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Under the Radar?

You may be big enough to have to play by some rules, but too small for others. How do you know just what's applicable?

As any business owner with employees knows, there's a welter of state and federal laws providing employees with certain rights and protecting them from various forms of discrimination. But not every law in your jurisdiction applies to every employer. Many laws explicitly state that they only apply to businesses that have a certain number of employees or more.

Consider a recent case. Design Group One, a tiny architectural firm in Chester, Connecticut, fired a pregnant woman. The employer said the reason was poor performance, but the former employee claimed it was because of all her doctor appointments. She sued under the state's Fair Employment Practices Act, which prohibits discrimination on the basis of sex, including pregnancy.

In July, the Connecticut Supreme Court ruled that the law in question did not apply because the firm had only two employees, while the law specifically applies only to businesses with three or more. The judges noted that the legislators had clearly stated their intention to protect businesses with only one or two employees from lawsuits alleging discrimination.

So if your business is quite small, certain laws simply don't apply to you. The threshold, however, is different for each law. For instance, consider just the most well-known federal laws. The Americans With Disabilities Act (ADA) and Title VII of the Civil Rights Act, which prohibits discrimination on the basis of race, religion or national origin, both apply to companies with 15 employees or more. The Age Discrimination in Employment Act doesn't kick in until 20 employees. But OSHA regulates workplace safety for every business, even if it has only one employee. The Family and Medical Leave Act, which requires employers to allow workers to take up to 12 weeks unpaid leave, covers companies with 50 or more employees.

Even if your business appears to be too small to be covered by a given law, other criteria may subject you to it anyway. The federal Fair Labor Standards Act, which regulates wages and hours, including when you have to pay overtime, applies to every enterprise with two or more employees if it's a public agency, hospital, health-care facility, school or business with a gross income of $500,000 or more. Even if your business doesn't meet these criteria, the law applies if you engage in interstate commerce.

Note that the fact that your business is protected from a federal law in a given area doesn't exempt you from similar state laws. For instance, a firm in Connecticut with three employees wouldn't be liable for discrimination under Title VII of the Civil Rights Act with its 15-employee threshold, but it would be under the state's Fair Employment Practices Act. Accordingly, attorneys evaluating a potential plaintiff's options will look at both the state and federal laws and their thresholds before crafting a claim.

So should you avoid adding one more employee to avoid going over some threshold? It's worth a thought, but be guided more by the needs of your business than by fear of litigation.


Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

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This article was originally published in the November 2002 print edition of Entrepreneur with the headline: Under the Radar?.

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