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What the FLSA Means for a Small Business Payroll
The Fair Labor Standards Act (FLSA), enacted in 1938, sets federal minimum wage, overtime and recordkeeping rules. The Labor Department's Wage and Hour Division enforces it, and workers can sue too. For owners planning year-round, it ties payroll cost, worker status and back-pay reporting together. Our checklist is the Saltbox Pay-Week Audit, below. See 29 U.S.C. 201 and the Department's guide page.
The short version
- Federal minimum wage stands at $7.25 an hour, unchanged since July 24, 2009; where a state sets a higher rate, that one wins.
- After 40 hours in a fixed workweek, overtime pay is 1.5 times the regular rate, and nondiscretionary bonuses count in that rate.
- Most white-collar exemptions need a duties test and $684 a week; the 2024 increases were struck down.
- For Social Security and Medicare purposes, back pay awarded under the FLSA counts as wages, and it shows on Form W-2 for the year in which it is paid.
Who it covers
| Group | Covered? | Note |
|---|---|---|
| Firm that has 2+ employees and $500,000 in annual sales | Yes | Hospitals, schools and governments are covered at any sales level |
| Worker at a smaller firm | Sometimes | Covered individually if the job regularly involves interstate commerce |
The numbers
| Item | Amount | Year |
|---|---|---|
| Federal minimum wage | $7.25 an hour | 2026 |
| Exempt salary level, most white-collar staff | $684 a week | 2026 |
| Repeated or willful pay violation, civil penalty | Up to $2,515 | 2026, same as 2025 |
Source: Federal Register, 91 FR 27833
As of October 29, 2026 we found no final rule for the contractor test proposed February 27, 2026 or the joint-employer rule proposed April 23, 2026.
The Saltbox Pay-Week Audit
- Pick one pay week and tally hours against the 40-hour line.
- Check each exempt claim for duties and the $684 salary.
- Add nondiscretionary bonuses to the regular rate.
- Test each 1099 worker on the facts, not the label.
- Confirm payroll records go back 3 years.
What it means for year-round planners
- Worker status is a wage and a tax question with different tests; see employees and contractors.
- The audit fits the year-round planning calendar as a mid-year task.
- Back pay lands in the payroll of the year it is paid.
Mistakes people make
- Treating a salaried worker as exempt on pay alone.
- Omitting nondiscretionary bonuses from the overtime rate, or averaging hours across two weeks.
- Believing a signed contractor agreement ends the question.
A Wage and Hour investigation, a collective-action suit or a retaliation claim calls for an attorney.
Common questions
Does the FLSA apply to a small business?
Yes, when the firm has two or more employees and annual sales of $500,000. Below that, a worker whose job regularly involves interstate commerce can still be covered.
Is a salaried employee automatically exempt from overtime?
No. Most white-collar exemptions need the right duties and at least $684 a week. A few jobs, such as outside sales, have no salary test.
Do short breaks count as paid time?
Federal law does not require breaks, but rest breaks of about 5 to 20 minutes that an employer gives count as paid hours.