Federal Employment Law Guide for Small Business

Federal employment law is the floor, not the ceiling. Every state builds on top of these requirements, and some exceed them dramatically. But the federal floor itself is complex: different laws activate at different employee counts, penalties changed in January 2025, the FLSA exempt salary threshold was vacated by a court in November 2024, and the One Big Beautiful Bill Act (signed July 4, 2025) introduced new tax deductions for overtime and tips that require employer reporting starting in 2026.

This guide covers every major federal employment law that applies to small businesses with 5 to 100 employees: what triggers each law, what it requires, and what changed in 2025-2026. I built FirstHR to help small businesses stay on top of these layered requirements. For state-specific rules that build on this federal baseline, see the individual state guides in our Compliance Hub.

Federal Employment Law Thresholds by Employer Size

The single most important thing for a small business owner to understand about federal employment law is that different laws activate at different employee counts. A business with 10 employees faces a fundamentally different compliance landscape than one with 20 or 50.

Fair Labor Standards Act (FLSA)

Minimum Wage

The federal minimum wage is $7.25 per hour, unchanged since July 24, 2009. This is the longest period without an increase in FLSA history. The Raise the Wage Act of 2025 proposed increasing the rate to $17 by 2030, but the bill has not been passed. Tipped employees may be paid a cash wage of $2.13 per hour if tips bring total compensation to at least $7.25. A youth wage of $4.25 per hour is available for employees under 20 during their first 90 calendar days. Full-time students may be paid 85% of the minimum wage with a DOL certificate.

FLSA coverage applies to enterprises with $500,000 or more in annual gross revenue, or to individual employees engaged in interstate commerce. Most employers meet one of these thresholds. In practice, 30+ states have minimum wages above $7.25, and employers must pay whichever rate is higher. For state-specific minimum wages, see the individual state guides in the Compliance Hub.

Overtime

FLSA requires overtime pay at 1.5 times the regular rate of pay for all hours worked beyond 40 in a workweek. There is no daily overtime threshold under federal law (unlike California and a few other states). The workweek is a fixed, recurring 168-hour period that the employer designates.

Exempt vs. Non-Exempt Classification

To classify an employee as exempt from overtime, employers must meet both the salary basis test and the duties test. The salary threshold is $684 per week ($35,568 per year). The DOL issued a 2024 rule to increase this in two phases ($844/wk in July 2024, then $1,128/wk in January 2025), but a Texas federal court vacated the entire rule in November 2024. The threshold reverted to the 2019 level. The highly compensated employee (HCE) threshold also reverted to $107,432 per year.

The duties tests cover five categories: executive (manages enterprise or department, supervises 2+ employees), administrative (office or non-manual work related to management policies), professional (advanced knowledge in a field of science or learning), outside sales (customarily engaged away from employer's place of business), and computer employees (systems analysis, programming, engineering). The primary duty test applies: the exempt duty must be the employee's primary function, but there is no specific percentage requirement.

OBBBA: Tax Deductions for Overtime and Tips (2025-2028)

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, introduced two new federal income tax deductions. For full IRS guidance on the OBBBA deductions, see the IRS OBBBA guidance page. The overtime deduction covers "qualified overtime," defined as the premium or half portion of FLSA-required overtime pay (not the base rate, and not state-only overtime). The deduction is capped at $12,500 per year ($25,000 for joint filers) and phases out at MAGI of $150,000 single / $300,000 joint. The tips deduction covers "qualified tips" up to $25,000 per year for employees in IRS-listed tipped occupations, with the same income phaseout.

Recordkeeping

FLSA requires employers to retain payroll records for 3 years and time cards or wage computation records for 2 years. Form I-9 retention is 3 years from the date of hire or 1 year from the date of termination, whichever is later. For complete new hire document requirements, see the onboarding documents guide.

Family and Medical Leave Act (FMLA)

FMLA applies to private employers with 50 or more employees for at least 20 workweeks in the current or preceding calendar year. Public agencies are covered regardless of size. For a complete overview of eligibility and rights, see usa.gov FMLA overview. Individual employees must also meet three eligibility requirements: 12 months of employment, at least 1,250 hours worked in the preceding 12 months, and working at a location where 50 or more employees are employed within a 75-mile radius.

Employers must maintain group health insurance during FMLA leave on the same terms as if the employee were working. The employee must be restored to the same or an equivalent position upon return. Employers must provide a general notice (poster), an eligibility notice within 5 business days of a leave request, and a designation notice. For managing leave alongside onboarding policy documentation, structure your handbook to address FMLA before the first qualifying event.

Many states have family leave laws with lower employer thresholds: D.C. at 20 employees, Vermont at 10/15, Oregon at 25, and California at 5. When both federal and state FMLA apply, the employee is entitled to whichever law provides the greater benefit. See individual state guides for details.

Federal Anti-Discrimination Laws

Title VII of the Civil Rights Act (15+ Employees)

Title VII prohibits discrimination based on race, color, religion, sex, and national origin. Since Bostock v. Clayton County (2020), sex includes sexual orientation and gender identity. The Pregnancy Discrimination Act is an amendment to Title VII. Enforcement is through the EEOC; employees must file a charge within 180 days (300 days if a state or local agency has jurisdiction). For building anti-discrimination policies into your employee handbook, cover all protected classes from your first day at 15 employees.

Americans with Disabilities Act (15+ Employees)

The ADA requires employers to provide reasonable accommodations for employees with physical or mental disabilities that substantially limit a major life activity. The interactive process is required: employer and employee must engage in good-faith dialogue to identify effective accommodations. The employer can assert an undue hardship defense if the accommodation would cause significant difficulty or expense. Disability-related questions are prohibited before a conditional job offer. Medical examinations are permitted only post-offer and must be job-related.

Other Key Anti-Discrimination Laws

The Age Discrimination in Employment Act (ADEA, 20+ employees) protects workers aged 40 and over. The Older Workers Benefit Protection Act (OWBPA) adds specific requirements for severance agreements and RIF waivers: 21-day consideration period (45 days for group terminations) and 7-day revocation period. The Genetic Information Nondiscrimination Act (GINA, 15+ employees) prohibits using genetic information, including family medical history, in employment decisions.

The Pregnant Workers Fairness Act (PWFA, effective June 27, 2023, 15+ employees) requires reasonable accommodations for pregnancy, childbirth, and related conditions. This is separate from both Title VII pregnancy protections and the ADA. Employers cannot require an employee to take leave if a reasonable accommodation is available. The PUMP Act (2022) extends FLSA break time for nursing to all FLSA-covered employees (previously, exempt employees were excluded), requiring reasonable break time plus a private space (not a bathroom) for one year after birth.

The Equal Pay Act applies to all employers regardless of size, requiring equal pay for equal work regardless of sex. EEO-1 reporting is required for employers with 100 or more employees (and federal contractors with 50+ employees): annual demographic workforce data filing. For a ready-to-use anti-discrimination policy, see the sample employee handbook.

Workplace Safety (OSHA)

OSHA covers virtually all private employers with one or more employees. The general duty clause requires employers to maintain a workplace free from recognized hazards likely to cause death or serious physical harm. Twenty-two states operate their own OSHA plans covering both private and public sectors; seven additional states cover public sector only.

Reporting requirements: fatalities within 8 hours; in-patient hospitalizations, amputations, or loss of an eye within 24 hours. Employers with 10 or more employees must maintain OSHA 300 logs (with industry-specific exemptions for low-hazard industries). Key standards for small businesses include hazard communication (GHS), fire safety and emergency action plans, electrical safety, walking-working surfaces (fall protection), and PPE requirements. OSHA offers a free On-Site Consultation program specifically for small businesses. For integrating safety training into your new hire process, see the onboarding best practices guide.

Immigration: I-9 and E-Verify

Form I-9 is required for all employers and all employees (citizen and non-citizen). Section 1 must be completed by the employee on or before the first day of work. Section 2 must be completed by the employer within 3 business days of the start date. Retention: 3 years from the date of hire or 1 year from the date of termination, whichever is later. The M-274 Handbook for Employers (USCIS) provides detailed guidance. For the complete new hire paperwork checklist, I-9 is always the first item.

E-Verify is not federally mandated for all private employers. It is required for federal contractors and subcontractors, and some states require it for all employers (Arizona, Mississippi, South Carolina) or for state contractors. For employers who use E-Verify, cases must be created within 3 business days of the hire date. E-Verify cannot be used to pre-screen applicants before a job offer. The Immigration Reform and Control Act (IRCA, 4+ employees) prohibits discrimination based on citizenship or immigration status for authorized workers, and prohibits document abuse (demanding specific I-9 documents).

Benefits Continuation (COBRA)

COBRA applies to employers with 20 or more employees on more than 50% of business days in the preceding calendar year. It covers group health plans including medical, dental, and vision. Qualifying events for employees include termination (other than gross misconduct) and reduction in hours. For spouses and dependents, qualifying events also include divorce, death of the covered employee, Medicare eligibility, and a child aging out of coverage.

Employers with fewer than 20 employees are not subject to federal COBRA. State mini-COBRA laws vary widely: D.C. provides only 3 months, while California offers 36 months (Cal-COBRA for employers with 2-19 employees). Check your state guide for applicable continuation coverage. For the offboarding process including COBRA notice delivery, see the offboarding guide.

WARN Act (100+ Employees)

The Worker Adjustment and Retraining Notification Act applies to employers with 100 or more full-time employees (excluding part-time workers under 20 hours per week). It requires 60 days written advance notice for plant closings (affecting 50 or more employees at a single site) or mass layoffs (500 or more employees, or 50-499 if they constitute 33% or more of the workforce). Notice must go to affected employees, the state dislocated worker unit, and local government.

Exceptions: faltering company (actively seeking capital and notice would jeopardize efforts), unforeseeable business circumstances, and natural disaster. Penalties: back pay plus benefits for each day of violation, up to 60 days. Several states have their own mini-WARN acts with lower thresholds: California at 75 employees, New York at 50 employees, New Jersey at 100 but 30-day layoffs. For workforce changes involving departing employees, the employee exit process guide covers the full offboarding workflow.

Federal Payroll Tax Requirements

The Social Security wage base for 2026 is $184,500, up from $176,100 in 2025. FUTA remains at $7,000, unchanged since 1983. The gross FUTA rate is 6.0%, but employers in states with approved UI programs receive a 5.4% credit, resulting in a net rate of 0.6%. OBBBA changes for 2025-2028 affect employee tax returns (overtime and tip deductions) but do not automatically change withholding unless the employee adjusts their W-4. For complete tax forms for new employees, see the payroll setup guide. For new hire reporting requirements by state, see the state-by-state guide.

Other Federal Requirements

USERRA (Military Leave)

The Uniformed Services Employment and Reemployment Rights Act applies to all employers regardless of size. It provides up to 5 years of cumulative military leave with reemployment rights to the same or an equivalent position. Employers must continue health coverage for up to 24 months during military service. Discrimination based on military service is prohibited. For integrating military leave into your onboarding checklist, include USERRA rights notice in your new hire packet.

Employee Polygraph Protection Act (EPPA)

The EPPA prohibits all private employers from requiring, requesting, or suggesting that employees or applicants take a polygraph test. Exceptions exist for government employers, security service firms, pharmaceutical manufacturers, and employers conducting ongoing investigations with reasonable suspicion and specific procedural safeguards.

National Labor Relations Act (NLRA)

The NLRA covers all private employers (excluding government, agriculture, railroads, and airlines). Section 7 protects employee rights to organize, bargain collectively, and engage in concerted activity. This applies to non-union workplaces too: employees discussing wages, working conditions, or workplace concerns with coworkers is protected concerted activity. Section 8 defines unfair labor practices. For employee handbook drafting, ensure no policy restricts Section 7 rights.

Federal Contractor Requirements

Federal contractors face additional obligations. Executive Order 11246 requires affirmative action for employers with 50 or more employees and contracts of $50,000 or more. The Drug-Free Workplace Act applies to all federal contractors. Davis-Bacon requires prevailing wages on federal construction contracts of $2,000 or more. The Service Contract Act applies to federal service contracts of $2,500 or more. For contractor documentation, see the contractor onboarding guide.

Required Federal Workplace Postings

Federal posting requirements vary by employer size and which laws apply. Download all required federal posters free at dol.gov/agencies/whd/posters. Remote and hybrid employers must distribute notices electronically to employees who do not have regular access to a physical posting location.

Federal Threshold Comparison Table

This table is the reference every small business owner should bookmark. As your headcount grows, new federal obligations activate. For state-specific requirements that kick in at lower thresholds, see the individual state guides. Many states cover anti-discrimination from 1 employee (D.C., Vermont, Alaska), paid sick leave from 1 employee (numerous states), and family leave from 10-25 employees. The onboarding compliance guide covers multi-state requirements.

Key Federal Changes 2020-2026

The most operationally significant changes for 2025-2026: OBBBA employer reporting for overtime and tips deductions on W-2 forms (prepare systems before year-end 2025), SS wage base increase to $184,500, OSHA penalty amounts and the new 20% reduction for clean records, and the continued uncertainty around the FLSA exempt salary threshold. For structuring your complete employee onboarding plan around these federal requirements, see the planning guide.

Frequently Asked Questions