Launching in the US: Hiring (Part 1) – Key Concepts
Whilst making the first recruits in a new market will inevitably be daunting, there are some practices, processes and legal terms that are unique to the US and worth understanding.
What are the main differences compared to the UK?
• Documents. In the US it is common for all the key terms to be contained in an offer letter rather than a standalone employment contract. In lieu of an offer letter, key members of senior management may receive an employment agreement. In addition to an offer letter, an intellectual property agreement is always recommended and in some States a non-compete/non-solicit agreement may be advisable;
• State variances. US employment laws operate at both the Federal and State levels. This can pose compliance challenges. For example, in California non-competes are not enforceable, in Massachusetts an interviewer cannot ask a candidate for their previous salary, and in New York you may not take into account a candidate’s period of unemployment when considering them for a position. Be sure you understand rules unique to each State in which you operate before bringing on employees;
• Specific terms. Whilst a notice period is a standard term in a UK full-time contract, the majority of US employees are employed “at will” which means that an employer can terminate an employee with immediate effect, often without cause, and an employee may resign without prior notice. This is just one example of many US specific terms; and
• Administration. In order to follow official process an employer is required to make specific filings to State, Federal and municipal authorities. In addition, specific notices must be made available onsite and ongoing reporting must be completed.
There are a number of laws that will apply to your business and will have an impact on budgeting, compliance and how you manage your teams. In addition, certain States, such as California Massachusetts, New York and Washington State, have legislation that operates alongside Federal employment rules. These laws are typically more restrictive than the Federal standards. Examples of key Federal laws include:
• Fair Labour Standards Act (FLSA). This covers minimum wage and overtime provision;
• Family and Medical Leave Act (FMLA). This entitles employees in companies with over 50 staff to take unpaid job-protected leave for up to 12 weeks under specific circumstances such as parental leave, caring for a spouse in sickness or personal health reasons;
• Occupational Safety and Health Act (OSHA). This stipulates the minimum working conditions required;
• American Disability Act (ADA). This prohibits discrimination against disabled employees and guarantees equal rights and accommodation rights in the work place; and
• The Civil Rights Act of 1964. This prohibits discrimination and harassment in the workplace.
US employment concepts
The main US-specific employment concepts deriving from this legislation and others are overtime pay, medical leave, employee classification, non-compete agreements and “at will” employment:
1. Overtime pay
Compared to UK law, US employment law is structured more closely around hourly wages and hourly minimums. Exempt employees must be paid a certain base salary and must perform certain tasks; they are then exempt from overtime requirements. While the Obama administration promulgated changes to who constitutes an exempt employee, those changes are on hold pending court action and the advent of the new Trump administration. In addition, States such as California have slightly different – and more stringent – rules regarding who classifies as an exempt employee.
The minimum wage varies greatly by State, from $5.15 per hour in Georgia to $11.50 per hour in the District of Columbia. Fourteen States have matched the Federal minimum rate of $7.25 per hour and 29 States have set a rate higher than this. In addition, some cities, including San Francisco, Seattle, New York City and many others, have established their own minimum wage.
2. Medical leave
Employers must provide 12 weeks unpaid leave and hold the role open for an employee for the following situations:
• The birth of a child and to care for the new-born child within one year of birth;
• The placement with the employee of a child for adoption or foster care and to care for the newly placed child within one year of placement;
• To care for the employee’s spouse, child, or parent who has a serious health condition; and
• A serious health condition that makes the employee unable to perform the essential functions of his or her job.
This level of support applies to employees that have worked for a “covered” employer for at least 12 months. The main test for determining a covered employer is one with over 50 employees in the private sector but this test can depend on other local and technical criteria. Some States expand these medical leave rights, and the ADA also may mandate medical leaves of absence in certain situations.
3. Employee classification
Workers should be correctly classified as employees or contractors. Employees are generally classified as full-time or part-time. While contract workers are not generally eligible for any employer benefits, an employee’s status as full-time or part-time will impact benefits and protections to which they may be entitled.
Historically, many employers have misclassified employees as independent contractors to save costs; this is an arena that poses significant legal risk at the State and Federal level if undertaken incorrectly.
The JustWorks white paper in the Dropbox has a good summary of the key differences between these categories and the main considerations when classifying employees.
4. Non-competes and non-solicitation clauses
A non-compete clause prevents an employee from competing with a previous employer within specific parameters. A non-solicitation clause prevents an ex-employee approaching customers of the previous employer with the intention of selling them an alternate product, and may prohibit employees from encouraging their co-workers to join them at a new job.
A non-compete or non-solicitation clause will typically be included in the offer letter or in a separate agreement which employees will be required to subscribe to at the point of joining a company. Many companies have had mixed experiences in terms of whether a non-compete agreement has been enforceable. Clearly it is in the interest of the employer but the courts are sensitive to what is deemed as industrial “protectionism” and in many instances have favoured a more competitive job market and less restricted workforce. Some States, such as California, prohibit non-compete agreements, and others, such as Massachusetts, pose limitations on their geographic and temporal scope before deeming them enforceable.
This map shows what is acceptable in each State for non-compete agreements..
A non-solicitation agreement normally prevents an ex-employee from soliciting clients or customers after leaving a company. These agreements can also cover ex-employees looking to recruit additional employees from a previous employer. These agreements are subject to the same State-by-State analysis as non-competes.
5. At will employment
If you are employed “at will” an employer can terminate employment for any reason provided it is not unlawful, and an employee may leave their job at any time. It is normally assumed that an employee is “at will” unless it is specified otherwise. Be careful of creating a “presumption” that an employee is not at will with references to “for cause” termination in a handbook or other paperwork.
Where to go next
• Check out our Dropbox for a range of additional resources;
• Legal requirements;
o A listing of Labor offices for each State;
o More info on the Fair Labor Standards Act (FLSA);
o Minimum wage explanation;
o More info on Family and Medical Leave Act (FMLA);
o Summary of the Occupational Safety and Health code;
o Guide to FMLA and a 1 page summary;
o At will employment exceptions;
• Employee classification;
o Risks of employee misclassification blog;
o IRS guidance on “employee” vs. “contractor” (page 7-10);
o Good video from Justworks on the simple difference between contractors and employees;
• Given the specialization and technical nature of these topics, speaking to accountants and advisors such as those below is strongly suggested:
o Melissa Clarke (Payne & Fears);
o Kristin Pedersen (Daijogo & Pedersen); and
o Dan Glazer (Wilson, Sonsini, Goodrich & Rosatti).
Thanks in particular to Melissa at Payne & Fears for her help in presenting this topic.
This blog and those in this series are aimed at helping entrepreneurs learn about the US market, what it takes to start here, and ultimately what it takes to succeed here. Many of the topics (if not all) are complex and it is best to view these blogs as a basic introduction from which you the entrepreneur must triangulate to your own specific set of circumstances – and invariably it will be sensible and appropriate to seek third party professional advice.