02 October 2007

Small Firm Exemptions To Employment Laws

Laws prohibiting discrimination in employment often make an exception for the small firm. Title VII, which is the model for many other federal and state discrimination laws, sets a threshold for employer coverage at fifteen employees. A firm employing fewer employees is exempt. As long as it employs no more than fourteen, it can refuse to hire women, Moslems, or disabled persons, and it will not be in violation of federal discrimination law. If it employs as many as nineteen, but no more, it can terminate and refuse to hire anyone over the age of forty.

The practice of exempting small firms from employment laws began long before Title VII. Early occupational safety laws and workers' compensation laws typically exempted small firms. New Deal-era laws such as the Wagner Act and Fair Labor Standards Act of 1938 ("FLSA") originally lacked small firm exemptions, but amendments and administrative practices created protective niches for small firms. As a result, an exempt small firm can pay less than the statutory minimum wage, refuse to pay overtime rates, discharge union supporters, and reject collective bargaining regardless of the wishes of its employees.

From Richard Carlson, "The Small Firm Exemption and the Single Employer Doctrine In Employment Discrimination Law", St. John's Law Review (2006).

Carlson goes on to note that statistically, small businesses are less likely to employ beneficiaries of these laws, and that small firms make up a meaningful share of the American work force.

The ADA and Title VII apply to any employer with 15 or more employees for a period of 20 weeks or more. The Age Discrimination in Employment Act (ADEA) has a 20 employee minimum requirement for 20 or more weeks. An exception is the EPA (Equal Pay Act), which does not provide minimum employee exceptions. The cutoff of the Family and Medical Leave Act is 50 employees.

The FLSA and Wagner Act thresholds are a function of revenue.

Under the FLSA:

All employees of certain enterprises having workers engaged in interstate commerce, producing goods for interstate commerce, or handling, selling, or otherwise working on goods or materials that have been moved in or produced for such commerce by any person, are covered by FLSA.

A covered enterprise is the related activities performed through unified operation or common control by any person or persons for a common business purpose and -

* whose annual gross volume of sales made or business done is not less than $500,000 (exclusive of excise taxes at the retail level that are separately stated); or
* is engaged in the operation of a hospital, an institution primarily engaged in the care of the sick, the aged, or the mentally ill who reside on the premises; a school for mentally or physically disabled or gifted children; a preschool, an elementary or secondary school, or an institution of higher education (whether operated for profit or not for profit); or
* is an activity of a public agency.

Any enterprise that was covered by FLSA on March 31, 1990, and that ceased to be covered because of the revised $500,000 test, continues to be subject to the overtime pay, child labor and recordkeeping provisions of FLSA.

Employees of firms which are not covered enterprises under FLSA still may be subject to its minimum wage, overtime pay, recordkeeping, and child labor provisions if they are individually engaged in interstate commerce or in the production of goods for interstate commerce, or in any closely-related process or occupation directly essential to such production. Such employees include those who: work in communications or transportation; regularly use the mails, telephones, or telegraph for interstate communication, or keep records of interstate transactions; handle, ship, or receive goods moving in interstate commerce; regularly cross State lines in the course of employment; or work for independent employers who contract to do clerical, custodial, maintenance, or other work for firms engaged in interstate commerce or in the production of goods for interstate commerce.

Domestic service workers such as day workers, housekeepers, chauffeurs, cooks, or full-time babysitters are covered if:

* their cash wages from one employer in calendar year 2007 are at least $1,500 (this calendar year threshold is adjusted by the Social Security Administration each year); or
* they work a total of more than 8 hours a week for one or more employers.

In short, while there is, in theory, an FLSA exemption for firms engaged in intrastate commerce, if you make long distance calls or send letters to other states, your business is engaged in interstate commerce.

There has been less exploration of the boundaries of the federal labor-management law called the Wagner Act, because there isn't much of a percentage in having a union in a very small enterprise when the employer can permanently replace employees who strike.

[Under the Wagner Act] in the United States there is no minimum threshold of employees an employer must employ before an application ismade for certification under the procedure. There is however an exception for small businesses, though this is based on the practices of the Board rather than the legislation itself. But here the exception is based on the gross annual receipts of the employer ($500,000 for retail establishments and $50,000 for non-retail establishments), rather than the number of employees.

From here, also discussing exemptions in England and elsewhere.

By way of comparison, rather than having anti-discrimination laws, Germany, as of 2004, required that employees terminate employment only for cause in all firms of under ten employees (FTE, excluding owners, family members without employment contracts, consultants, and temps, at a single establishment), and the laid off employees be released from service according to certain standards.

Some state laws, for example, Colorado laws on non-competition clauses and certain aspects of management-labor relations, lack comparable exemptions. Colorado's Labor Peace Act excludes employers with fewer than eight employees.

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