Small Business Overtime Guide: FLSA Rules, Exemptions and Worked Examples

Under the Fair Labor Standards Act (FLSA), covered non-exempt employees earn at least time and one-half time their regular rate of pay for every hour over 40 in a workweek. Headcount alone doesn't determine FLSA coverage.

Four things impact what you owe: whether the FLSA covers your business or the employee's work, whether the employee is exempt, how many hours fall in each workweek, and the employee's regular rate. Job title doesn't decide it, and neither does paying someone hourly or salaried.

Those hours are moving. In September 2026, hourly earnings growth for small businesses stayed below 3% (2.78%), while weekly earnings and hours worked kept growing, according to the Paychex Small Business Employment Watch. Paychex reads that as businesses meeting demand through existing workforce capacity.

As your team's hours change, knowing when overtime applies helps you pay each employee what the law requires. The overtime you pay also carries into year-end reporting: SurePayroll® By Paychex builds year-end Forms W-2 from your payroll records.

Which small businesses have to follow federal overtime rules

Headcount alone doesn't determine FLSA coverage. The FLSA can cover your entire business or apply through an individual employee's work.

Enterprise coverage. For most private businesses, the FLSA covers the whole enterprise when it has at least two employees and at least $500,000 in annual dollar volume of sales or business done, according to the U.S. Department of Labor (DOL) Wage and Hour Division (Fact Sheet #14).

Individual coverage. Even without enterprise coverage, the FLSA protects employees whose work regularly involves interstate commerce. That route applies regardless of a business's sales volume. DOL Fact Sheet #6 lists the kinds of everyday work that count for retail employees:

• ordering goods from out of state
• verifying and processing credit card transactions
• using the mail or telephone for interstate communications
• keeping records of interstate transactions
• handling, shipping or receiving goods moving in commerce

A salon front-desk employee who processes card payments, or a restaurant employee who receives shipments from out-of-state suppliers, is doing the kind of work DOL lists.

Which employees are entitled to overtime: exempt vs. non-exempt

Non-exempt employees earn overtime. An employee qualifies for an overtime exemption only after meeting every test, and neither a salary nor a manager title settles it.

A non-exempt employee qualifies for the FLSA's minimum-wage and overtime protections. Most hourly and tipped employees, and many salaried employees, are non-exempt.

The most common exemptions for small businesses, the executive, administrative and professional exemptions, generally require all three of these tests:

• Salary basis. The employee receives a predetermined amount each pay period that isn't reduced because of variations in the quality or quantity of their work.
• Salary level. The salary meets the currently enforced federal salary threshold of $684 a week ($35,568 a year) (DOL salary levels; Federal Register, May 15, 2026).
• Duties. The employee's primary duty fits an executive, administrative or professional exemption, based on their actual job duties, not their job title.

A salaried shift manager who also works the register or the floor alongside the team isn't disqualified by that work alone: under 29 CFR 541.106, doing exempt and nonexempt work at the same time doesn't by itself rule out the executive exemption. What decides it is whether management remains the employee's primary duty.

A manager whose primary duty is the same routine, recurring work the team does can't qualify as an exempt executive. The highly compensated employee exemption uses a separate pay level ($107,432 a year) with a shorter duties test, and some states set a higher salary level or different duties requirements than exist under federal law.

Commissioned employees of qualifying retail or service establishments, such as a stylist or a salesperson, may be exempt under Section 7(i) of the FLSA. All three of DOL's conditions must be met: the business is a retail or service establishment, the employee's regular rate exceeds 1.5 times the applicable minimum wage, and more than half the employee's earnings over a representative period are commissions (DOL Fact Sheet #20).

For the employee classification tests, see exempt vs. non-exempt employees and the definition of a non-exempt employee.

How overtime hours are counted in a workweek

Covered non-exempt employees earn federal overtime after working more than 40 hours in one workweek; outside of limited exceptions, the FLSA doesn't use an eight-hour daily threshold.

A workweek is "a fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods," according to DOL Fact Sheet #23. You choose when it starts, on any day and at any hour. You can change the start if the change is meant to be permanent and isn't designed to sidestep overtime (29 CFR 778.105).

Count each workweek separately rather than averaging hours across a pay period. An employee who works 30 hours one week and 50 the next earns 10 hours of overtime for the second week, even though the biweekly paycheck covers 80 hours in total.

Count all the time an employee works, including opening setup and closing duties done before or after a scheduled shift. Under 29 CFR 785.11, "work not requested but suffered or permitted is work time."

What counts toward the regular rate of pay

Employers pay overtime at time and one-half, frequently referred to as 1.5 times, the regular rate, and a non-discretionary bonus or commission can raise the regular rate above an employee's base wage.

The regular rate is determined based on the employee's total compensation for employment in a workweek divided by the total hours worked that week.

Include these pay elements when you calculate the regular rate:

• Non-discretionary bonuses, such as attendance, production or sales-target bonuses an employee expects when they meet the terms
• Commissions
• Shift differentials, such as extra pay for night shifts (29 CFR 778.207)

You can leave out a discretionary bonus, where you alone decide both whether to pay it and how much, at or near the end of the period it covers (DOL Fact Sheet #56A and Fact Sheet #56C).

You don't need to include the tips an employee keeps beyond the tip credit in the regular rate. If you take a tip credit, the regular rate does include the amount of that credit (29 CFR 531.60). Tipped overtime is figured on the full minimum wage (DOL Fact Sheet #15). For how bonus pay works in payroll, see how to pay an employee bonus.

How to calculate overtime for different types of pay

Each example below shows how to calculate overtime pay for one non-exempt employee working 45 hours in one workweek, so 5 of those hours are overtime.

The bonus row, step by step.

1. Add straight-time pay for all hours and the bonus: $18 × 45 = $810, plus $90, for $900.
2. Divide by hours worked to get the regular rate: $900 ÷ 45 = $20.
3. Multiply half the regular rate by the overtime hours: $10 × 5 = $50. Straight-time pay already covers every hour once, so the $50 premium brings the week to $950.

The tipped row, step by step, following the method in DOL's overtime calculator example:

1. Multiply the full federal minimum wage by 1.5: $7.25 × 1.5 = $10.87.
2. Subtract the tip credit: $10.87 − $5.12 = $5.75, the direct cash wage you pay for each overtime hour.
3. Multiply by the overtime hours: $5.75 × 5 = $28.75. Add the 40 straight-time hours at the $2.13 cash wage ($85.20) for $113.95 in direct cash wages for the week, plus the employee's tips.

Tipped employees earn overtime on the full minimum wage, not the $2.13 cash wage (DOL Fact Sheet #15). For more, see tipped minimum wage vs. regular minimum wage.

A bonus that covers several workweeks. When you pay a quarterly or monthly non-discretionary bonus, spread it back across the workweeks it covers, then pay additional overtime premium for each workweek that had overtime (DOL Fact Sheet #56C). A $650 bonus covering 13 weeks adds $50 to each workweek. In a 45-hour workweek, that raises the regular rate by $50 ÷ 45, about $1.11, and adds half of that for each of the 5 overtime hours: about $2.78 in additional overtime pay for that week.

A non-exempt employee's commissions increase the regular rate the same way a non-discretionary bonus does. Salaried employees who don't meet an exemption earn overtime too; the exempt vs. non-exempt guide covers other salaried non-exempt pay arrangements.

Comp time vs. overtime pay for private employers

As a private employer, you can't give a non-exempt employee time off in a later workweek instead of paying overtime. Under Section 7(o) of the FLSA, comp time in place of overtime is limited to public agencies, such as state and local governments (DOL).

An employee's agreement doesn't change that.

You can't replace overtime pay, but you can manage schedules and approval policies prospectively:

• Adjust hours within the same workweek. Giving an employee Friday off in a workweek where they've already worked long days reduces that week's total. A day off the following week doesn't change the overtime already earned.
• Set a written overtime-approval policy, and pay for overtime worked anyway. Under 29 CFR 785.13, management has to "see that the work is not performed if it does not want it to be performed," and "the mere promulgation of a rule against such work is not enough." You enforce the policy separately; the hours still get paid.

State overtime laws that differ from federal rules

When state and federal overtime rules differ, the employee is entitled to overtime under the higher standard, meaning the one that provides the higher rate of pay (DOL FLSA FAQ).

A few states show how much the rules can differ:

• California: generally, overtime after 8 hours in a workday and on a seventh consecutive workday, with double time after 12 hours in a day and for some seventh-day hours (California Labor Commissioner).
• Alaska: daily overtime generally begins after 8 hours; employers with three or fewer employees are exempt from the state overtime requirement. Federal rules may still apply (Alaska Wage and Hour).
• Nevada: daily overtime after 8 hours in a 24-hour period for employees earning less than 1.5 times the state minimum wage (Nevada Labor Commissioner).

Some states, including California, Colorado, New York and Washington, also set a higher salary level for exempt status than the federal $684 a week. Check your state labor department for the overtime rules where your employees work.

Penalties for unpaid or miscalculated overtime

If your business underpays overtime, whether through a miscalculated regular rate or the misclassification of a non-exempt employee as exempt, you generally owe the back pay plus an equal amount in liquidated damages (DOL Handy Reference Guide to the FLSA).

Recovery generally reaches back two years, or three years for willful violations. For repeated or willful overtime violations, DOL can also assess civil money penalties of up to $2,515 per violation (29 CFR 578.3). Employees can file a private lawsuit to recover back wages, in addition to filing a complaint with DOL.

Calculate overtime by workweek, and keep the time and pay records supporting each calculation. For a broader look at payroll consequences, see payroll penalties.

Overtime records to keep for FLSA compliance and Form W-2 reporting

Keep each non-exempt employee's hours and pay by workweek so you can calculate overtime and identify qualified overtime for Form W-2, Wage and Tax Statement, reporting.

The FLSA's recordkeeping rules require employers to keep these records for each non-exempt employee (29 CFR 516.2):

• the time and day the workweek begins
• the regular hourly rate in any workweek with overtime
• hours worked each workday and total hours each workweek
• straight-time earnings and overtime premium pay
• the date of payment and the pay period covered

Keep payroll records for at least three years, and time cards and wage rate tables for at least two (29 CFR 516.5 and 516.6).

Qualified overtime is the part of FLSA-required overtime pay above the employee's regular rate: the "half" in time-and-a-half. In the $18-an-hour example, $9 of each $27 overtime hour is qualified overtime, or $45 for that week.

Overtime that only state law requires isn't qualified overtime. The IRS states it directly: "Overtime compensation not required by the FLSA is not eligible for the deduction" (IRS Fact Sheet FS-2026-13). A California employee who works a 10-hour day inside a 38-hour week earns two hours of daily overtime under state law, but that premium isn't qualified overtime, because the FLSA doesn't require it.

Report the employee's total qualified overtime compensation in Box 12 of Form W-2 using code TT. The IRS General Instructions for Forms W-2 and W-3 describe qualified overtime as "compensation that exceeds the regular rate of pay (such as the 'and-a-half' portion of time-and-a-half compensation)" paid to an individual as required under section 7 of the FLSA.

When you run payroll in SurePayroll, the overtime you pay non-exempt employees each pay period becomes part of your payroll records, and SurePayroll builds year-end Forms W-2 from those records, including qualified overtime in Box 12. Classifying each employee, tracking hours by workweek and paying the required overtime rate stay your decisions, and so does reviewing which overtime qualifies.

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