Overtime Rules and Exemptions Under the FLSA – Justworks Help Center

What is the Fair Labor Standards Act (FLSA)?

The Fair Labor Standards Act (FLSA) is the federal wage and hour law which regulates minimum wage, overtime, equal pay, recordkeeping, and child labor. The FLSA generally requires employers to pay employees at least the minimum wage, and overtime if employees work more than 40 hours in a week. The FLSA does, however, exempt certain kinds of employees from the minimum wage and overtime requirements. These are known as “exempt employees”.

Note: Some states and local jurisdictions have their own wage and hour laws, which may provide greater protection for employees than what is provided under the FLSA. Generally, where federal, state, and local laws conflict, the law that is most beneficial to the employee prevails.

Who is covered by the FLSA?

Most employers are covered by the FLSA.

Employees who work for certain businesses or organizations (or "enterprises") are covered by the FLSA. These enterprises, which must have at least two employees, are: (1) those that have an annual dollar volume of sales or business done of at least $500,000 (2) hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies.

Even if an employer is not covered on an enterprise-wide basis, employees may be individually covered by the FLSA if their work regularly involves them in commerce between states. The FLSA covers individual workers who are "engaged in commerce or in the production of goods for commerce."

BUSINESS OWNERS EXEMPTION:

Under a special rule for business owners, an employee who owns at least a bona-fide 20% equity interest in the company they are employed by, regardless of the type of business organization (e.g., corporation, partnership, or other), and who is actively engaged in its management, is considered exempt under the executive employee exemption.

What does it mean to be an exempt or non-exempt employee under the FLSA?

Non-exempt employees:

Non-exempt employees are those that are subject to the minimum wage and overtime requirements under the FLSA. These employees must be paid the minimum wage and an overtime premium (at least one and one-half times their regular rate of pay) for hours worked over 40 in a week.

Non-exempt employees may have minimum wage, overtime, and recordkeeping requirements in addition to FLSA requirements, depending on the state/locality in which they work.

Exempt employees:

The FLSA exempts certain kinds of employees from the minimum wage and overtime requirements. Although there are several exemptions, the most common are:

Administrative employees
Executive employees
Professional employees
Computer professional employees
Outside sales employees
Highly compensated employees

Some states and/or localities have differing or additional requirements for employees to qualify for exemptions. In certain states, some exemptions are not available at all. For example, California and New York do not recognize the FLSA’s exemptions for highly compensated employees or business owners. Employers need to check applicable state and local wage and hour laws before making a determination on whether an employee is exempt.

For a list of other, less common FLSA exemptions, see here.

To be exempt, employees must generally meet three tests:

Duties test: The employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations. Each exemption classification requires certain types of exempt duties.
Salary basis test: The employee must be paid a predetermined and fixed salary that is not subject to reduction because of changes in the quality or quantity of work performed. For certain exemptions, a fixed fee may also meet this test.
Salary level test: The amount of salary paid must meet a minimum amount specified by the regulations.

On the federal level, owners or employees with more than 20% bona-fide equity interest are not subject to the salary level requirement. If the employee holds under 20% bona-fide equity interest, they may not be exempt unless they qualify for another exemption. Additionally, certain white collar employees are not subject to either the salary basis or salary level tests (e.g., doctors, teachers, lawyers, outside sales employees).

Many states and/or localities have their own salary tests, with some setting a higher minimum salary than the federal minimum salary.

If an employee is paid an annual salary that exceeds the salary level test, does that mean the employee is exempt from overtime pay?

Not necessarily. For an exemption to apply, an employee’s specific job duties and salary must meet all of the applicable requirements that are outlined by the DOL and state wage enforcement agencies. So, even if the employee’s salary exceeds the applicable salary threshold(s), the duties test must also be met.

Can salaried employees be non-exempt?

Yes, salaried employees can be non-exempt and can continue to be paid a salary as long as they receive at least the minimum wage for all hours worked and are compensated at 1.5 times their regular rate of pay for all hours worked beyond 40 in the workweek (and other overtime requirements as applicable). Employers will need to track the hours of salaried employees closely to ensure they pay overtime in accordance with all applicable federal, state, and local laws.

For DOL guidance on how to comply with the overtime requirement for salaried non-exempt employees, see DOL Fact Sheet 23. Be sure to also check state and local wage and hour laws.

What is the salary requirement for part-time salary workers?

Unless the employee falls under one of the occupations that is not subject to the salary level requirement (e.g., doctors, lawyers, teachers, outside sales), the employee must satisfy the full standard salary level test if they work any amount of time in the workweek. Full-time or part-time status does not impact this salary level requirement.

What is the overtime rate for non-exempt employees?

Under federal law, the overtime rate is 1.5 times the employee's regular rate of pay. "Regular rate of pay" includes an employee’s hourly rate plus the value of non-discretionary bonuses, shift differentials, and certain other forms of compensation. Not all types of compensation are included in the regular rate of pay. For further DOL resources and information on overtime calculation, see here.

Some states and/or localities have different overtime rates and requirements. For example, overtime requirements in California dictate that a) employees are paid 1.5 times their regular rate of pay for any hours worked in excess of 8 in a workday and b) employees are paid 2 times their regular rate of pay for all hours worked over 12 hours in a workday.

What constitutes "hours worked" under the FLSA?

Employees must be paid for all hours worked in a workweek. In general, “hours worked” includes all time an employee must be on duty, or on the employer’s premises or at any other prescribed place of work, from the beginning of the first principal activity of the work day to the end of the last principal activity of the workday. Also included is any additional time the employee is allowed to work.

Problems arise when employers fail to recognize and count certain hours worked as compensable time. Hours worked may include meal and rest periods, travel time, training time, and preliminary/postliminary activities. For example, an employee who continues to work while eating lunch is working. This time must be counted and paid as compensable hours worked because the employee has not been completely relieved from duty.

For additional information on what constitutes hours worked, see DOL Fact Sheet 22. Be sure to also check you state and local requirements.

Do non-exempt employees have to record their hours on a daily basis or punch a time clock?

Under FLSA regulations, overtime-eligible workers are not required to punch a time clock. However, the FLSA requires that employers keep certain records for every non-exempt employee to make sure they are paid the wages they are owed. Employers may choose how to record hours worked for overtime-eligible employees — there is no special or prescribed form.

Employers must keep an accurate record of the number of hours worked by the employee per day, but it’s not necessary to record specific start and end times. For example, an employer could require an employee to only provide the total number of hours he or she worked each day, including the number of overtime hours, by the end of each pay period.

Note: State laws may have additional recordkeeping requirements.

Department of Labor (DOL) Resources

Other Resources

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Disclaimer

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.