Employment in the United States: Navigating Compliance for Modern Workplaces

ADCO Law

Employment matters are governed by both federal and state laws in the United States. In general, federal laws prevail over state laws unless state laws provide more protections for employees. The fundamental principles of the employment laws in the United States encompass fair treatment, exploitation prevention and discrimination prevention. 

“Flexible employment arrangements” are commonly referred to as “flexible work arrangements” in the United States. These arrangements allow employees to make adjustments to the arrival and departure times. The relevant flexible work arrangements law (i.e., the Fair Labor Standards Act) does not specify flexible work schedules, which highly depend on the agreement between the employer and the employee. The common forms of flexible work arrangements include flexible work schedules, part-time positions, compressed work schedules, shift work, and job sharing.

The key elements in employment contracts generally include terms of employment, employee responsibilities, employee benefits, dispute resolution, non-disclosure agreements, work product ownership agreements, noncompete clauses (see paragraph below), and employment termination procedures. 

Noncompete clauses are highly governed by state laws and have been generally accepted throughout the United States. However, starting from January 1, 2024, California implements a new rule prohibiting noncompete clauses (i.e., Senate Bill 699 and Assembly Bill 1076). The new rule renders the noncompete clauses in employment contracts unenforceable in California, regardless of where and when the contracts were entered and whether the governing law of the contracts is California law or not. Other states like Minnesota, North Dakota and Oklahoma have also implemented an outright ban on noncompete clauses in employment contracts. On the federal level, the Federal Trade Commission announced a nationwide ban on noncompete clauses on April 23, 2024. The new rule will be effective 120 days after publication in the Federal Register and is likely the noncompete clauses signed overseas from being enforced in the United States.

Different from many foreign jurisdictions, most of the states in the United States allow “at-will employment”, which enables employers to terminate employment for any reason except for certain types of exceptions i.e., public policy exceptions, implied contract exceptions, and covenants of good faith and fair dealing. The public policy exception prohibits employers from terminating employees in violation of the public policy of the state; the implied contract exception prevents employers from terminating employees when the employees have an expectation of fixed-term employment based on the common practice of the employers; covenant of good faith and fair dealing prevents employers from terminating employees in bad faith or by malice. Each state allows different types of exceptions. For example, California employment laws allow for all three types of exceptions, e.g., under the public policy exception, an employer may not terminate the employment for the employee’s refusal to violate the laws as requested by the employer in California. 

However, if specific terms of employment and termination clauses are stipulated and specified in the employment contract, the employers must follow the explicit terms and clauses when terminating the employment.

The typical components of severance packages in the United States include severance pay, health insurance, and other stipulated terms like retirement/pension plan, outplacement service, and use of company equipment (e.g., car or laptop). 

Severance pay: Unlike many countries, there’s no legal mandate for severance pay in the United States. It’s determined by agreement between employer and employee. Typically, severance pay is a lump sum or a series of payments of financial compensation based on salary and length of service. Common structures involve one to two weeks’ worth of pay for each year worked.

Health insurance: the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) allows employees to continue the health insurance plans for a limited period of 18 or 36 months (i.e., COBRA coverage).

Penalties and sanctions for violations of federal employment laws vary depending on various laws and regulations. For example, any plan failing to offer COBRA coverage can result in a penalty of up to $110 per day; any violation of the Equal Pay Act, which is set to abolish the gender pay gap, can result in a fine of no more than US$10,000 and/or imprisonment of no more than 6 months. Employers should consult relevant federal laws for details. 

Penalties and sanctions for violating state employment laws are highly different from state to state. For example, under the California Labor Code, violations are mainly categorized into two types: class A violations and class B violations. Class A violations are those that would cause “substantial probability that death or serious physical harm would result therefrom” and would result in a penalty from US$5,000 to US$10,000; class B violations are those that “have a direct or immediate relationship to the health, safety, or security of minor employees” and would result in a penalty from US$500 to US$1,000. Employers should consult relevant state laws for details.

There have been various federal and state employment rule-makings in recent years. The businesses are recommended to monitor the rule-making processes of different regulators and legislators closely. The federal rule-making regulators include Department of Labor, Equal Employment Opportunity Commission, Federal Trade Commission, and National Labor Relations Board. The state rule-making bodies include the state’s legislature and relevant agencies; for example, the California employment rule-making bodies include the California State Legislature (i.e., California State Assembly and California State Senate) and California Department of Industrial Relations. 

The recent federal rule-making topics worth noting include: independent contractor rules by Department of Labor, and joint employer rules by National Labor Relations Board. The recent state rule-making topics worth noting include: noncompete clauses and employee privacy by various state legislatures.