Employment issues to consider when expanding in the United States

June 2019 | EXPERT BRIEFING | LABOUR & EMPLOYMENT

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So you want to open an facility or hire employees in the United States? Perhaps you seek to expand into new markets, open up to new customer bases or take advantage of a different pool of employees. You will, of course, face obvious legal hurdles involving taxation and corporate formation (including possible E-2 treaty investor options). Perhaps the most complex issue, however, will involve the maze of different and sometimes contradictory employment and labour laws in the US. In some respects, human resources management is easier in the US than in many countries (nearly every state has an ‘at-will’ default, so no automatic statutory severance programmes). But, there are many legal and human resources traps for the unwary. As you hire employees in the US, below are some critical questions to ask.

In what state or states will you operate? The first and most critical question in determining your legal employment-related obligations is determining the geography, specifically the state or states in which you will have employees. Different states have different laws and statutes. For example, some states have mandatory paid sick leave. Others will not enforce covenants-not-to-compete. Still others require mandatory disability insurance. This is just the tip of the iceberg. The key is realising there is rarely a ‘one size, fits all’ component to compliance with employment laws on a state-to-state basis.

How many employees will you have in a given state and how many in total in the US? A change in employee population may trigger application of certain federal and state employment laws. For example, once you have 50 or more employees within a 75-mile radius, you must allow eligible employees to take job-protected leave under the Family and Medical Leave Act (FMLA). Or, once your company employs more than 100 employees in the US, you will be legally obligated to send workforce data to the Equal Employment Opportunity Commission (EEOC) in an EEO-1 report (although there are a few cases, too, where companies with less than 100 employees must file). If you have 15 or more employees in the US, then you will be covered by most federal anti-discrimination laws, including those covering race, colour, religion, sex (including pregnancy), national origin, disability or genetic information (age is 20). But beware: some states have lower thresholds for application of their anti-discrimination laws (for example, six employees in Indiana and New Hampshire).

Should you prepare a suite of employee policies and/or an employment handbook? Some companies wait until their number of employees triggers above-referenced laws, but it is generally a good practice to implement policies (particularly anti-discrimination and harassment and non-disclosure of confidential information) relatively soon after opening in a state. Once again, one-size-fits-all is generally a bad idea. Different states have different requirements and some have laws that must be referenced in handbooks and policy manuals, while other states require certain ‘magic language’. Compliant employment applications are important as there are certain federally prohibited questions and some state-specific prohibitions (such as enquiring about criminal history in some states – known as ‘ban the box’).

Should you require employees to sign employment agreements? Nearly every state has a default ‘at-will employment’ relationship between employees and employers, which means either the employee or the employer may terminate the employment relationship for any reason or no reason, provided it does not violate a law (such as for an improper discriminatory purpose). If you want to provide a severance or separation pay mechanism, then a formal agreement is recommended. In addition, whether incorporated into an employment agreement or in a standalone restrictive covenant agreement, consider whether your employees are at a level where restrictive covenants, such as non-competes, employee non-solicits or customer non-solicits, are appropriate. Again, this is an area where state laws differ – sometimes significantly. Non-competes are not permitted in California, Oklahoma and North Dakota. Non-solicits may not be enforceable in these states either. Other states strongly disfavour non-competes, but will enforce in certain circumstances if they are narrowly tailored to protect legitimate business interests. Still others have tricky ‘consideration’ requirements (e.g., Illinois and Texas). Even in states that will consider enforcing non-competes in certain circumstances, do not foist a one-size-fits-all non-compete on lower level employees. Narrowly tailored confidentiality and non-disclosure provisions or agreements are generally a good idea for most employees.

Do you need to register to do business in a given state? The short answer is likely yes. In nearly every state, you will be required to register with a secretary of state. To take advantage of certain laws or courts, such as to enforce contracts, you may have to be registered. Some states will permit you to register as a foreign corporation (foreign state typically) or under a reciprocal arrangement.

What about employment taxes? If you employ anyone in the US, you will need a federal identification number (FEIN) for federal payroll taxes and withholdings. You will also likely need to make state income tax withholdings in most states and, thus, proper registration and payroll set-up is vital. Third-party payroll providers may be available to provide assistance.

What do I have to do about workers’ compensation? If you have an employee in a given state, you will most likely have to register with that state’s workers’ compensation system or obtain workers’ compensation insurance. Workers’ compensation provides compensation to employees for on-the-job injuries, while providing protection (near immunity) for employers from costly tort lawsuits.

Why not avoid all of these employment-law headaches by simply retaining workers on an independent contractor basis? Unless you are truly retaining the ‘contractor’ for task-specific special projects, this approach is fraught with peril. Also known as ‘freelancing’, independent contractor relationships are under increasing scrutiny by courts, administrative agencies and plaintiffs’ lawyers. If the individual is under your direction and control and is at all economically dependent on you, it is likely the individual should be classified as an employee.

What about unemployment insurance? In any state where you have an employee, you will need to register with the Department of Labor or other unemployment commission to obtain a state unemployment number. You will have to pay unemployment taxes, which go to a state fund, and ultimately provide short-term payments to individuals who lose their jobs (subject to some exceptions).

Do I need to be concerned about an employee’s immigration status? All employees in the US must be lawfully permitted to reside and work in the US. This requires some work by the employer, in the form of an I-9 employment eligibility verification with the US Citizenship and Immigration Services. Most states allow for eVerify (an online verification process), but either way this process requires confirmation of an employees’ social security number and resident status. Be particularly careful when transferring employees office to office and country to country (as there are tax issues in addition to immigration issues) given the complexities of the VISA process.

Opening a facility in the US or hiring US-based employees comes with a range of benefits. However, it is crucial to be aware of the legal compliance considerations in your expansion efforts to avoid costly litigation.

Kevin M. Cloutier is an employment and trial lawyer at Sheppard Mullin Richter & Hampton. He can be contacted by email: kcloutier@sheppardmullin.com.

Kevin M. Cloutier

Sheppard Mullin Richter & Hampton