Labor laws and compliance in the United States

This guide has important information for businesses looking to hire employees or contractors in the US. The United States is the third largest country by area as well as population. It’s also the world’s biggest economy. Hiring good talent in the US is not easy. The unemployment rate is at an all-time low. US is the biggest outsourcer for business processes, data entry, digital marketing and other services.

United States Labor Law Compliance Guide

Minimum Wage

$7.25 (federal)

Overtime Wage

$1.5x Regular Wages

Meal Breaks

No federal mandate

Rest Breaks

No federal mandate

Working hours

8 hours/day, 40 hours/week

Salary Payment Cycle


Payroll Taxes

Social Security, Medicare

Paid Vacation

No federal mandate

Overtime Hours

Beyond 40 hours in a week

Night Shift Pay

110% of regular pay
Between 6PM and 6AM


No federal mandate
Most businesses give 10 days/year

No Work Days

Saturday, Sunday

Hiring in The US

A business needs a local entity, usually a subsidiary, in the US to hire locally.
It can take several weeks and a considerable amount of money to set up a subsidiary in the US. You’ll need to register your business name and incorporate your preferred type of entity with a US state. You will need to apply for a Federal Tax ID Number or Employer Identification Number (EIN).

It’s a nine-digit number the Internal Revenue Service (IRS) uses to keep track of your organization’s tax obligations. In some ways, it’s similar to a Social Security number for individuals. You need to file Form SS-4, Application for Employer Identification Number (EIN) to the IRS to get your EIN.
You will also need to get a sales tax permit in states where you will do business in the US.
Opening a company bank account in the US can be quite challenging. Most banks require a resident American to be the signing authority for opening a bank account.
Hiring and paying employees or contractors in the US is a complex process. You need to comply with social security, Medicare and other employer obligations. United States has one of the strongest enforcement systems for corporate governance. You will need a good lawyer and CPA to help you with compliance.
There are legal differences between employees and contractors in the US. Incorrect classification of a contractor as an employee or vice versa can land you into legal troubles.

Minimum Wage in US

The national minimum wage in the US is $7.25 per hour. Each state has its own minimum wage law that can be higher than the national minimum wage.

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You must pay the higher of the two rates to your employees. California has the highest minimum wage, at $15 per hour.
While minimum wage law sets the floor, in most cases, you will be paying a much higher salary to your employees. Due to the low unemployment rate and too many opportunities, actual wages top $20 per hour in most while collar jobs. In the technology industry, a competitive salary is in the range of $50 per hour in most cities.

Working Hours in US

Standard working hours in the US are 8 hours per day or 40 hours per week. The standard workweek is Monday through Friday but can be changed depending on business need.

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The Fair Labor Standards Act (FLSA) defines which roles are eligible for overtime pay in the US. In general, most managerial and executive roles are exempt from overtime payment. Most creative and professional positions are also exempt.

Overtime pay for non-exempt roles is 150% of the base hourly pay. All contractors or part-time employees are generally entitled to overtime pay.

Payroll and Taxes in the US

Employers typically follow a bi-monthly payment schedule, with salaries paid every two weeks.

Salary must be paid in cash, by check, or by direct deposit to the employee’s account at a bank or other financial institution.

Some aspects of payroll processing are regulated by the Internal Revenue Service (IRS) and the Department of Labor (DOL). You must comply with these laws:

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  • Fair Labor Standards Act (FLSA)
  • Federal Insurance Contributions Act (FICA)
  • Federal Unemployment Tax Act (FUTA)

In addition, you also have to abide by state payroll processing laws. Each state has its own rules governing minimum wage, payday schedules and record keeping. Payroll compliance in the US can become cumbersome if you have employees in more than one state.

If you have 1-2 employees in one state, you can process payroll manually. You will still need to keep records of things like hours worked, wages paid and worker classifications. But as you add more employees and contractors, you’ll need to use an automated solution for payroll processing.

Before you start processing your payroll, you will need the following documents from your employees:

  • W-4 Employee’s Withholding Certificate
  • W-9 Employee’s Withholding Certificate – used for contractors or freelancers. You will need this to file 1099-NEC at the end of the year
  • I-9 Employment Eligibility Verification
  • Medical insurance and retirement plan forms

Classifying employees correctly as employee or contractor is a major issue with US payroll processing. An error can lead to fines from the IRS. If you control only the output or result, then the worker is likely a contractor. If you also control how the work is to be done, then the worker must be classified as an employee.

You can withhold income tax, Social Security tax and Medicare tax only for employees, not independent contractors or freelancers. For employees, you will need to file form W-2.

Employers are responsible for calculating and withholding money for federal, state and local taxes from every workers’ paychecks. It’s determined by the Forms W-4 submitted by your workers and tax rates. In addition, you need to pay federal unemployment tax (FUTA). You will also match your employees’ contribution towards the Social Security and Medicare taxes.

If your employees opt to contribute towards 401K or other retirement plans, you will need to withhold their contribution and deposit in their retirement accounts. If you offer health and other insurance, you will have to deduct employee contribution towards those plans and pay to the insurance provider.

Sometimes, you may have to deduct towards court ordered deductions such as such as child support and alimony.

As you can see, setting up an entity, hiring employees and managing payroll in the US is a complex and costly affair. You’re better off going with an Employer of Record service provider unless you plan to hire a large number of employees.

Individual Income Tax

In the US, domestic income is subject to income tax for both citizens and foreigners. Any foreign income of a resident is also taxed in the US. In addition to the federal income tax, most states and cities also levy income tax on their residents.
The US income tax system follows the progressive structure, meaning people who earn more also pay higher taxes. United States offers married couples the option of filing their tax return jointly.

Statutory Leave Policies in the US

The federal Family and Medical Leave Act (FMLA) mandates up to 12 weeks of unpaid leave. The FMLA provides up to 12 weeks of unpaid sick, parental and maternity leave for an employee

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Employees must have worked for at least one year at the same employer to get this benefit.

There is no national standard for paid or sick leave in the United States.

Nine states and Washington, DC have laws requiring paid family and sick leave.
However, most employers in the services sector offer 2-3 weeks of paid leave. Most employers also offer disability insurance that pays workers during maternity or illness. It’s usually a contributory benefit where both the employer and the employee pay towards the premium.

Employee Benefits

The United States has a comprehensive social security system that offers retirement, disability and medical benefits. Employees are also eligible for unemployment benefits for a limited amount of time of time.

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Most employers also provide paid leave, health, dental and vision insurance to their employees. Some also offer group life and disability insurance to their employees. Even though the US has a social security system, most people also contribute towards other retirement plans like 401K and IRA. Contributions to these plans are exempt up to an annual limit. Roth IRA is another retirement plan where contributions are not tax exempt, but future earnings and withdrawals are tax exempt.
Employee Termination

Most employment agreements in the US are “at will” meaning employment can be terminated without any reason by both the employee and the employer. But the standard practice is to give 2 week’s notice or pay to the employee.

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But employers cannot terminate an employee based on his or her race, gender, national origin, disability, religion, or age. Employers also have to follow local city, state and federal laws while dismissing an employee. The employer may have to allow the employee to continue with health insurance while unemployed under the COBRA law.

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