The Fair Labor Standards Act is the federal law most small-business owners have heard of but fewer have actually read. That gap is expensive — FLSA basics cover the rules that determine whether your employees are owed overtime, how long you need to keep their time records, and what happens if a Department of Labor investigator shows up. This guide covers the core provisions every small-business owner needs to understand, in plain language, with the exceptions that actually apply to small teams.
What the FLSA actually covers
The Fair Labor Standards Act, passed in 1938, sets four federal labor standards that apply to most private-sector employers in the US:
- Minimum wage: the federal floor is $7.25/hour. Most states have higher minimums — when state and federal minimums differ, the higher rate applies.
- Overtime: non-exempt employees must be paid at least 1.5× their regular rate for all hours worked over 40 in a single workweek.
- Recordkeeping: employers must maintain specified payroll and time records for at least 3 years.
- Child labor: restrictions on the hours and types of work minors can perform, with stricter limits under age 16.
The FLSA is enforced by the Department of Labor’s Wage and Hour Division (WHD). When the WHD finds a violation, back pay is owed plus an equal amount in liquidated damages — meaning the employer typically pays double the underpaid wages. Willful violations carry additional civil penalties and potential criminal liability.
Does the FLSA apply to your business?
Almost certainly yes. The FLSA applies under two tests, either of which is sufficient:
- Enterprise coverage: your business has at least two employees AND either (1) annual gross sales or business of $500,000 or more, OR (2) is engaged in the operation of a hospital, school, preschool, government agency, or similar covered enterprise.
- Individual employee coverage:even if the business doesn’t meet enterprise coverage, an individual employee is covered if their work “engages in commerce or in the production of goods for commerce.” In practice, this covers almost any employee who uses phone, email, mail, or ships goods across state lines — which is most employees in most businesses.
The $500K threshold is sometimes cited as a reason small businesses are exempt. In practice, individual employee coverage nearly always applies to small teams doing ordinary business. Assume FLSA applies and consult an employment attorney if you believe a specific exemption applies to your situation.
The overtime rule: what it actually means
FLSA overtime is based on the workweek, not the pay period, the day, or the month. The workweek is a fixed, regularly recurring 168-hour period (7 consecutive 24-hour days). You choose which day it starts — Sunday, Monday, or any other day — and it stays consistent. You cannot average hours across two weeks to avoid overtime.
The regular rate of pay
Overtime is calculated at 1.5× the “regular rate of pay,” which is not simply the hourly rate. The regular rate includes most forms of compensation for that workweek: hourly wages, salary, non-discretionary bonuses, shift differentials, and commissions. It excludes discretionary bonuses, gifts, vacation pay, and certain other items. For tipped employees, the regular rate calculation interacts with tip credits in ways that require careful handling.
Daily overtime vs. weekly overtime
Federal FLSA only requires overtime after 40 hours in a workweek. There is no daily overtime requirement at the federal level. An employee who works 12 hours on Monday and 4 hours on Tuesday owes no overtime if the total stays under 40. This is one of the major differences between federal law and California state law, which requires overtime after 8 hours in a day. If your business operates in California, California law applies; see our guide on California break and compliance requirements.
Exempt vs. non-exempt: the classification that matters most
“Exempt” means exempt from the overtime and minimum wage provisions of the FLSA. “Non-exempt” means covered by those provisions. The classification is determined by the employee’s actual job duties and compensation — not by job title, not by the employment contract language, and not by how you’ve historically treated the role.
The most common FLSA exemptions for small businesses:
| Exempt (no OT required) | Non-exempt (OT required) | |
|---|---|---|
| Salary basis | Must be paid ≥ $684/week on salary basis (as of 2024 DOL rule) | Can be hourly or salaried below threshold |
| Executive exemption | Primary duty: management; supervises ≥ 2 full-time employees; authority to hire/fire | Does not meet all three tests |
| Administrative exemption | Primary duty: office/non-manual work directly related to business operations; exercises independent judgment on significant matters | Primarily routine or clerical work |
| Professional exemption | Learned professional (requires advanced knowledge) or creative professional | Work does not require advanced specialized education |
| Outside sales exemption | Primary duty: making sales away from employer's place of business | Inside sales, customer service, most retail roles |
| Typical small-team roles | General manager, licensed nurse practitioner, outside sales rep | Baristas, servers, retail associates, technicians, front desk staff |
Misclassifying a non-exempt employee as exempt is one of the most common — and most expensive — FLSA violations. The back-pay exposure runs from the date of misclassification (up to two years, three if willful) for every overtime hour unpaid. For a single employee who regularly worked 50 hours a week for two years, that back pay can exceed $50,000 before liquidated damages.
FLSA recordkeeping requirements
The FLSA requires employers to keep specific records for each non-exempt employee. The core time and pay records:
- Employee’s full name and Social Security number
- Address, including zip code
- Birth date, if younger than 19
- Sex and occupation
- Time and day of week when the employee’s workweek begins
- Hours worked each workday and total hours worked each workweek
- Basis on which wages are paid (hourly, salary, piece rate)
- Regular hourly pay rate
- Total daily or weekly straight-time earnings
- Total overtime earnings for the workweek
- Deductions from or additions to wages
- Total wages paid each pay period
- Date of payment and the pay period covered
Payroll records must be kept for 3 years. Records on which wage rates are based (time cards, work schedules, job evaluations) must be kept for 2 years. In practice, keeping 3 years of everything is cleaner than managing two different retention schedules.
There is no FLSA requirement for a specific format — digital or paper records are both acceptable. However, digital records are far easier to produce during an investigation. A time-clock app that exports PDF payroll reports creates the audit trail automatically. See our guide on tracking PTO accruals for hourly employees for related recordkeeping considerations.
Minimum wage under the FLSA
The federal minimum wage has been $7.25/hour since 2009. Most states and many cities have higher minimums, and when state law is more protective than federal law, the higher rate applies. In 2026, states like California ($16+/hour), New York ($15+/hour), and Washington ($16+/hour) all have minimums significantly above the federal floor.
For tipped employees, the FLSA allows a tip credit: the federal minimum cash wage for tipped employees is $2.13/hour, as long as the employee earns enough in tips to bring their total hourly compensation to at least the full minimum wage. Many states have eliminated the tip credit entirely (California, Oregon, Alaska, and others). Track which rules apply in each state where you operate, and see our DOL rule changes overview for 2026 for recent updates.
What happens when the WHD investigates
Most WHD investigations are triggered by employee complaints. The investigator will typically request payroll records, time records, and employee contact information for the period under review. The investigation can cover the previous 2–3 years of records depending on whether a willful violation is alleged.
If violations are found, the standard outcome is a back-wage agreement: the employer pays the underpaid wages plus an equal amount in liquidated damages. For record-keeping violations without underlying wage violations, civil penalties can still be assessed. The WHD can also seek court orders requiring future compliance.
Good records are the primary defense in any FLSA investigation. An employer who can produce accurate, complete time records for every non-exempt employee for the past three years has substantially fewer vulnerabilities than one who can’t.