Towards the end of the spring school semester, a golden hiring opportunity opens up for small business owners. College and high school students begin looking for summer positions, hoping to make a little extra pocket change, and maybe even gain some vital work experience at the same time.
For employers, it’s an opportune moment to bring in temporary staffing to catch up on pending projects and extra work. It’s also an excellent time to scout for permanent employees . . . whether you formally hire them at the end of the summer, or wait for them to return fully trained after their next round of schooling.
Hiring student workers is also a way to give back to the future generation – summer jobs and internships teach vital work skills, and help young people determine what they want to do with their lives once they finish their formal education. Hands-on “real world” work experience is an education in itself.
This all sounds warm and fuzzy, but employment opportunities always have a potential for risk. What special payroll issues should you be aware of before hiring a summer worker?
Must interns be paid compensation?
Bringing new employees “up to speed” typically requires an investment in paid training time, a necessary up-front cost that is expected to provide long-term benefits to the business. For that reason, temporary employees are often used for tasks that require a minimum of training. On the other hand, internships by their nature imply an educational opportunity for the student to gain valuable training and experience. Therefore, some internships do not include monetary compensation.
An unpaid intern is very different from someone who provides volunteer services (and volunteering is only allowed in government or non for profit organizations). By law, all employees are entitled to monetary compensation. So how can a business determine whether an internship should be considered an employee relationship?
The U.S. Department of Labor provides guidelines regarding unpaid internships. The “primary beneficiary test” considers the “economic reality” of the relationship to determine who is the “primary beneficiary” of the relationship.
Here are the factors in a nutshell:
- The training received would be similar to that received in an educational environment, tied to a formal education program, and meet the needs of the intern’s academic commitments.
- There should be no expectation of compensation – express or implied. The intern’s activities should complement the work of paid employees rather than displacing them, and be of limited duration, without expectation of a forthcoming permanent, paid position.
If these factors are not met, an intern should be paid at least minimum wage and would be eligible for overtime pay.
For more information, see Fact Sheet #71 from the U.S. Department of Labor Wage and Hour Division.
Am I allowed to hire a minor?
Many student workers are under 21 years of age, and the employment rules and safety standards for minors are more rigorous than those for adult employees. Make sure you are aware of any special Federal and state rules particular to their age and related to the type of work they will be doing. There are special exceptions to these rules for newspaper carriers, agriculture, the entertainment industry, certain home workers, and family workers.
Generally, the minimum age for employment is 14 years. Employees between the ages of 14 and 16 are very limited in the types of jobs they are allowed to do, and are also restricted in the quantity of hours they can work:
- Between 7 a.m. and 7 p.m. during the school year, or until 9 p.m. between June 1 and Labor Day, as long as school isn’t in session.
- A maximum of 3 hours on a school day, 8 hours on a non-school day, 18 hours in a school week, and 40 hours in a non-school week.
- Students participating in work experience or career exploration programs are allowed to work up to 23 hours per week, including during some school hours.
Employees under the age of 18 are not allowed to perform hazardous work, unless they are enrolled in certain student apprenticeships or training programs. Restricted types of activities include running power equipment and vehicles, and working near flammable or hazardous materials, such as areas where food is being cooked.
If the employee is under the age of 18, the employer must obtain an age certificate recognized by both the U.S. Department of Labor and your state Wage and Hour Division. Check with your State Department of Labor regarding additional requirements for hiring minors.
There is a lower Federal minimum wage for workers under the age of 20, full-time students and student learners, and some workers with disabilities. If the state minimum wage is higher than the Federal minimum, you must pay the higher rate.
Should I consider hiring family?
The rules for hiring your own children are much more flexible than those for hiring other minors and there are also more tax advantages for the business and the family. There is no limit to the amount of hours or the time of day that owner’s children can work, nor is there a minimum age, although there are still restrictions regarding hazardous work for children under the age of 16. If all employees in the business are immediate family, the business isn’t even required to pay them minimum wage or overtime pay.
A parent with a sole proprietorship, or parents who are the sole owners of a partnership, do not have to withhold FICA and Medicare on their minor children who work for them until they reach the age of 18 and FUTA until they become 21. This means that the child’s earnings are essentially tax free earnings to the family, up to the Federal Standard Deduction, and while still being considered a deductible expense for the business. This legitimate loophole does not apply to owners of S and C Corps.
Add in the opportunity to pass on your legacy, to teach your children basic work values and a trade, and hiring family becomes a pretty smart idea. My brother and I have very fond memories of working with our parents in the family business during school vacations. It was an experience that benefited the whole family.
Read more about the advantages of family owned businesses in our previous blog article: Does growing up in a family business provide valuable life experience?
Why does it matter?
Employment laws can be complicated and inconvenient, so some businesses choose to overlook the rules. They may decide to misclassify temporary workers as independent contractors, or pay them “under-the-table”. These business owners may feel that if the employee is happy with the arrangement, no harm is done. Is this a safe course?
Being an employer, by its nature, is a risky activity. What do responsible businesses do to mitigate risk? They typically purchase insurance to protect themselves. Is it costly? Definitely, but it’s worth the cost in the long run.
The same is true with payroll regulations. Following the rules can be tedious and expensive, but it’s the safe choice in the end. So protect your employees and protect your own interests by following the rules carefully. Some of the rules aren’t so obvious, and it’s better to know than to be surprised. When in doubt, seek professional advice.
The staff at Level and True Accounting Services LLC have experience with employment issues, and would be happy to assist you in establishing proper payroll procedures in your business. Visit the Payroll page on our website for more information.
You may also want to check out our previous blog article: A Business Owner’s Basic Guide to Payroll: Employment Myths and Misconceptions
– Written by Gina Palacio, Owner of Level & True Accounting Services LLC