Fair Labor Standards Act (FLSA) Guide for Small Businesses
Learn who the Fair Labor Standards Act covers, the $7.25 minimum wage, overtime rules and penalties, with slides, tables and a checklist for employers.
Last reviewed October 29, 2026 · General information, not legal advice
General information only, not legal advice. CPA Tax Payroll and Accounting Corp is a CPA firm, not a law firm. Laws change: confirm with the official source or a licensed attorney before you act. Read the full notice.
The Fair Labor Standards Act, usually shortened to the FLSA, is the federal law that sets minimum wage, overtime pay, payroll records and child labor rules for many U.S. employers. The U.S. Department of Labor's Wage and Hour Division enforces it. This page is for owners of small businesses and nonprofits who want to know whether the FLSA applies and what it asks of an employer.
Slide show: The FLSA in seven slides
What the law does
The FLSA of 1938 sets federal minimum wage, overtime, recordkeeping and child labor rules.
Who it covers
Employees of businesses with $500,000 or more in sales, or whose own work crosses state lines. Nonprofits count only for business-type activity.
The core rule
Non-exempt employees get at least $7.25 an hour and 1.5 times their regular rate after 40 hours in a workweek. Where state law pays more, the higher rate wins.
The key number
Most executive, administrative and professional staff are exempt from overtime only if they earn at least $684 a week and pass a duties test. The 2024 increases were struck down.
The deadline
A worker generally has 2 years to sue for back pay, or 3 years if the violation was willful.
The penalty
Back wages, an equal amount as liquidated damages and attorney fees. Civil penalties reach $2,515 per violation for repeated or willful pay violations in 2026.
A practical tip
Many employers audit exempt status, overtime bonuses and 1099 workers yearly. Page 3 walks through the Punch-to-Paycheck Trace.
Who is covered
Test
What the rule says
Enterprise coverage
At least 2 employees and $500,000 a year in sales or business done. Hospitals, care facilities, schools and government agencies are covered at any dollar level
Individual coverage
An employee of a smaller firm is covered if the work regularly involves interstate commerce, such as out-of-state calls or shipping
Nonprofits
Charitable activity is not counted. Business-type activity, such as a gift shop or fee-based services, is counted; charitable donations and most dues are left out of the $500,000
White-collar exemptions
Executive, administrative, professional, computer and outside sales staff are exempt only if both the duties and salary tests are met; outside sales staff, practicing lawyers and doctors, and teachers have no salary test
Highly paid employees
Office or non-manual workers with at least $107,432 in total pay, including $684 a week as salary or fees, who customarily and regularly perform an exempt duty
No white-collar exemption
Blue-collar manual workers, and police, firefighters, paramedics and similar first responders, however high their pay
How it touches your taxes and payroll
The IRS uses its own control test for employment tax, which can differ from the FLSA's economic-reality test, and a label or signed agreement alone decides neither; see employee vs independent contractor. Back pay awarded under the FLSA counts as wages for Social Security and Medicare and is reported on Form W-2 in the year it is actually paid (IRS Publication 957). The employee income tax deduction for overtime pay above the regular rate (IRC 225, tax years 2025 through 2028) does not reduce Social Security and Medicare tax. See also payroll taxes and tips and overtime reporting.
