United States at a Glance

The laws governing employment relationships in the United States come from federal, state and local statutes, agency regulations, and case law. In the United States, there are no mandatory requirements for hiring as most employment is non-contractual or “at-will.” The at-will employment doctrine provides flexibility to both employer and employee. Effectively, an employer is permitted to terminate an employee for good cause, bad cause, or no cause (except for Montana which requires just cause to terminate an employee), provided it is not a discriminatory cause (such as terminating because of age, race, ethnicity or gender) and not violating public policy in some fashion (such as retaliation for refusing to violate a law or statute). Likewise, an employee is permitted to quit or leave work under the same circumstances.

Employers must comply with federal, state and local labor laws. These laws govern work conditions, minimum wages, hours of work, the frequency and manner of making wage payments, meals and rest periods, and the requirement for certain benefits, such as paid and unpaid leave. Federal labor requirements are enforced by the U.S Department of Labor, state labor laws are enforced by state labor departments, and local laws are generally enforced by the city mayor or a county agency.

Under the laws of the United States, there are no minimum requirements for an employment contract. Also, in most states, no written memorialization of any terms is required. An employment relationship in the United States is presumed to be “at-will,” i.e., terminable by either party, with or without cause or notice. Indeed, most employees in the United State are employed on an “at-will” basis, without a written employment contract, and only with a written offer of employment that outlines the basic terms and conditions of their employment. Employment contracts, when used, can vary widely. They can be fixed-term, indefinite, or open-ended (no limit on duration), or based on project completion. Each of these types of contracts can be negotiated between the parties.

Employment contracts may be indefinite, fixed-term, full-time or part-time. The individual terms will vary according to the state the employee is being hired in. The employment relationship in the United States is subject to markedly less regulation than in other countries. Except for some protections on wage and hours and a prohibition on discrimination, the parties to an employment relationship in the United States are generally free to negotiate and set the terms and conditions of their relationship

No legal provision govern fixed or unlimited term contracts. Unlike many other countries, American law does not limit the duration of a fixed-term employment contract or the circumstances under which the parties may enter into a fixed-term employment contract. In the absence of an employment contract, employment relationships are presumed to be “at-will,” terminable by either party at any time, with or without cause.

To be considered “exempt,” an employee must satisfy all three of the following requirements:

• Exempt employees must be paid a salary as opposed to being paid on an hourly basis. This means the employer pays the employee for any week in which they perform work, regardless of the quality or quantity of the work.
• On a federal level, exempt employees must earn $1,128 per week or $58,656 annually.* Some states have higher thresholds.
• The nature of an exempt employee’s work must fall into one of the categories as defined by the FLSA, which includes exemptions for those performing executive, administrative or professional duties. It also exempts computer employees and those in outside sales.

Exempt employees are not covered by the Fair Labor Standards Act (FLSA), and are, therefore, not entitled by law to overtime pay. In theory, exempt employees receive compensation for their overtime work from their salary or from other benefits offered by the employer. Salaried employee overtime law has no provisions protecting these employees from long hours. If they find themselves regularly working overtime, they will need to negotiate with their employer for a higher salary, time in lieu, or a more reasonable workload.

To make sure they are in accordance with salaried employee overtime law, employers must familiarize themselves with federal and local regulations. They should track hours of employees, exempt and nonexempt. If not, they may be responsible for paying claims of mistakenly treating employees as exempt when they are nonexempt, failing to identify, record, compensate “off-the-clock” hours such as taking work home, working through lunch, etc. and failing to include “wage augments” when calculating an employee’s overtime rate.

Non-exempt employees must be paid minimum wage plus overtime pay if they work more than 40 hours in a workweek. Overtime must be paid at 1.5 times the regular pay rate. Employers will also need to consult the state labour laws in the state where the employee is working for additional requirements. Employees are considered non-exempt unless they qualify for an exemption under federal and/or state law.

Employers and employees should check with federal and state regulations to determine exemption status. Before classifying and treating any employee as exempt from overtime, employers should confirm that the employee satisfies all applicable tests for overtime exemption under federal and state laws. If an employee is covered by both federal and state law but doesn’t meet both sets of tests, employers should consult with counsel to determine how they should classify the employee in that particular situation.

*The salary exempt threshold is currently in review by the Federal courts.

The Occupational Safety and Health Administration, more commonly known by its acronym OSHA, is responsible for protecting worker health and safety in the United States. Employers are required to provide employees with a safe and healthy place of employment, which is free from recognized hazards (death or serious physical harm). Employers are obliged to: remedy known workplace hazards; limit the amount of hazardous chemicals workers can be exposed to; use certain safe practices and equipment; monitor hazards; and keep records of workplace injuries and illnesses. Regarding the COVID-19 pandemic, the U.S. Center for Disease Control (CDC) has issued its guidance with detailed instructions on cleaning and disinfecting public spaces, workplaces, businesses, schools, and homes.

For home office situations where the employee performs office work activities, such as filing, computer research or work, reading, writing, etc., employers have little responsibility. In fact, OSHA has issued guidance stating that it will not conduct inspections of employees’ home offices, it will not hold employers liable and it does not expect employers to inspect an employee’s home office.

Additionally, employers, who are required to keep records of work-related injuries and illnesses under the OSH Act, are responsible to do so even if the injury or illness occurs in an employee’s home. However, for an injury sustained at home to be considered a “work-related” injury it must have 1) occurred while the employee is being paid to work, and 2) be directly related to the performance of the employee’s work duties (rather than to the general home environment).

Generally, courts hold that a covenant restricting the activities of an employee upon the termination of his or her employment with the employer will be enforced if it protects a legitimate business interest, is reasonably limited in scope, time and place, is supported by consideration and is reasonable. The following restrictive covenants are recognized and may be enforceable under the law: i) non-disclosure clauses; ii) non-solicitation of customers; and iii) non-solicitation of employees. Non-compete clauses have been banned by the Federal Trade Commission in the United States.

Collective bargaining agreements are highly variable but usually provide specific termination protections beyond the normal discrimination or public policy prohibitions. The termination process is often time-consuming and subject to arbitration or unfair labor practice claims, which would be initiated by the union on behalf of the member, if the procedural steps are not followed properly. Unions are likely to challenge terminations on substantive grounds as well, so additional care must be taken by the employer when selecting a member for termination.

No legal provision governs a formal “trial period.” However, from a business perspective, some employers prefer to have an internal policy on trial periods, often referred to as “introductory periods” or “probationary periods”, which generally provide for a formal performance evaluation after an initial stated period of employment such as 90 days.

Federal law regulates wages, working hours and overtime pay for non-exempt employees, but employees in executive, administrative or professional positions are exempt, as are outside sales employees, certain skilled computer professionals, employees of certain seasonal amusement and recreational businesses.

Under federal law, non-exempt employees must generally be paid 1.5 times the regular rate of pay for all hours worked over 40 hours per week. An exemption from the overtime pay requirement applies to certain categories of employees (e.g., executive, administrative and professional), provided the requirements are met. States and localities have additional regulations on overtime pay and requirements and may require overtime pay for exceeding a daily hour threshold and, in some instances, may require an overtime rate of two times the regular rate of pay.

The Fair Labour Standard Act (FLSA) does not specify how data should be collected and managed and whether a time and attendance app should be used, however it does state that it is mandatory to keep a record of employee working hours for hourly, non-exempt employees as well as exempt and non-exempt salaried employees.

Generally, workers employed on an “at-will” basis may be terminated, with or without cause or grounds, provided it is not for an illegal reason; notably discrimination on grounds of a category protected by law or protected “whistleblowing” activity (reporting certain activities where the employee reasonably believes that the information he or she provided relates to potential violations of specific laws by the employer). For at-will employment terminations, there is no cause required, although it is always preferable to have sufficient cause when terminating an employee. If the cause is not provided (and there is no legal requirement to do so), the former employee may consider pursuing legal action charging that (a) the employer did not provide a valid reason for the termination; and (b) the termination was done for an impermissible reason, such as discrimination.

Except in certain mass dismissals, U.S. law does not impose a formal “notice period” to terminate an individual employment relationship. Most employees are employed “at-will” and either party can terminate the employment relationship without notice. However, the general practice is to provide at least two weeks of base pay and medical benefit continuation in lieu of notice. Each employer will select an appropriate period of time and then generally maintain a consistent approach for subsequent terminations.

Similarly, employees are not obliged to provide a formal notice period, as there is no statutorily required minimum length of notice. However, the general practice is to provide at least two weeks’ notice.

Pay in lieu of notice is permitted in case the employer chooses to apply a notice period. “Garden leave” – a period during which a departing employee is paid his or her salary, but is not permitted to work – is not a typical concept in the U.S. As it is not a common arrangement in the U.S., the federal and state laws regarding garden leave are nominal and each situation will be examined independently. Unlike in many countries, however, it should not be assumed that an extended garden leave (beyond a period reasonable for normal transition) would be valid in the U.S. if it does not satisfy restrictive covenant requirements

U.S. citizens and resident aliens are subject to income tax on their worldwide income, regardless of source. All U.S. citizens and residents, including resident aliens and citizens who reside outside the U.S., pay federal tax on their worldwide income, with credits for foreign income taxes (subject to certain limitations).

A non-resident alien is subject to U.S. tax on income that is effectively connected with a U.S. trade or business and on U.S.-source fixed or determinable, annual or periodic gains, profits and income (generally investment income, including dividends, royalties and rental income).

Requirements of setting up a Corporations (C-Corp, S-Corp):

• So not require a minimum paid-up share capital.
• Typically require at least one director.
• A minimum of one shareholder is required. However, S-Corps are limited to 100 shareholders. C-Corps have no maximum number of shareholders, making them ideal for larger businesses or those planning to go public.

• Do not require a minimum paid-up share capital.
• Generally, require at least one member or manager, equivalent to a director.
• Typically require at least one shareholder.

In the U.S., most business entities, including C-Corps and LLCs, do not require a minimum paid-up share capital. The company can issue shares at a nominal value, and in many cases, there are no strict rules concerning debt and equity. However, businesses should be mindful of thin capitalization rules (Section 163(j) of the Internal Revenue Code), which may limit tax-deductible interest expenses if the company’s debt is excessively high compared to its equity.

Directors do not need to be U.S. residents in most states. For example, Delaware does not impose residency requirements for directors or officers, making it an attractive location for incorporation.

A local resident is generally not required to serve as the company’s administrator. However, most states require the appointment of a Registered Agent with a physical address in the state of incorporation to receive legal documents on behalf of the company. This is essential for the operational legitimacy of the entity.

Upon incorporation, certain insurances are often required or recommended, depending on the nature of your business. Common insurances include:

• General Liability Insurance
• Workers’ Compensation Insurance (if you have employees, which is required in most states)
• Professional Liability Insurance (for service-based businesses)
• Commercial Property Insurance (if you own office space or other assets)

In some industries, such as healthcare or finance, specific insurance coverages may be mandatory.

In most cases, a physical office is not required to make the entity operational. Many businesses opt for a virtual office or a Registered Agent service, which provides a physical address for legal and business correspondence. However, some states may require a physical mailing address, which can be satisfied through a Registered Agent. Although a physical office is not mandatory, it can lend credibility to the business and enhance its local presence.

Profits can be repatriated in several ways, including dividends, interest, royalties, or management fees. It’s important to note that dividends paid to foreign shareholders may be subject to a withholding tax of around 30%, though this rate may be reduced under a tax treaty between the U.S. and the shareholder’s home country. Additionally, transfer pricing rules are in place to ensure that payments between related entities are conducted at arm’s length.

U.S. tax rules governing transactions between related parties adhere to the arm’s length principle, which mandates that such transactions be conducted at market rates. Several methodologies are commonly used to determine transfer prices, including:

• Comparable Uncontrolled Price (CUP) Method
• Cost-Plus Method
• Resale Price Method
• Transactional Net Margin Method (TNMM)
• Profit Split Method

Transfer pricing rules are strictly enforced by U.S. tax authorities, and businesses may be required to provide documentation to justify the prices used in related-party transactions.

At the federal level, electronic invoices (e-invoices) are not mandatory. However, certain states or industries may require digital invoicing for efficiency. Many businesses adopt e-invoicing to streamline processes and reduce errors, but it is not a nationwide mandate.

In the U.S., the fiscal year typically runs from January 1 to December 31. However, businesses can choose a different fiscal year-end if it aligns better with their business cycles, subject to approval by the IRS.

• Corporate Tax Returns (C-Corp): For companies using the calendar year, tax returns are due on April 15. If a business follows a fiscal year, the deadline is the 15th day of the fourth month after the fiscal year-end. Companies can request a six-month extension by filing Form 7004, extending the filing deadline to October 15.
• LLCs (Taxed as Partnerships): These companies must file by March 15, or request an extension.

U.S. companies are subject to various tax obligations, including:

1. Federal Corporate Income Tax: Companies must file their tax returns with the IRS (using Form 1120for C-Corps or Form 1065 for LLCs taxed as partnerships).
2. State Corporate Income Tax: Corporations may also need to file state corporate tax returns, depending on the jurisdiction.
3. Payroll Taxes: If a business has employees, payroll taxes must be withheld and submitted regularly (using Forms 941 and W-2).
4. Sales and Use Tax: Businesses are responsible for collecting sales tax from customers and remitting it to the state authorities.
5. Estimated Tax Payments: Companies may need to make quarterly estimated tax payments if they expect to owe more than $500 in taxes for the year.

Foreign companies are not obligated to appoint a tax representative in the U.S. However, it is common for foreign-owned U.S. entities to hire local tax professionals to ensure compliance with U.S. tax laws. While a registered agent is required to receive legal notices on behalf of the company, they do not handle tax matters.

Income tax is levied at two different levels: federal and state. Some cities and municipalities also levy income tax. Therefore, an individual’s total income tax liability depends on the state and the municipality where the individual resides or works. U.S. taxpayers must file tax returns annually with the IRS and with the state and local tax authorities under whose jurisdiction they live if those governments impose income or net worth taxes. On the federal return, taxpayers must report income and deductions and must compute the tax due. Taxes are generally collected by employer withholding on wages and salaries and by individual payment of estimated taxes on income not subject to withholding. On a state level, periodic returns of income tax withholding are also required with varying due dates, and most require that an annual state or local Form W-2 be provided to employees and filed with the taxing authority.

2025 Federal Income Tax Brackets and Rates

2025 Standard Deduction

• Social Security & Medicare (FICA Taxes): Employers contribute 7.65% of an employee’s wages for Federal Insurance Contributions Act (FICA) taxes, as follows:
  • Social Security Tax (OASDI): Both the employer and the employee contribute 6.2% of the employee’s wages, up to a wage base of $160,200 (2023 limit).
  • Medicare Tax: Both the employer and employee contribute 1.45% of all wages. Employees earning over $200,000 also pay an additional 0.9% Medicare tax, but the employer does not match this extra contribution.
• Unemployment Insurance (FUTA & SUTA): Employers pay unemployment insurance taxes, which range from 0.6% to 6%, depending on the state and the company’s history of claims. – Some States have State Unemployment Tax Act (SUTA), others may call it SUI, UI or Reemployment Tax. The percentage of State SUTA varies by state. Each state determines the wage base or minimum earnings required for the taxes to be applied.
• Workers’ Compensation Insurance: Costs vary by industry and state but typically range from 0.5% to 5% of an employee’s wages.
• Health Insurance: While not federally required for small businesses, many employers offer health insurance, with employer contributions typically costing between $5,000 and $15,000 per employee per year.

U.S. law provides retirement benefits and subsidized health insurance under federal Social Security and Medicare programs. The taxes generally are borne equally by the employer and the employee, with the employer responsible for remitting each employee’s portion to the federal government.

Employers must comply with many different types of local payroll taxes. These taxes are based on where employees work and/or live. Employers must pay State Disability Insurance and Paid Family and Medical Leave; rates and the wage base and minimum earnings required for the taxes to be applicable vary by state.

Employers must also pay Worker’s Compensation insurance (workers’ comp); workers’ comp is purchased as private insurance by business owners in most states, but some states require it to be paid as a tax. Costs vary depending on factors such as business location, industry, payroll, and employees’ class codes.

Employers can also acquire Employment Practices Liability Insurance (EPLI), as it covers businesses against claims by workers that their legal rights as employees of the company have been violated. EPLI provides protection against many kinds of employee lawsuits, including claims of sexual harassment, discrimination, wrongful termination, etc. The cost of EPLI coverage depends on type of business, the number of employees and various risk factors.

In addition to Social Security and Medicare taxes, employers have additional payroll tax obligations that they must manage, including federal, state, and sometimes local taxes:

1. Federal Payroll Taxes:
   1. Federal Income Tax Withholding: Employers must withhold federal income tax from employees’ wages based on their earnings and the information on Form W-4.
   2. FICA Taxes: As noted, both employee and employer contribute to Social Security and Medicare taxes.
   3. Federal Unemployment Tax (FUTA): Employers pay FUTA tax on the first $7,000 of an employee’s wages at a rate of 6%, with a credit of up to 5.4% available for timely state unemployment tax payments, effectively lowering the rate to 0.6%.
2. State Payroll Taxes:
   1. State Income Tax Withholding: In states with income tax, employers must withhold income tax from employees’ wages. Not all states have an income tax (e.g., Texas and Florida).
   2. State Unemployment Tax (SUTA): Employers are responsible for paying state unemployment taxes, which range from 0.5% to 6%, depending on the state.

Employers must adhere to strict deadlines for submitting payroll taxes:

1. Federal Payroll Taxes:
   1. Semiweekly or Monthly Deposits: Depending on payroll tax liability, employers must make semiweekly or monthly deposits of withheld taxes using the Electronic Federal Tax Payment System (EFTPS).
   2. Form 941 (Quarterly Reporting): Employers must file Form 941 quarterly to report federal income taxes, Social Security, and Medicare taxes. The deadlines for filing are:
      1. April 30 (Q1)
      2. July 31 (Q2)
      3. October 31 (Q3)
      4. January 31 (Q4)
2. FUTA Tax (Form 940): Employers must file Form 940 annually by January 31 to report FUTA tax for the previous year.
3. State Payroll Taxes: Deadlines and reporting requirements vary by state, but most states require quarterly reporting and payment for state income tax withholding and unemployment taxes.
4. W-2 Form Submission: Employers must issue Form W-2 to employees by January 31 each year, and also file copies with the Social Security Administration.

In the United States, bonuses and 13th month pay are not required. A bonus is a payment made in addition to the employee’s regular earnings. Under the FLSA, all compensation for hours worked, services rendered, or performance is included in the regular rate of pay. However, the FLSA provides a list of payments that may be excluded from the regular rate of pay, including certain bonuses. Unless specifically noted, payments that are excluded from the regular rate may not be credited towards overtime compensation.

A bonus is discretionary only if all the statutory requirements are met: a) the employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus; b) the employer has the sole discretion to determine the amount of the bonus; and c) the bonus payment is not made according to any prior contract, agreement or promise causing an employee to expect such payments regularly.

A nondiscretionary bonus is a bonus that fails to meet the statutory requirements of a discretionary bonus. Nondiscretionary bonuses are included in the regular rate of pay, unless they qualify as excludable under another statutory provision.

Many employers use separation agreements, which provide additional compensation and benefits to terminating employees in exchange for an agreement to waive any claims related to their employment or termination and an agreement not to sue the employer for any reason. These are very common in the U.S., and they may come in many forms. These agreements are highly variable and unique to each employer. Employers also may utilize a severance pay plan. These plans are prepared well in advance of a termination and generally apply to any terminations at the employer, but there can be exceptions.

Salaries vary significantly by role, industry, and location. For example, a professional like a software developer can expect to earn between $80,000 and $120,000 annually. Hourly wages for lower-skilled roles range from $15 to $25 per hour.

In general, wages must be paid by cash or check. Most states permit payment by direct deposit or by debit card, but only with the written consent of employees and only if the employees are not subject to a fee to withdraw their pay. Most states regulate the frequency at which employees must be paid. It could be either weekly, bi-weekly, semi-monthly or monthly, and it will vary by state.

A statement of wages (often known as a pay stub) must be issued on or before the day of the related salary payment. The information included on the pay stub may vary as states have specific requirements for the information that must be provided to employees each payday. This information can include regular hours, regular pay, overtime hours and overtime pay.

There is no requirement for paid time off for annual leave or vacation time under federal law. In practice, most employers provide employees with paid vacation time ranging from one week per year during the first few years to three weeks or more for long-serving employees. Employees represented by a union may receive more generous vacation time.

***Vacations must be approved at least 30 days in advance.

The Federal Family and Medical Leave Act (FMLA) entitles eligible employees of covered employers (those with fifty (50) or more employees within a seventy-five (75) mile radius) to take unpaid, job-protected leave for specified family and medical reasons, with continuation of group health insurance coverage under the same terms and conditions as if the employee had not taken leave. Under the FMLA, employees may be entitled to up to twelve (12) weeks’ of unpaid medical leave in a 12-month period for a serious health condition that prevents the employee from performing the functions of his or her job. Though there is no national law guaranteeing paid sick leave, several states, counties, and cities require employers doing business within their boundaries to offer paid sick leave.

Under the FMLA, employers with fifty (50) or more employees within a seventy-five (75) mile radius are required to provide employees with twelve (12) weeks’ unpaid leave in a 12-month period for the birth or placement of a child. Some state laws provide for maternity leave for employees who are not covered under the FMLA. In addition, several states provide workers with partial pay during parental leave and in general, it seems there is a trend toward state family leave laws.

Although the United States government recognizes several “national holidays,” the Fair Labor Standards Act (FLSA) does not require payment for time not worked, such as holidays (federal or otherwise). These benefits are generally a matter of agreement between an employer and an employee (or the employee’s representative). However, it is customary for employers to provide employees with paid time off to observe nationally and locally recognized holidays.

Employee benefits fall into two categories: those required by law and those an employer chooses to offer voluntarily. The U.S. Bureau of Labor Statistics states that legally required benefits provide workers and their families with retirement income and medical care, mitigate economic hardship resulting from loss of work and disability, and cover liabilities resulting from workplace injuries and illnesses. Mandated basic benefits include:

• Federal Insurance Contributions Act (FICA) – Old Age Survivors, and Disability Insurance (OASDI)
• And Medicare.;
• Unemployment insurance;
• Workers’ compensation insurance;
• Family and medical leave (FMLA), when required

Some states and local jurisdictions require paid family leave and/or paid sick and safe leave

Other job perquisites are at the discretion of the employer. These can include paid vacation, health insurance, life and disability insurance (in some states, short-term disability leave is mandatory), 401(k) retirement savings plans, education assistance, wellness programs, and childcare assistance.