U.S. labor, social security and tax regulations – Depends on the particular U.S. state? Or even the city?

My field of work also includes business inquiries regarding US law. Here I had a case in which a German company wanted to open a branch office in the USA, specifically in Denver, Colorado. Now a German employee is to be deployed there as a local team leader. Specifically, the question was now about locally applicable labor, social security and tax law.

First of all, it should be noted that U.S. law generally has a rather federal structure, i.e., the respective U.S. states have in many cases enacted their own regulations that apply only locally in the respective state. On top of this, there is federal U.S. law. And as if it is not complicated enough, the respective cities and municipalities can also enact their own regulations. The respective sources of law are the Constitution, statutes, legal ordinances and case law. To overcome differences, so-called “Uniform Laws” exist in many areas of law. The most successful is the Uniform Commercial Code (UCC), which applies in all U.S. states.

In terms of legal cultures, U.S. law follows the “British” common law. The exception is the U.S. state of Louisiana, which follows the French legal tradition and has its own civil code within this framework.

The specific question is now divided into three parts, labor law, social security law and tax law.

With respect to labor law, the employment of workers is governed by various federal and state laws. The most important source of law here is the Fair Labor Standards Act (FLSA), which originates from federal law. It has specific regulations on minimum wages, overtime and working hours and sepecially on overtime payment. Specifically, under the FLSA, a federal minimum wage of $7.25 per hour (2022) is in effect. Besides, the most important FLSA protection is overtime pay. Here, each hour worked in excess of a regular 40-hour workweek must in general be compensated at 1.5 times the regular hourly rate. With regard to the signing of contracts, it is important to note that, as a rule, only managing directors and senior executives receive an employment contract. In practice, regular employees receive only a very brief “engagement letter” or “offer letter. With regard to contract termination, the so-called “employment-at-will” doctrine applies, according to which both the employee and the employer can in principle terminate the employment relationship with or without cause at any time. In practice, however, at least a 14-day notice period has gained popularity. With regard to notices of termination, it must be ensured that they cannot be classified as “discriminatory”.

So much for federal law. As mentioned above, however, local state law also applies – in this case, the law of the state of Colorado: In deviation from the FLSA, Colorado has a local minimum wage of $12.32 per hour. And as a city, Denver currently (2022) has a minimum wage of $15.87. Under the “favorability principle” also applicable in the U.S., the latter minimum wage of USD 15.87 per hour therefore applies to the Company. Furthermore, a local feature of Colorado is that after the Colorado Overtime and Minimum Pay Standards Order eery employer shall authorize and permit a compensated 10-minute rest period for each 4 hours of work.

With regard to social security, there is still no general national health insurance, although at least since 2010 “Obamacare” has been able to reach a large part of the population for at least basic protection. The most important law for social security is the rather rudimentary Social Security Act, which at least covers basic benefits for pension insurance, unemployment insurance and health insurance for people over 65 and particularly needy. In practice, therefore, social security remains the task of private care.The social security agreement between Germany and the USA, which is relevant for assignments from Germany to the USA for up to 24 months, unfortunately only covers old-age, survivors’ and disability insurance. No remarkable practice-relevant characteristics for the U.S. state of Colorado and for the city of Denver could be researched.

With regard to tax law, the following applies: Tax jurisdiction in the USA is divided between the federal government, states and municipalities. It is therefore possible for taxes to accrue cumulatively at the federal level (federal taxes), at the state level (state taxes) and at the local level of cities and municipalities (local taxes). For the personal income tax, it is like in Germany that here the worldwide income is recorded according to a basically progressive tax rate. For corporate income tax, at the federal level, the U.S. levies a corporate income tax similar to the German corporate income tax. This is 21% at the federal level and an additional 4.63% of federal taxable income at the Colorado state level. For the sales tax, the individual states and cities set their own tax – for Denver, this is currently 8.81%, namely 2.9% with respect to the state of Colorado and another 4.81% for the city of Denver and 1,1% taxes for the greater region.

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