Scaling up necessarily requires help, but hiring can be risky. Companies have two choices when hiring a new worker: 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 their work hours, and require them to work only for you.
But having 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 various legal protections under state and federal employment laws. Suppose an employer does not follow these laws. In that case, 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.
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.[1] By 2030, contractors and freelancers will comprise an estimated one-half of the country’s workforce.[2]
Hiring an employee can be risky. Contractors minimize that risk and 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 precious during economic uncertainty (e.g., the pandemic). As businesses adapt to labor shortages, supply chain issues, inflation, and a slowing economy, contractors’ agility will likely 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 concentrate on fields requiring specialized skills.
The latest jobs report shows that businesses are still hiring plenty of employees. In June 2022, nonfarm payroll employment rose by 372,000. The Bureau of Labor Statistics reports notable job gains in professional and business services, leisure and hospitality, and health care.[3]
Many companies today hire both contract workers and employees. While companies must avoid misclassifying employees as independent contractors,[4] it is equally important to understand the laws that provide employee protection. Worker protection laws generally can be grouped into a few major legal areas.
Equal Opportunity Employment (EEO) laws prohibit employers from discriminating against their employees—and job applicants—based on age, disability, ethnicity or national origin, genetic information, pregnancy, race or color, religion, and sex.
Federal EEO laws include:[5]
US Equal Employment Opportunity Commission (EEOC) enforces these laws and has the authority to investigate employment discrimination claims and pursue legal action against employers. Remedies may include compensatory and punitive damages and the employer’s requirement to stop discriminatory practices. Victims of alleged discrimination may also bring private lawsuits under federal EEOC laws.
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:
The US Department of Labor (DOL) enforces the FLSA. Violations may result in a prosecution that leads to recovery of back wages, fines, and even criminal prosecution.[6]
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 severe health condition. During the twelve weeks, a covered employee is entitled to continue health insurance coverage and job protection.
Suppose an employer denies a legitimate FMLA leave request, refuses to reinstate an employee after they leave, retaliates against an employee for requesting leave, or does not comply with the FMLA. The DOL may bring legal action to compel FMLA compliance in that case. Hiring can be risky if you are not aware of your wage and hour obligations as an employer. Wage and hour laws violations mean that 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 employer’s discretion—and some are not. Certain benefits are legally required, including the following:
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.[7]
Suppose you provide health coverage to eligible employees. In that case, they must have continued access to their health plan for some time after leaving the job, as required by Consolidated Omnibus Budget Reconciliation Act (COBRA). Information obtained through an employer-sponsored group health plan is subject to confidentiality provisions 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).
Hiring can be risky because the employer is responsible for maintaining worker safety. Workplace safety laws are often associated with dangerous professions such as construction and trade work. However, the Occupational Safety and Health Act sets the general standard for safe working conditions, 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, leading 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.
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,
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. Still, 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 more robust 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 a lawsuit and administrative claims. Smaller companies may lack a formal human resources department and rely on management to establish and enforce legal policies.
Hiring can be risky. The delicate nature of employment matters, combined with ever-changing laws, can create situations that demand the assistance of a lawyer. Contact us to discuss your situation and learn how we can help. If you think you are in over your head on a particular policy or issue, our legal team is here for you.
[1] 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.
[2] 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.
[3] The Employment Situation—August 2022, Bureau of Labor Statistics, U.S. Dep’t of Labor, https://www.bls.gov/news.release/pdf/empsit.pdf.
[4] Wage and Hour Division, Misclassification of Employees as Independent Contractors, U.S. Dep’t of Labor, https://www.dol.gov/agencies/whd/flsa/misclassification.
[5] Laws Enforced by EEOC, U.S. Equal Emp. Opportunity Comm’n, https://www.eeoc.gov/statutes/laws-enforced-eeoc.
[6] Fair Labor Standards Act Advisor, U.S. Dep’t of Labor, https://webapps.dol.gov/elaws/whd/flsa/screen74.asp.
[7] 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.
(By Appointment Only)
14425 Falcon Head Blvd
Bldg E-100
Austin, TX 78738
