Your Federal Liability

When you hire even one employee, you bring a new level of complexity into your business and a new set of considerations related to employment laws. Important federal employment laws include the FLSA, OSHA, FICA, FUTA, ERISA, Equal Pay Act, Title VII of the Civil Rights Act, ADEA, ADA, COBRA, and FMLA.

The federal labor laws generally apply to employers above a certain size, defined in terms of the number of employees they have. But how do you count your employees if you have part-time workers, or if your payroll ebbs and flows with the seasons? Generally, you must count all the employees who are on your payroll during a week. This means that you must count each of your part-timers, temporary workers, and leased workers as employees; however, don't count your independent contractors. Do this for each week in the year. If you meet the threshold number of employees under a given law for at least 20 weeks in a year, you are covered by that law for the entire year.

Temporary or leased employees. In almost all temporary or leasing situations, your business and the staffing agency are likely to be considered joint employers. That means that both of you will have some legal responsibility under federal and state employment laws that apply to your employees.

Also, just because you think you have structured your contracts to delegate responsibility to a staffing company, you may not have escaped all legal liability. For example, your business always retains liability for the safety of employees in the workplace under OSHA and antidiscrimination laws.

Generally, you can avoid payroll responsibilities when the individuals are supplied by a temporary or staffing agency, even if you have recruited them yourself. You may be able to exclude contingent staff (nonemployees) from your employee benefit plans even if you are a joint employer, but you may have to include them in your "count" for coverage and nondiscrimination purposes if they have worked for you for more than one year.

Independent contractors. Many of the laws that apply to employees do not apply to independent contractors. However, there is a complex test that the government will use to determine if the worker really is an independent contractor, and there are penalties for misclassifying employees as independent contractors when they should have been treated as employees.

In fact, in an annual poll, small business owners said repeatedly that the independent contractor rules are the government laws that they would most like to see clarified and improved.


A woman owned a small pet grooming business. She hired independent contractors to do the grooming for her, and she had them sign contracts that stated that they were independent contractors.

At some later point, one of the groomers filed an unemployment claim, which prompted an IRS investigation. The IRS, applying its complex rules, determined that the groomers were employees rather than independent contractors.

As a result, she had to pay $13,000 to the government.

The two factors the government looks at most closely are: