Home » Wage and Hour Laws: FLSA Guide for Small Businesses

Wage and Hour Laws: FLSA Guide for Small Businesses

SoHoSoCal
July 25, 2026
10:55 pm

The Fair Labor Standards Act, commonly known as the FLSA, establishes federal requirements for minimum wage, overtime pay, employee records and youth employment.

These rules affect most small businesses, but federal law is only the starting point. State and local laws may require higher wages, daily overtime, meal periods, paid breaks or additional protections. When different standards apply, employers generally must comply with the rule that provides employees with greater protection.

Does the FLSA Apply to Small Businesses?

A business may be covered by the FLSA through enterprise coverage or individual employee coverage.
Enterprise coverage generally applies when a business:

Has at least $500,000 in annual sales or business volume and engages in interstate commerce.
Operates a hospital, healthcare facility, school or public agency.
Conducts another activity specifically covered by federal law.

Even when the business does not meet the enterprise threshold, individual employees may still be protected if their work involves interstate commerce. This may include communicating with out-of-state customers, processing credit card transactions, ordering interstate supplies or handling goods that moved between states.

Because coverage is broad, employers should not assume that a small workforce or limited revenue automatically removes FLSA obligations.

Employees, Independent Contractors and Volunteers

Only employees receive the FLSA’s minimum wage and overtime protections, but calling someone an “independent contractor” does not determine the worker’s legal status.

The Department of Labor examines the economic reality of the relationship, including the worker’s independence, opportunity for profit or loss, investment, control, permanence and whether the work is integral to the business.
Small businesses should be especially careful when a worker:

Performs the company’s primary service.
Works indefinitely for one business.
Uses equipment supplied by the company.
Has little control over scheduling or pricing.
Has no independent customers or business operation.

Private for-profit businesses also generally cannot use unpaid volunteers to perform work that would normally be completed by employees.

Federal Minimum Wage Requirements

The federal minimum wage remains $7.25 per hour for covered nonexempt employees. When a state or local minimum wage is higher, the employee generally must receive the higher rate.

Employers must count all compensable time, including work they allow employees to perform even when it was not requested or scheduled. This can include certain preparation, closing, remote work and after-hours communication.

An employer may discipline an employee for violating scheduling or overtime policies, but it generally must still pay for work it knew or should have known was performed.

Rules for Tipped Employees

Under federal law, an employer using the tip credit may pay a tipped employee a direct cash wage of at least $2.13 per hour and claim up to $5.12 per hour as a tip credit.
The employer must:

Inform the employee about the tip-credit rules.
Ensure cash wages and tips equal at least the applicable minimum wage.
Pay any shortage when tips are insufficient.
Allow employees to retain their tips, except for a lawful tip pool.
Exclude managers and supervisors from receiving employee tips, subject to limited rules for tips they receive directly.

State laws may require a higher direct wage or prohibit the federal tip-credit approach entirely.

How Is Overtime Pay Calculated?

Covered nonexempt employees must receive at least 1.5 times their regular rate for hours worked beyond 40 in a fixed seven-day workweek.

Overtime must be calculated by workweek, not averaged across a two-week or monthly pay period. For example, an employee who works 45 hours during one week and 35 hours during the next has five overtime hours in the first week.

The regular rate may include more than an employee’s hourly wage. Certain commissions, nondiscretionary bonuses and incentive payments may need to be included when calculating overtime.

Private employers generally cannot replace required overtime pay with compensatory time off in a later workweek.

Does Paying a Salary Eliminate Overtime?

No. Paying an employee a salary does not automatically make the employee exempt from overtime.
Most executive, administrative and professional exemptions require the employee to satisfy three elements:

The employee is paid on a salary basis.
The employee meets the applicable salary threshold.
The employee performs qualifying exempt duties.

As of 2026, the standard federal salary threshold is $684 per week, equivalent to $35,568 annually. The higher thresholds created by the 2024 overtime rule were vacated by a federal court. The Department of Labor restored the operative 2019 regulatory thresholds in 2026.

Job titles such as “manager,” “administrator” or “specialist” do not establish an exemption. The employee’s actual responsibilities and compensation must satisfy all applicable requirements.

Outside sales employees and certain doctors, lawyers and teachers are subject to different tests.

Common Wage and Hour Mistakes

Frequent FLSA compliance problems include:

Treating all salaried employees as overtime-exempt.
Allowing employees to work before clocking in or after clocking out.
Averaging hours across multiple workweeks.
Failing to include applicable bonuses or commissions in the regular rate.
Deducting uniforms, tools or shortages when doing so reduces pay below the required minimum wage.
Incorrectly classifying employees as independent contractors.
Giving private-sector employees time off instead of required overtime pay.
Failing to record remote or after-hours work.
Assuming unauthorized overtime does not need to be paid.

A written policy is helpful, but it does not protect an employer that knows employees are performing unpaid work.

Child Labor Requirements

Federal law restricts the hours and occupations available to employees under 18.
For most nonagricultural employment:

Children under 14 generally cannot be employed in FLSA-covered jobs, subject to limited exceptions.
Employees ages 14 and 15 may work only in permitted nonhazardous occupations and during restricted hours outside school.
Employees ages 16 and 17 may work unlimited federal hours but cannot perform occupations declared hazardous.
Federal youth-employment restrictions normally end at age 18.

For 14- and 15-year-olds, federal limits generally include no more than three hours on a school day, 18 hours during a school week, eight hours on a nonschool day and 40 hours during a nonschool week.
State laws may impose stricter schedules, work-permit requirements or additional prohibited occupations.

Payroll Recordkeeping Requirements

Covered employers must maintain accurate records showing how employee wages were calculated.
Important records include:

Employee identity and occupation.
The beginning of the employee’s workweek.
Hours worked each day and workweek.
Regular hourly rate.
Straight-time and overtime earnings.
Additions to and deductions from wages.
Total wages and applicable pay period.

Payroll records generally must be retained for at least three years. Documents supporting wage calculations, such as timecards, schedules and wage-rate tables, generally must be retained for at least two years.
Records may be electronic or paper, but they must be accurate and accessible.

Required Workplace Posters

Employers with employees covered by the FLSA must display the official “Employee Rights Under the Fair Labor Standards Act” poster where workers can readily see it.

Federal posters are available from the Department of Labor at no cost. Employers should also check state and local posting requirements and replace outdated notices when necessary.

Penalties and Protection Against Retaliation

Wage and hour violations can result in back wages, an equal amount in liquidated damages, civil penalties and legal expenses. Willful or repeated violations may lead to additional consequences.

Employers must not terminate, threaten, demote or otherwise retaliate against an employee for making a wage complaint or participating in an investigation. Protected complaints may be oral or written and can include internal reports made to the employer.

Wage and Hour Compliance Checklist

Small businesses can reduce compliance risks by taking these steps:

Identify which federal, state and local wage laws apply.
Review every employee and contractor classification.
Confirm that exempt employees satisfy both salary and duties tests.
Record all working time, including remote and after-hours work.
Calculate overtime separately for each workweek.
Include applicable bonuses and commissions in the regular rate.
Audit tipped-employee notices and tip-pooling arrangements.
Review jobs and schedules before employing workers under 18.
Retain payroll and timekeeping records for the required periods.
Display current workplace posters.
Train supervisors not to permit off-the-clock work.
Investigate wage complaints without retaliation.

Frequently Asked Questions

Do small businesses have to pay overtime?
Yes, when the business or employee is covered by the FLSA and the employee does not qualify for a specific exemption.

Is every salaried employee exempt from overtime?
No. Salary alone is insufficient. The employee must satisfy the applicable salary basis, salary level and job duties requirements.

Can employees waive their overtime pay?
No. An employee cannot privately agree to give up overtime protections established by the FLSA.

Can overtime be averaged over two weeks?
Generally, no. Overtime must normally be calculated separately for each seven-day workweek.

Must unauthorized overtime still be paid?
Generally, yes, if the employer knew or should have known the work was performed. The employer may enforce its scheduling policy separately.

How long should payroll records be retained?
Core payroll records generally must be kept for three years, while supporting wage-calculation records generally must be kept for two years.

Legal Notice

This article provides general educational information and is not legal advice. Wage and hour requirements can change and may differ by state, locality, industry and employee position. Employers should consult current government guidance or qualified employment counsel before making classification or payroll decisions.

Source: NFIB Guide to Wage and Hour Laws