What Laws Small Business Owners Must Know About Employment

Running a business comes with a long list of responsibilities — and one of the most confusing parts can be employee laws. You didn’t start your company to become a legal expert, but ignoring basic employment rules can lead to lost money, lost time, and legal trouble.

You don’t need to learn every regulation — just the ones that apply to your business size and type. This guide breaks down the must-know laws in plain language, so you can stay compliant and focused on running your business.

1. At-Will Employment — But With Limits

In most U.S. states, the default rule is at-will employment. This means an employee can leave at any time, and you can end the working relationship at any time — with or without cause.

But there are important exceptions. You cannot fire someone for:

• Reporting harassment, unsafe conditions, or illegal activity

• Being part of a protected group (race, religion, disability, etc.)

• Taking legally protected leave (family, medical, sick, etc.)

• Talking about wages or working conditions with coworkers

The key here: always document why you’re ending employment. A few notes in your files could save you from future problems.

2. Anti-Discrimination Laws — What Applies to You?

Anti-discrimination laws are based on number of employees. Here’s a quick overview of which laws apply depending on your size:

If you have fewer than 15 employees, you may be exempt from certain federal laws, but state laws might still apply. So even if you’re a small team, it’s smart to act like these protections apply — it’s better for your team and your business.

3. Wage and Hour Laws — What You Need to Do

The basics of wage laws are straightforward, but easy to overlook. Here’s what most small businesses must follow:

• Pay at least minimum wage (federal or your state’s — whichever is higher)

• Pay overtime (1.5x pay) for more than 40 hours/week (unless employee is exempt)

• Keep accurate time records

• Offer required meal and rest breaks (varies by state)

Many lawsuits start with poor time tracking or unpaid overtime. Having a reliable system — even if it’s just a spreadsheet at first — is essential.

4. Paid Sick Leave — Required in Many States

Many states and cities now require businesses to offer paid sick leave. The rules vary, but here’s a common structure:

• Employees earn 1 hour of paid sick time for every 30 to 40 hours worked

• You must let unused hours carry over into the next year

• You cannot punish or fire someone for using earned sick leave

If your state doesn’t have paid sick leave laws, offering it anyway can still improve loyalty and reduce turnover.

5. Family and Medical Leave — Depends on Size

The Family and Medical Leave Act (FMLA) only applies to businesses with 50 or more employees. It provides unpaid, job-protected leave for things like:

• Birth or adoption

• Serious illness (self or close family)

• Military-related leave

But some states offer paid family leave that applies to much smaller businesses — sometimes even with just one employee. Know what your state requires, and don’t assume you’re exempt just because you’re a small team.

6. Harassment & Retaliation — Have a Policy in Place

You don’t need to wait for a law to tell you this: every business should have a clear harassment and retaliation policy. It protects your employees and protects you from lawsuits.

This includes:

• A way for employees to report issues

• A process for handling complaints

• A strong message that retaliation isn’t tolerated

The earlier you put this in writing — ideally in your employee handbook — the better.

7. Form I-9 — Must Be Done for Every Employee

Every time you hire someone, you must complete Form I-9 within 3 business days. It confirms the employee is authorized to work in the U.S.

As the employer, you’re responsible for:

• Reviewing their documents (passport, green card, license + SS card, etc.)

• Completing and storing the form

• Keeping it for at least 3 years after hire or 1 year after they leave, whichever is longer

There are fines for not doing this — even if it’s just a paperwork error.

8. COBRA — Health Insurance Continuation (20+ Employees)

If you offer group health insurance and have 20 or more employees, you must offer COBRA coverage when someone loses their benefits due to:

• Termination

• Reduction in hours

• Divorce or legal separation

• Death of the covered employee

The employee pays the full cost of coverage, plus up to 2% for administrative fees. You just need to notify them of their rights and manage the timeline.

9. Labor Law Posters — Yes, You Need These

Even if you have just one employee, you must display certain labor law posters in a visible spot. They cover wage rights, safety, discrimination laws, and more.

If you have remote workers, you may need to email or share these notices digitally. You can download the required posters for free from government websites — no need to pay companies selling poster kits.

10. Employee Handbook — Not Required, But Extremely Useful

You don’t have to have a handbook — but every small business should. A basic one helps you:

• Set expectations

• Prevent confusion

• Protect yourself legally

Include:

• Work hours and pay schedule

• Time off and sick leave policies

• Code of conduct

• How to report problems

• Disclaimer about at-will employment

Even a simple 5-page document is better than none at all.

You don’t need a law degree to run your business, but knowing these essentials will help you avoid costly mistakes and build a better workplace. Think of these laws like the guardrails on a road — they’re there to keep you moving forward safely.

Start with the basics:

• Pay properly

• Track time

• Follow anti-discrimination rules

• Have written policies

As your team grows, your responsibilities grow too — but when you have systems in place early, it’s much easier to scale.

If you need help setting up these systems or understanding what laws apply in your state, consider getting guidance from an HR expert or checking out a small business HR course tailored to entrepreneurs like you.