Once you reach the point in your business where it becomes necessary to hire employees to assist you with production or other operations, keep in mind that there are a number of federal and state laws that employers must follow when hiring employees. The laws ensure that both the employer and employee pay required government taxes. In addition, certain laws provide protections to employees by (1) establishing minimum wages and benefits, (2) preventing discrimination, and (3) creating safe workplaces.
Many small business turn to employee leasing firms (see the “Outsourcing the Back Office” section for more information) to help manage the required paperwork, deductions, etc.
Should you decide to manage this responsibility yourself, this lesson presents an overview of the various labor law requirements you must comply with. It includes excerpts from the Hawaiʻi State Department of Labor and Industrial Relations Labor Law Requirements for New Employers guide. The reader is encouraged to read the longer discussions on the various labor laws at:
http://labor.hawaii.gov/wp-content/uploads/2013/03/New-Employer-Packet-3-14-13.pdf
Why is this important?
Following the various laws will protect you and your business from possible legal action and fines and ensure eligibility in programs that are compliance dependent.
Federal Employer’s Identification Number (FEIN)
A federal employer’s identification number (FEIN), is a number assigned solely to your business by the IRS. Your FEIN is used to identify your business to several federal agencies responsible for the regulation of business.
To determine if you need a FEIN check out the requirements at the IRS website: http://www.irs.gov/Businesses/Small-Businesses-Self-Employed/Do-You-Need-an-EIN. As a general rule, most businesses (including LLCs) are required to have one and in many cases, banks will require one to open a business bank account.
You can apply for a FEIN online (you will get FEIN immediately) by visiting the IRS webpage at: https://sa2.www4.irs.gov/modiein/individual/index.jsp. Alternatively, you can mail in the forms (processing takes approx. 4 weeks) which can be found at: http://www.irs.gov/file_source/pub/irs-pdf/fss4.pdf.
Citizenship requirements
When you consider hiring an employee, you must ensure that the individual is authorized to work in the U.S. Authorized workers include the following groups:
- Citizens or nationals of the U.S.
- Lawful permanent residents
- Aliens authorized to work during the period of hire
To document authorization, each employee must complete an Employment Eligibility Verification Form I-9 (https://www.uscis.gov/i-9). The employer (you) must retain the form and make it available for inspection, upon request, by U.S. government officials.
If the employee is not a citizen or a lawful permanent resident, the individual may need to apply for an Employment Authorization Document (EAD) to prove eligibility to work in the U.S. See the Handbook for Employers at https://www.uscis.gov/i-9-central/handbook-employers-m-274 for more information on citizenship and employment.
Farmers may apply for the H-2A temporary agricultural program which establishes a means for agricultural employers who anticipate a shortage of domestic workers to bring nonimmigrant foreign workers to the U.S. to perform farm labor or services of a temporary or seasonal nature. The program requires approval from the U.S. Citizenship and Immigration Services (USCIS). You will need to file an application with the Department stating that there are not sufficient workers who are able, willing, qualified, and available, and that the employment of aliens will not adversely affect the wages and working conditions of similarly employed U.S. workers. See the following for additional information: http://www.foreignlaborcert.doleta.gov/h-2a.cfm.
Child labor laws
Under the Hawaiʻi Child Labor Law, a child labor certificate or “work permit” is required for working minors until they reach 18 years of age. Specific rules and documentation can be found at: http://labor.hawaii.gov/wsd/child-labor/.
Wages
Effective January 1, 2018, the Hawaiʻi minimum wage is $10.10 per hour. Employees must be paid at least twice monthly and within seven days after the end of each pay period and pay statements must include specific information.
Employees must be paid overtime for time worked over 40 hours per week. Overtime is equal to no less than one and one-half times the regular pay rate. See Section 387-3, Hawaii Revised Statutes.
Exceptions to this rule are explained in the White Collar Exemptions chart.
Reporting new hires
You must report every newly hired or rehired employee to the Hawaiʻi Child Support Enforcement Agency (CSEA) within 20 days after the date that the employee starts work. The CSEA is a division within the Department of the Attorney General and works in partnership with the Federal Office of Child Support Enforcement and other State and local agencies to ensure that children have the ongoing financial support of both parents, by providing a system for payments and disbursements of court-ordered child support.
The CSEA is the State Parent Locator Service (SPLS) for Hawaii and provides data entry, storage and interface services for Hawaiʻi’s new hire reporting system the State Directory of New Hires (SDNH). The SDNH is a mandatory program for all states. SDNH reports statewide employment information to the National Directory of New Hires (NDNH). New hire information from NDNH is used by all state child support enforcement agencies to track non-custodial parents who are working out of state. For more information about SDNH see: State Directory of New Hires Q&A.
Federal and State taxes
As an employer, you must withhold certain taxes from your employees’ wages. These include the following:
- Federal income tax
- State income tax
- Social Security
- Medicare
You must withhold federal and state income tax from your employees’ wages. To determine how much to withhold from each wage payment, each employee must complete Form W-4 for federal taxes (http://www.irs.gov/pub/irs-pdf/fw4.pdf ) and Form HW-4 for state taxes (http://files.hawaii.gov/tax/forms/2017/hw4.pdf). Use the Agricultural Employer’s Tax Guide (http://www.irs.gov/pub/irs-pdf/p51.pdf ) and the Hawaiʻi State Department of Taxation Employer’s Tax Guide (http://files.hawaii.gov/tax/news/pubs/17BkltA.pdf) for tax rate and submission information.
For wages paid in 2018 the social security tax rate is 6.2%, for both the employee and employer, on the first $128,400 paid to each employee. You must withhold this rate from each employee and pay a matching amount.
The Medicare tax rate on all wages is 1.45% each for the employer and the employee. You must withhold this rate from each employee and pay a matching amount.
The most efficient way to make Federal tax payments is to use the Electronic Federal Tax Payment System (see: https://www.eftps.gov/eftps/home.do).
For State tax payments, see the State Tax Electronic Filing system (http://hawaii.gov/tax/b3_elf.htm).
Tax rates and regulations can change annually so be sure to check the Federal and State websites for the most current information.
Unemployment Insurance
The objective of the Unemployment Insurance (UI) program is to provide temporary financial assistance to workers who are involuntarily unemployed. Employers are required to pay UI contributions on the wages of each employee up to the annual taxable wage base. The contributions are deposited into a trust fund, and withdrawn for purposes of paying benefits to eligible individuals. There can be no deduction from the employee’s wages for repayment.
Every individual or organization that becomes an employer must file a status report on Form BB-1, “Basic Business Application,” with the State Tax Office within 20 days after hiring an employee. A determination of liability will be made, the subject employer will be assigned an identification number, and tax forms will be furnished. Because new employers do not have any reserves when they first register as they have not made any contributions, they are assessed a flat UI contribution rate for approximately two years.
New employers will be issued an “Unemployment Insurance for Workers” poster that should be posted at each work place. The poster furnishes information to workers on their benefit rights and how to file a claim for unemployment benefits.
Employers must file a Quarterly Wage, Contribution and Employment and Training Assessment Report, “Form UC-B6” (http://labor.hawaii.gov/ui/hui-express-file-quarterly-reports/). The most efficient way to file the report and make your payment is through the Hawaiʻi Unemployment Insurance (HUI) Express website (see: https://hui.ehawaii.gov).
Agriculture labor, independent contractor, and family member exclusions exist. See the Handbook for Employers on Unemployment Insurance to determine whether you qualify for an exclusion: http://labor.hawaii.gov/ui/test-handbook-for-employers/.
An Employer FAQ can be located at http://labor.hawaii.gov/ui/906-2/.
Temporary Disability Insurance
The Hawaiʻi Temporary Disability Insurance (TDI) law requires employers to provide partial “wage replacement” insurance coverage to their eligible employees for non-work-related sickness or injury (including pregnancy). This means that if an employee is unable to work because of an off-the-job sickness or injury and that employee meets the qualifying conditions of the law, the disabled employee will be paid disability or sick leave benefits to partially replace the wages lost. For additional information and a list of exclusions, see the Hawaiʻi State Department of Labor and Industrial Relations Labor Law Requirements for New Employers guide.
TDI coverage can be purchased from an authorized TDI insurance carrier (see the state’s published list at: http://labor.hawaii.gov/dcd/files/2013/01/TDI-Carriers.pdf). You can pay either the entire premium or charge 50% of the premium (not to exceed 0.5% of weekly wages) to eligible employees.
For more information visit the Disability Compensation Division website on TDI at: http://labor.hawaii.gov/dcd/home/about-tdi/
Prepaid Health Care (Medical)
The Hawaiʻi Prepaid Health Care (PHC) Act sets minimum standards of health care benefits for workers. Employers are required to provide Hawaii employees who suffer disabilities due to non-work related illnesses or injuries adequate medical coverage for these types of illnesses or injuries, thereby protecting them from the high cost of medical and hospital care.
Employers must provide health care coverage to employees who work at least twenty (20) hours per week and earn 86.67 times the current Hawaiʻi minimum wage a month ($10.10 x 86.67 = $875). Coverage commences after four (4) consecutive weeks of employment or the earliest time thereafter.
PHC coverage can be purchased from an approved health plan though an authorized health care contractor (see the state’s published list at: http://labor.hawaii.gov/dcd/files/2013/10/Approved-Health-Care-Plans.pdf). You can pay either the entire premium or share the cost of the premium with eligible employees. The employee’s share of the premium (for single coverage) is limited to 1.5% of the individual’s monthly gross wages, not to exceed 50% of the monthly premium.
For more information visit the Disability Compensation Division website on Prepaid Health Care at: http://labor.hawaii.gov/dcd/about-phc/
Family and Medical Leave Act
The federal Family and Medical Leave Act allows an employee to take a period of unpaid leave due to a serious health condition that makes the employee unable to perform his/her job, to care for a sick family member, or to care for a new son or daughter (including by birth, adoption or foster care).
Besides the federal Family and Medical Leave Act, which generally applies to companies having more than 50 employees, Hawaiʻi has its own law. The Hawaii law applies only to companies with 100 or more employees. For details on the federal and state plan, see https://www.dol.gov/whd/fmla/ and http://labor.hawaii.gov/wsd/hawaii-family-leave/.
Workers’ Compensation
Workers’ Compensation (WC) provides employees with medical care and partial wage loss replacement for a work-related injury/illness. Any employer having one or more workers, full-time or part-time, permanent or temporary, is required to provide WC coverage.
WC coverage can be purchased from an insurance carrier authorized to provide WC insurance in Hawaiʻi. The employer must pay the full cost of the premium. Employees cannot be assessed for any portion of an employer’s WC insurance premium.
The employer must post signage in the workplace and file specific forms when an injury is reported. See the Hawaiʻi State Department of Labor and Industrial Relations Labor Law Requirements for New Employers guide for additional information.
Providing a safe workplace
The Hawaiʻi Occupational Safety and Health (HIOSH) laws and regulations are intended to assure safe and healthful working conditions for Hawaii’s workers. Employers are responsible for:
Furnishing employees with workplaces that are safe and free from recognized hazards
Creating specific reports
Maintaining required records on employee injuries and illness reports, employee exposure, and medical surveillance
Posting specific information including any HIOSH citations that are issued to the company
Occupational safety and health laws and regulations are enforced through workplace inspections conducted by HIOSH compliance officers. Inspections are conducted without advance notice. Where violations are found, citations and fines may be issued. Visit the HIOSH website for additional information: http://labor.hawaii.gov/hiosh/home/for-employers/.
Employee rights
Hawaiʻi law prohibits discrimination (unequal treatment) in employment practices and policies. The laws cover pre- and post-hiring practices. Discrimination is prohibited on the basis of:
- Sex
- Race
- Ancestry/national origin
- Religion*
- Color
- Disability
- Age
- Marital status
- Assignment of income for child support
- Arrest and court record*
- National Guard participation
- Sexual orientation
- Breast feeding
*See the Hawaiʻi State Department of Labor and Industrial Relations Labor Law Requirements for New Employers guide for exemptions/exceptions.
Specific rules apply in relation to:
- Sexual harassment
- Pregnancy discrimination
- Accommodations for employees with disabilities
- Religious accommodations
See the Hawaiʻi State Department of Labor and Industrial Relations Labor Law Requirements for New Employers guide for details.
Notice to employees
You must publicly display certain information for employees, which explains what their rights and benefits are. The Department of Labor and Industrial Relations (DLIR) has a free, all-in-one poster that includes required information on: Wage and Hour, Disability Compensation, Occupational Safety and Health, employment discrimination and whistleblower protection laws, Unemployment Insurance, business/plant closings, and military leave.
You can download the required posters from the DLIR website, http://labor.hawaii.gov/labor-law-poster/.
Smoke-Free Law
The Smoke Free Hawaiʻi law creates fair and consistent statewide protection for the health of people who do not want to be subjected to secondhand smoke. Under the law, smoking is prohibited in certain areas. See the Overview of the Smoke Free Workplaces Law for prohibited areas and exceptions at
https://health.hawaii.gov/tobacco/files/2013/10/28Sept2017-Laws-rev1.pdf
Many states have enacted “right-to-work” laws that prohibit agreements requiring union membership or dues as a condition of employment.
Hawaiʻi does not have such a right-to-work law and allows union contracts between an employer and a union.
Employees vs. Independent Contractors
Many small businesses try to avoid the avoid the requirements and regulations that come with hiring employees by treating them as independent contractors. To prevent this, the federal government has strict guidelines when determining whether you indeed have an employee or independent contractor. All information that provides evidence of the degree of control and independence will be considered. This information falls into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Keep in mind, state and federal government agencies perform regular audits looking for workers who have been misclassified as independent contractors. Penalties could include fines for unfiled W-2 forms, payment (including interest) for uncollected withholdings, penalties for unpaid taxes and additional fines and penalties, including criminal penalties and incarceration if fraud or intentional misconduct is suspected.
Next steps and resources
Before hiring an employee, be prepared to follow the various labor laws.
Review the Hawaiʻi State Department of Labor and Industrial Relations Labor Law Requirements for New Employers guide at:
http://labor.hawaii.gov/wp-content/uploads/2013/03/New-Employer-Packet-3-14-13.pdf
Visit the Department of Labor and Industrial Relations website at: