/ Adoption)
The Pregnancy Discrimination Act of 1978 (PDA), prohibits discrimination on the basis of pregnancy, childbirth, or related medical conditions as well as discrimination against employees with caregiving responsibilities, which includes child care. State laws may provide additional protection for pregnant employees.
Federal law requires employers to provide reasonably accommodations, including breaks, to employees who need to express breast milk at work for up to one year after the child’s birth. If an employer has fewer than 50 employees, these federal requirements do not apply if the requirements impose and undue burden on the employer. The employer must provide a place, other than a bathroom, that is shielded from view and free from intrusion from coworkers and the public, which may be used by the employee to express breast milk.
The FMLA entitles an “eligible employee” of a “covered employer” to take unpaid, job-protected time off for specified family and medical reasons, including (1) the birth of a child or placement of a son or daughter with the employee for adoption or foster care, (2) for an employee’s own serious health condition, (3) to care for a spouse, son, daughter, or parent who has a serious health condition, or (4) for any qualifying exigency arising out of the fact that a spouse, son, daughter, or parent is a military member on covered active duty or call to covered active duty status. The FMLA is discussed in more detail in Part 3(i).
There are no required terms that must be included in an employment agreement.
The employer and employee may agree to any terms, provided that the terms do not abrogate statutory rights or otherwise conflict with a statute.
Types Of Agreement
Employers and employees may enter into a variety of agreements related to the employment relationship, including individual employment agreements (regarding hours of work, location of work, compensation, benefits, etc.), confidentiality and non-disclosure agreements, non-competition agreements, non-solicitation agreements, offer-letters (may be construed as a contract), executive compensation agreements, collective bargaining agreements (between union and employer), fixed duration/term agreements, retention agreements, part-time employment agreements, arbitration agreements etc. Generally, common law and state statutes (not federal law except as it relates to collective bargaining agreements and arbitration agreements) will determine the enforceability of such agreements.
Employers may use confidentiality or non-disclosure agreements or include confidentiality or non-disclosure obligations in an individual employment agreement. The U.S. Economic Espionage Act of 1996, makes theft/misappropriation of trade secrets a federal crime. The Federal Computer Fraud and Abuse Act, generally prohibits intentionally accessing a computer without authorization or in excess of authorization and prohibits the theft of trade secrets from computer based programs or their destruction.
There are also specific statutes particular to certain industries or professions that may require or limit contractual or secrecy obligations. The Uniform Trade Secrets Act (“USTA”) which defines trade secrets and describes claims related to trade secrets, has been passed in many states, although not always in a uniform state. State law and common law apply with respect to trade secrets.
Ownership of Inventions/Other Intellectual Property (IP) Rights
Federal laws govern the ownership of certain intellectual property (“IP”) rights. In the absence of a written agreement between the parties, the employer typically owns the IP rights. Ownership may not be exclusive, depending on the type of IP. Individual employment agreements can include terms that properly assign IP (assignment of inventions agreement), protect works made for hire, and prevent improper use of IP developed for the employer. State laws may provide greater restrictions with regard to an employer’s right to claim ownership of IP created by an employee.
Federal law does not prohibit employers from conducting pre-employment drug testing, so long as the testing is non-discriminatory and in compliance with any applicable collective bargaining agreement. For example, the ADA makes it unlawful for employers to discriminate against recovering alcoholics and drug users who have already sought treatment for their addiction. As such, under the ADA, employers cannot refuse to hire someone simply because they have a history of substance abuse and employers cannot refuse to hire someone merely because they are enrolled in a drug or alcohol rehabilitation program. Under the NLRA, any drug testing program affecting unionized workers must be negotiated and agreed on with the union. Federal contractors and employers in certain industries may require, or be required to conduct, drug tests for employees in safety or security sensitive positions. Many states and localities have enacted prohibitions and/or limitations on such testing.
The Fair Credit Reporting Act (“FCRA”), governs the use of consumer reports, including credit checks and criminal background checks, for employment purposes. Prior to requesting a consumer report for an applicant or employee, the employer must disclose to the applicant or employee, in a clear and conspicuous written document consisting solely of the disclosure, that the employer intends to obtain such consumer report to make employment decisions. The applicant or employee must authorize the procurement of the report in writing. Employers must follow the specific requirements under the FCRA if it considers taking adverse action based on a consumer report against an employee.
Other than the FCRA, federal law does not prohibit employers from making pre-employment inquiries about arrest and conviction records, although the Equal Employment Opportunity Commission cautions against disqualifying applicants based on the results of criminal background checks, as doing so may have a disparate impact on certain racial and ethnic groups. Many states or localities enacted laws, often called “Ban the Box laws,” prohibiting pre-employment inquiries or criminal background checks or limiting the timing or scope of permissible inquiries and criminal background checks, such as after a conditional offer of employment has been made to the applicant.
Federal anti-discrimination laws prohibit employers from discriminating against individuals based on their national origin and citizenship. Employers cannot, however, hire individuals not authorized to work in the United States. Employers should confirm the potential employee’s status through a Form I-9 for U.S. nationals or by verifying the employment-based visa status of foreign nationals. Applicants must establish that they are admissible to the United States under provisions of the Immigration Admissibility Act.
Hiring Specified Categories Of Individuals
Under a variety of federal employment laws, employers are prohibited from discriminating and retaliating against employees who fall into various protected classes, including, by way of example, race/color, age, gender/sex (including gender identity, sexual orientation, and pregnancy status), national origin, religion, and disability.
Title VII prohibits discrimination, harassment, and retaliation by employers with 15 or more employees based on a person’s race, color, national origin, sex (including sexual orientation, gender identity, and pregnancy, childbirth or related conditions), and national origin in almost every aspect of the employment process, including job applications, hiring, compensation, and other terms and conditions of employment.
The ADA prohibits discrimination by employers with 15 or more employees against an individual with a disability in almost every aspect of the employment process, including job applications, hiring, compensation and benefits, and other terms and conditions of employment. Refer to Part 2(a)(ix) for additional information on the ADA.
The Age Discrimination in Employment Act (“ADEA”) prohibits employers with 20 or more employees from making employment decisions on the basis of an employee’s age (40 or older), including hiring, termination, discipline, advancement, demotion, or other terms and conditions of employment.
Applicable state and local laws may provide additional protections for applicants and employees in protected classes.
Outsourcing And/Or Sub-Contracting/Temporary Agency Work
There are no federal laws regarding outsourcing and/or subcontracting (although employers that contract or subcontract with the federal government must abide by additional requirements). The terms of a collective bargaining agreement and the statutes governing or relating to unions may restrict or limit outsourcing/subcontracting.
Further, when employers subcontract or outsource work or use a temporary agency to hire temporary workers, they may remain liable as an employer or joint employer of the workers performing the outsourced or subcontracted or temporary work if not done properly.
If an employer properly outsources or sub-contracts or uses temporary workers, those workers should not be considered an employee. Most federal employment laws do not apply to an outsourced or sub-contracted party that is properly classified as an independent contractor. If an individual is misclassified as an independent contractor, that individual will be considered an employee with the benefit of applicable federal employment laws. On a federal level, the U.S. Department of Labor generally enforces the classification of a worker as an employee or independent contractor.