Wage and Hour Q&A for Employers

What is the Fair Labor Standards Act (FLSA)?
The FLSA establishes minimum wage, overtime, recordkeeping and youth employment standards for full and part-time workers in the U.S.  Here is a handy reference guide to understanding the FLSA.

What is the minimum wage and am I required to pay it?

As of 2011, the FLSA requires the following:
$7.25 per hour for non-exempt employees (see below for state requirements)

For youth under 20 years old,
$4.25 per hour for the first 90 calendar days of employment.  Note that this is 90 calendar days starting from the first day of work, not 90 work days that the youth has worked.  Also, it is illegal to fire an employee for the purpose of hiring a youth to replace them.  For more information on youth employment, click here.

For tipped employees,
employers may consider tips as part of their wages, but employers must pay a cash wage minimum of $2.13 per hour.  Also, the employee must make the minimum wage, with a combination of the cash wage minimum and tips.  Otherwise, the employer must make up the difference.  For more information on pay for tipped employees, click here.

Employers are allowed to pay certain employees less than the minimum wage.  Those employees are:
1. students (such as interns)
2. full time students who work in retail, service, or colleges (such as under work-study programs)
3. individuals with physical or mental disabilities where the disability impairs their ability to work productively

Are there different state requirements for wage pay?
Yes.  Certain states have set a higher minimum wage standard than the federal standard.  Check out this comprehensive chart to find out your state’s minimum wage.  Some of the highest are:
Washington $8.67
Oregon $8.50
Connecticut, District of Columbia, Illinois, Nevada $8.25
Vermont $8.15
California, Massachusetts $8.00

What is the difference between an exempt and non-exempt employee?
Non-exempt employees are employees covered under the FLSA who are required to be paid the minimum wage for all hours worked and overtime pay.  Many workers who are paid hourly fall under this category.

Exempt employees are not required to be paid overtime.  The category of exempt employees includes executive, administrative, professional and sales employees.  To qualify for exemption, employees must 1) be paid more than $455 per week, and 2) meet certain job description requirements.  This group of employees is often called “white collar” employees.

Is there a limit on the number of hours I can ask my employees to work?
For adults age 16 and over, there is no limit on the number of hours or number of days the employer can require the employee to work.  However, overtime is required if employees work in excess of 40 hours in a week.

Do I have to pay my employees overtime?
Employees covered by the FLSA must be paid a minimum of 1.5 times their base pay for work over 40 hours per week. 

If my employee works nights and weekends only, but under 40 hours, must they be paid overtime?
No.  Under the FLSA, extra pay for working non-traditional hours is up to the employer and employee to work out; there is no requirement that overtime be paid for evening or weekend work if the employee works under 40 hours.

Image by Flickr user GirlReporter (Creative Commons)


Small Business Defined

In an earlier post, we discussed the definition of a small business, as issued by The U.S. Small Business Administration.  We wanted to revise and clarify the posting on what is defined as a small business.  The Federal Register provides a comprehensive listing of size standards, which apply to all SBA programs.

Businesses are categorized by:

  • the size of the business in terms of annual receipts, or
  • the number of employees.

When calculating the number of employees, include all full-time, part-time and temporary employees.  “Volunteer” workers such as interns who are not paid, would not be counted.

While many businesses are counted as “small” if they have under 500 employees, others have a lower or higher threshold for statutory purposes, and still others are counted by dollar amounts.  Check out your business type here!


Securing a Domain Name Before you Apply for a Trademark

Domain Names

We’ve already discussed the importance of seeking Federal trademark registration for your business name. Once you’ve come up with a great name for your new business, you must perform a thorough search to ensure you can use and protect that name before applying for a trademark. There is however, one very important step you should take before formally applying for a trademark – registering the corresponding domain name.

You’ve no doubt heard of cybersquatters. Cybersquatters register domain names in bad faith with the sole intent of exploiting money from the rightful owner of the trademark associated with that domain name. While there are legal causes of action against cybersquatters, these procedures are often complicated and typically expensive. Many cybersquatters are not located in the US and countries vary in their legal stance on cybersquatting.

Cybersquatters often monitor the Federal trademark register, watching for newly granted trademarks and immediately registering domain names containing these trademarks. It’s therefore not enough to simply check the availability of a domain name before you apply for a trademark. Because domain names are typically granted on a first come, first served basis, it’s imperative you register the name and any variants of it that you may want to control before you apply for your trademark. While this may seem like a premature expenditure considering your trademark application may not be successful, domain name registration is relatively inexpensive and the potential consequences of failing to register far outweigh this preventative cost.

Image by Flickr user ivanwp (Creative Commons)



It’s National Small Business Week!

National Small Business Week 2010

This week the U.S. Small Business Administration recognizes the approx. 27.2 million small businesses in the United States for contributing to the strength of the U.S.  economy in creating jobs and driving innovation.  nationalsmallbusinessweek.com

To all of our loyal readers – keep up the good work!

Also, if you happen to be in the Washington DC area, there are a number of great events and speakers scheduled May 18th-20th.  Online registration is closed but the Small Business Administration is holding on-site registration on May 18th.

Image by Flickr user ShashiBellamkonda (Creative Commons)


Employee Benefits – What is Required?

Senate Passes Insurance Industry Aid Bill

This article discusses employee benefits for private employers, meaning companies that operate separately from the government, including privately owned and publicly traded companies.  Employees who work for  federal, state and local government are governed by a separate and sometimes differing set of workplace rules.

Are employers required to provide vacation days or paid time off?

Generally, no.  When employers provide vacation days or paid time off to employees, it is done by choice, to remain competitive, and because it is the custom to do so.  It doesn’t matter if you are a full time or part time employee, there is generally no law that requires it.  However, different rules apply for federal, state and local government employees who may be entitled to certain days off.  But for private employers, if the employer chooses to provide paid time off to some employees, it must provide the same benefit to all of the members of that group.  For example, if a private employer provides paid time off to one of its full time employees, it may not discriminate or selectively provide those benefits to only certain members of that group.

Are employers required to provide health benefits?

As of now, the only state that requires health benefits is the state of Hawaii.  Employees who work more than 20 hours in Hawaii are required to be offered health benefits.  Many employers choose to offer health benefits, however to attract and retain employees.

If health benefits are offered to employees, any employer with 20 or more employees is required to provide COBRA (Consolidated Omnibus Reconciliation Act) benefits to departing employees, so long as the departure was not due to gross misconduct.  COBRA benefits are required for up to 18 months after employee departure.  However, the cost of these benefits are usually passed on to the former employee.

Are employers required to withhold taxes?

Usually yes but it depends.  Federal income tax is due from everyone who earns over a certain threshold amount (the amount varies depending on filing status).  The threshold amount is very low and most people probably will not qualify for this.  For example in 2010, the threshold amount for a single taxpayer with no children was $9,350. Note that the amount changes every year, since the IRS raises the amount every year.

Payroll taxes are a “pay-as-you-go” tax, requiring employers to withhold certain taxes from the employee’s paycheck, including income tax, social security tax, and medicare tax.  The amount of taxes employees pay depends on the employee’s income level and the information provided on the employee’s W-4 (e.g., marital status, exemptions).   Being a student does not automatically exempt an employee from payroll taxes.  Also, the employee’s status as full-time or part-time does not matter.  If the employee is not an employee but in fact an independent contractor, different rules apply, since the employer will not withhold taxes for the employee but rather the employee must pay on their own.

Remember, employees will have the MOST money withheld from your paycheck if “0” allowances are claimed on the W-4.  The higher the number of exemptions claimed, the LESS the amount taken out for taxes now.  For specific guidance on your individual tax situation, please refer to a tax professional or attorney.

Image by Flickr User Mike Licht (Creative Commons)


Creating a Corporate Purchasing Policy for Your Small Business

office max — nov 3

As your small business grows, more and more tasks will need to be delegated to employees.  This includes the ability for employees to make external financial and contractual commitments to purchase supplies, materials, and services for the company.  It is important for every company to have a clear internal Corporate Purchasing Policy that outlines the rules of company credit card use and authorizations necessary for various levels of spend.

A good Corporate Purchasing Policy has the following elements:

  1. Authorization Levels:  Which employees have the authority to approve purchases?  For example, a policy could state that all employees have authority to approve purchases up to $100, Managers have authority to approve purchases of $1,000 or less, and only the company President has authority to approve purchases over $1,000
  2. Purchasing Process:  The process that an employee must follow to make corporate purchases should be detailed.  For example, inputting the spend amount into an appropriate accounting system, which company credit card or account to use for the corporate purchase, and what employees should do with receipts.
  3. Enforcement:  Every Corporate Purchasing Policy should be strictly enforced to ingrain accountability in a business.  Employees discovered to be violating the Corporate Purchasing Policy should be subject to disciplinary action, up to and including, termination of employment.
  4. Policy Exceptions:  Any exceptions to the policy should be identified.   For example, can Managers authorize large purchases in emergency situations?

Image by Flickr user theogeo (Creative Commons)


Who Owns Intellectual Property – Employee or Employer?

When an employee leaves your company, it’s important to know who is the owner of any intellectual property that employee created while working for you. The general rule is that an individual owns the rights to anything they have created, regardless of whether they were employed by someone else at the time. There are however, two very important exceptions to this rule. The first is the “work for hire” doctrine which arises where an employee is hired to invent something. Under this doctrine, where the employee invents or creates something that is within the scope of their employment (i.e. what they were hired to do), the employer will in fact own the rights to this work.

What about an invention by an employee who was not specifically hired to invent? In this scenario, because it is not a “work for hire”, the employee (and not the employer) retains the rights to the invention. The employer may however have a right to use the employee’s invention, even if the invention is patented and even after that employee leaves the company. This right is called a “shop-right” and is a royalty-free, irrevocable and non-transferable right to use the invention. Factors considered when determining whether an employer has a “shop-right” include whether the employee allowed the employer to use the invention, whether company time, materials or equipment were used in the development etc.

The second exception to the general rule is where the employee has entered into a written contract assigning rights in anything they create, during the term of their employment, to their employer. This is obviously the safest approach for employers and it is strongly recommended you make sure that all new employees sign this kind of contract when they join your company. By having a clear assignment agreement in place, you can avoid costly disagreements over ownership that may arise when the employee leaves the company down the road.

Image by Flickr user Joebeone (Creative Commons)


Smlbizlaw Fast Facts!


According to the United States Small Business Administration (SBA), small firms employ just over 50 percent of all private sector employees and have generated 64 percent of net new jobs over the past 15 years.

And small business employ 40 percent of workers in the high tech sector (scientists, engineers, computer programmers) in the U.S.

In terms of intellectual property, small businesses produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the 1 percent most cited.

The SBA defines “small” as an employer with 500 employees or less.


Choosing Your Business Entity

Entering startup

There are 4 main types of legal entities with benefits and drawbacks to each:

1. Sole Proprietorship
2. General Partnership
3. Corporation
4. Limited Liability Company

In this post, we will briefly outline the basics and discuss considerations for each of these types below.

Sole Proprietorship

1. Basics:  You and your business are one and the same.  You alone have control over business decisions and sole decision-making authority.  This is the default type of legal entity, so if you do nothing and do not file any legal formation papers, you will be deemed to be a sole proprietor.

2. Tax:  The business is not a separate entity for tax purposes.  Income is taxed to you, the owner, in the year that the business receives the income.  It will be included on Schedule C of the owner’s tax return.

3. Liability:  This type of entity has unlimited personal liability for the owner which means that for debts, lawsuits, and any other obligation, the owner’s personal assets will be considered.  Though sometimes costly, this risk can be mitigated through insurance.

4. Other Considerations:  The sole proprietorship terminates upon the owner’s death, and there is no transfer of ownership.

General Partnership

1. Basics:  This is a separate legal entity and can be formed in one of 2 ways, by either entering into a written partnership agreement, or by establishing through the regular course of conduct that a partnership exists, through joint decision-making, joint payments, and joint operations.  Each partner shares decision-making authority and control over the business.  The actions of one partner will be binding over the other partner and the partnership as a whole.

2. Tax:  “Pass through” tax treatment to each of the partners, but ALSO requires the partnership to file a separate tax return, Schedule K-1 prepared by the partnership and acknowledged by the partners.

3. Liability:  Like a sole proprietorship, there is unlimited personal liabiltiy to each of the partners.

4. Other Considerations:  The elimination or death of a partner constitutes automatic dissolution of the partnership.


1. Basics:  Corporations are a separate legal entity formed by one or more individuals under your state law.  There are shareholders/owners, directors and officers.

2. Tax:  Corporations file a separate tax return.  There are 2 main types of corporations, both of which are taxed differently.

a) S corporations have “pass through” taxation.  The corporation itself does not pay taxes but does file an informational tax return under Schedule K-1.

b) C corporations have “double taxation” which means that the corporation pays taxes on its income, and when the profits are distributed to the shareholders/owners, they must pay taxes again on the same income.

3. Liability:  Corporations provide the protection of limited liability for shareholders/owners.

4. Other Considerations:  Ownership is readily transferable from one individual to another.  There are corporate formalities and related expenses and fees, including the written filing of the Articles of Organization and Bylaws, usually with the Secretary of State.  Each state has their own rules on filing for corporations, so look into your state’s requirements.

Limited Liability Company

1. Basics:  The LLC is a separate legal entity formed by one or more individuals under state law, and each state law varies on filing requirements for the LLC.  There is a great deal of flexibility in the rights of the owners and how the company will be controlled.

2. TaxFederal law and the IRS does not recognize the LLC as a business type for tax purposes.  LLC’s must choose either sole proprietor, partnership, or corporation for tax purposes.  For federal tax purposes, a single-member LLC will be disregarded for tax purposes, meaning it will be treated like a sole proprietorship.  State laws vary on tax treatment of LLC’s.

3. Liability:  One of the reasons for the popularity of LLC’s is that LLC’s enjoy limited liability for all members.

4. Other Considerations:  Like a corporation, ownership of an LLC is readily transferable.  There are some corporate formalities and additional expenses, such as drafting the Certificate of Formation and Operating Agreement.

Image by Flickr user dierken (Creative Commons)


Tax Indemnity Clause – Don’t get Taxed for Another Business’ Activities

Charlotte Tax Day Tea Party

Tax indemnity in a small business context means Company A compensates Company B for taxes assessed on Company B as a result of Company A’s business activities. This concept often comes into play when two parties enter into a co-marketing agreement and one party is promoting the products of another party.  Co-marketing  sometimes leads taxing authorities to assess taxes on the wrong entity.

For example, assume that you enter into a co-marketing agreement with hypothetical company XYZ, Inc. You agree to promote XYZ’s products on your website and receive a commission for sales that XYZ generates as a result of your promotion efforts. While you are likely liable for taxes on those commissions, you do not want to be liable for other taxes associated with XYZ’s sales of its products. Including a clause like the one below would protect your business in that scenario:

“Tax Indemnity. In the event [YOUR BUSINESS] incurs a sales tax liability as a result of the marketing and promotional efforts for XYZ and/or [YOUR BUSINESS] receives an assessment from a taxing authority directly attributable to XYZ’s product sales, XYZ shall indemnify [YOUR BUSINESS] for all taxes, interest and penalties which may be assessed.   [YOUR BUSINESS] shall use reasonable commercial efforts to mitigate such assessment prior to seeking indemnification from XYZ.”

For more information regarding taxes that may be assessed on your small business visit the IRS website at: http://www.irs.gov/businesses.

Image by Flickr user jacreative (Creative Commons)

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