Employment law

Employment law governs one of the most important relationships in any business. It sets minimum standards that contracts cannot undercut, protects workers against discrimination and unsafe conditions, regulates unions and collective bargaining and determines what happens when the relationship ends. Mistakes are common and expensive: misclassifying workers, miscalculating overtime and mishandling terminations are among the most frequent legal claims against small and mid-sized businesses. This lesson focuses on the legal framework. BUS-130 discusses harassment, motivation and pay from an organizational behavior perspective, and the HSE courses cover workplace health and safety law in depth.

Employment law in the United States is a mix of federal statutes, state statutes and state common law. Federal law sets floors, such as the Fair Labor Standards Act (FLSA) for minimum wage and overtime, Title VII and other laws against discrimination, the Family and Medical Leave Act and the National Labor Relations Act. States and cities often go further, with higher minimum wages, paid sick leave, broader anti-discrimination protections and limits on non-compete agreements. The common law default of employment at will gives employers more freedom to terminate than in most other countries, but many exceptions apply. Unionized employees are governed by their collective bargaining agreement, enforced through grievance arbitration.

Employee or independent contractor?

The first question is whether a worker is an employee at all. Employees get the protection of employment standards, workers' compensation and other statutes, and employers must withhold and remit payroll taxes and contributions. Independent contractors run their own businesses and get none of these protections. Labels in a contract are not decisive: courts and agencies look at the substance of the relationship. Misclassification exposes a business to back wages, overtime, unpaid payroll taxes, penalties, interest and, in some cases, class actions.

Different laws use different tests. The IRS uses a common-law control test, grouping factors into behavioral control, financial control and the relationship of the parties. The FLSA uses an economic reality test that asks whether the worker is economically dependent on the business or in business for themselves; the Department of Labor issued a rule in 2024 setting out six factors, and in early 2026 proposed replacing it with a test closer to its 2021 rule that emphasizes control and opportunity for profit or loss, so employers should check the current version. California, Massachusetts, New Jersey and several other states apply the stricter ABC test for some purposes: a worker is an employee unless the hiring entity proves (A) the worker is free from its control, (B) the work is outside the usual course of its business and (C) the worker is customarily engaged in an independently established trade or business. California adopted the ABC test in Dynamex (2018) and Assembly Bill 5 (2019), although voters exempted app-based drivers through Proposition 22 in 2020.

Minimum standards

The FLSA requires covered employers to pay at least the federal minimum wage of $7.25 an hour, unchanged since 2009, and overtime at 1.5 times the regular rate for hours worked over 40 in a workweek. Most states and many cities set higher minimum wages, adjusted annually in many cases, and an employer must pay the highest applicable rate; some states, such as California, also require daily overtime after eight hours. Executive, administrative and professional employees are exempt from overtime if they meet duties tests and are paid a salary of at least $684 a week; a 2024 rule raising the threshold was struck down by a federal court in November 2024, and some states, such as California, New York and Washington, set much higher thresholds. The Family and Medical Leave Act gives eligible employees of employers with 50 or more employees up to 12 weeks of unpaid, job-protected leave a year for serious health conditions, childbirth and family care. There is no federal requirement for paid vacation or paid holidays, but many states and cities require paid sick leave and a growing number require paid family leave.

Human rights and discrimination

Federal law prohibits employment discrimination on several grounds. Title VII of the Civil Rights Act of 1964 applies to employers with 15 or more employees and covers race, color, religion, sex and national origin; in Bostock v. Clayton County (2020), the Supreme Court held that firing someone for being gay or transgender is sex discrimination. The Age Discrimination in Employment Act (ADEA) protects workers aged 40 and over at employers with 20 or more employees. The Americans with Disabilities Act (ADA) prohibits disability discrimination and requires reasonable accommodation unless it would cause undue hardship. The Pregnant Workers Fairness Act of 2023 requires reasonable accommodation of pregnancy-related limitations. The Equal Pay Act requires equal pay for equal work regardless of sex, and the Genetic Information Nondiscrimination Act protects genetic information. Discrimination can be disparate treatment (intentional) or disparate impact (a neutral practice that disproportionately excludes a protected group and is not job-related and consistent with business necessity). Retaliation against employees who complain or participate in investigations is separately prohibited and is now the most frequently filed charge with the EEOC. An employee must usually file a charge with the EEOC within 180 days, or 300 days where a state agency exists, before suing. State and local laws often apply to smaller employers and add protected grounds. Harassment law is covered in BUS-130.

Ending employment: at-will and its limits

Most American employment is at will: unless a contract or collective agreement says otherwise, either party may end the relationship at any time, for any reason or no reason, with or without notice, as long as the reason is not illegal. Montana is the exception, with a statute requiring good cause after a probationary period. The at-will rule is limited by many exceptions. Employers may not fire employees for discriminatory reasons or in retaliation for protected activity, such as filing a discrimination charge, reporting safety violations, taking FMLA leave or engaging in concerted activity protected by the National Labor Relations Act. Most states recognize a public policy exception, protecting employees fired for refusing to break the law, serving on a jury, filing a workers' compensation claim or reporting wrongdoing. Many states recognize implied contracts based on employee handbooks or assurances of job security, unless the handbook clearly preserves at-will status, and a minority recognize an implied covenant of good faith in employment. Employment contracts for executives often require cause for termination or provide severance.

When an American employer terminates an at-will employee, it generally owes only wages earned to date, accrued vacation if state law or policy requires payout (California does), and continuation coverage rights under COBRA for group health insurance. Severance is not legally required unless a contract, policy or collective agreement provides it, although many employers offer severance in exchange for a release of claims. Releases of age discrimination claims must comply with the Older Workers Benefit Protection Act: the employee must be advised in writing to consult a lawyer, be given at least 21 days to consider the agreement (45 days in a group layoff, with information about who was selected) and have 7 days to revoke it after signing. The Worker Adjustment and Retraining Notification (WARN) Act requires employers with 100 or more employees to give 60 days' notice of plant closings and mass layoffs, and some states, such as New York, New Jersey and California, have stricter mini-WARN laws.

Even at will, how a termination is handled matters. Inconsistent explanations, terminations soon after an employee complains, takes leave or files a claim, and departures from the employer's own policies are classic evidence of pretext in discrimination and retaliation cases. Employers reduce risk by documenting performance issues contemporaneously, applying policies consistently, having a second manager or HR review terminations and giving a truthful, consistent reason. Employers that change essential terms, such as cutting pay, generally may do so prospectively for at-will employees, but they must comply with state wage payment laws and any contract.

Restrictive covenants

Enforceability of non-compete agreements depends on state law. California voids almost all employee non-competes under Business and Professions Code section 16600 and since 2024 has required employers to notify employees that past non-competes are void; Minnesota (from 2023), North Dakota and Oklahoma also ban most employee non-competes, and many other states ban them for lower-wage workers or require advance notice. Elsewhere, courts enforce non-competes that are reasonable in duration, geography and scope and protect legitimate interests, and some courts will blue-pencil an overbroad covenant to a reasonable scope. The FTC adopted a rule in 2024 banning most non-competes, but a federal court set it aside, and in September 2025 the FTC dropped its appeals and abandoned the rule, saying it would pursue case-by-case enforcement against unfair non-competes instead. Non-solicitation, confidentiality and trade secret protections (lesson 7) remain important alternatives.

Unions and collective bargaining

The National Labor Relations Act (NLRA) gives most private-sector employees the right to form and join unions and to engage in concerted activities for mutual aid or protection, whether or not they are unionized. A union becomes the exclusive bargaining representative through a secret-ballot election supervised by the National Labor Relations Board (NLRB), or by voluntary recognition. Employers commit unfair labor practices by interfering with, restraining or coercing employees in exercising these rights, for example by threatening job losses, interrogating employees about union support or promising benefits to defeat a union. Section 7 protects non-union employees who discuss pay and working conditions together, including on social media, so overly broad confidentiality and social media policies can be unlawful. Once a union is certified, both sides must bargain in good faith. About half of the states have right-to-work laws prohibiting agreements that require employees to pay union dues as a condition of employment.