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Fair Labor Standards Act

What is the Fair Labor Standards Act (FLSA)?

The Fair Labor Standards Act (FLSA), also referred to as the Federal Wage and Hour Law, defines several key payroll and employment guidelines. It was passed in 1938 by Congress and affects most private and public employment. The Employment Standards Administration's Wage and Hour Division within the U.S. Department of Labor administers the Act.

The FLSA sets several guidelines including the minimum wage amount, rates for overtime pay (time-and-a-half), work limits for minors, rules for employment record keeping (PDF) and calls for equal pay for equal work.

Enterprise coverage vs Individual coverage

As a business owner, you'll want to stay compliant with the rules set by the FLSA if the appropriate employer-employee relationship exists. Two tests are used to determine if the FLSA applies: enterprise coverage and individual coverage.

  1. For enterprise coverage, employees are protected by FLSA if at least two or more employees have similar jobs that are involved in interstate commerce or the production of goods or services for commerce. Businesses with gross annual sales of $500,000 or more also meet the requirements for enterprise coverage.
  2. Employers are covered by the FLSA under the individual employee coverage test if they engage in interstate commerce or in the production of goods and services for interstate commerce.

If your company must comply with FLSA, you'll need to stay on top of minimum wage requirements, hours worked, overtime requirements along with any possible tip requirements. In addition, you are required to display official posters with FLSA requirements and keep proper employee records.

If you have exempt employees, those individuals are not protected by FLSA and don't need to be paid a minimum wage or paid overtime. However, there are exempt salary requirements. The minimum weekly salary under the exempt classification for FLSA is $455 a week for an administrative, executive or professional employee.

Minimum Wage

The Fair Labor Standards Act sets several payroll rules that need to be followed when processing payroll for your small business. If you have nonexempt employees, they must be paid at least the minimum wage. The federal minimum wage rate is currently $7.25 per hour, which was set July 24, 2009.

There are also state minimum wage laws that may be higher, lower or equal to the federal requirement. Employees are entitled to the higher of the two wages. Visit the Department of Labor for your state's minimum wage requirements.

There is a lower minimum wage set for teenagers referred to as the "opportunity wage," which applies to those under age 20. The current opportunity wage is $4.25 per hour and can be paid for the first 90 consecutive calendar days. After 90 days the rate needs to be increased to federal minimum of $7.25 per hour.

To determine whether or not an employee was paid the minimum wage, you'll need to calculate payroll using the 40 hour workweek as set by the U.S. Department of Labor. A longer timeframe cannot be used. Any work over 40 hours requires overtime pay of at least 150% of regular pay.

If your business has employees that are typically tipped, the hourly rate can be set lower than the minimum. However, you'll need to keep track of both tips and the hourly rate to ensure they equal the minimum wage requirements.

Overtime Pay

A workweek is defined as seven consecutive 24-hour periods. Hours worked over 40 require overtime pay. When calculating payroll, you'll need to take into account overtime pay, which the FLSA requires pay of at least 150% of the regular rate.

Note that each state may have its own state overtime requirements that may differ from the FLSA rules. The law that best benefits the employee must be chosen.

Overtime Calculation:

  • Step 1: Total Pay for Workweek – Exclusions = Regular Pay
  • Step 2: Regular Pay/Hours Worked = Regular Rate of Pay
  • Step 3: Regular Rate of Pay x 0.5* = Overtime Premium Rate
  • Step 4: Overtime Premium Rate x Hours of Overtime = Premium Pay for Overtime
  • Step 5: Total Pay for Workweek + Premium Pay for Overtime = Total Weekly Compensation

*Note that in step 3, you can use 0.5 rather than 1.5 because the overtime hours have already been paid at the employee's pay rate in step 1.

 

When calculating overtime for payroll, there are several items to exclude: reimbursed business expenses, overtime in excess of FLSA requirements, employer-benefit plan contributions, vacation and holiday pay, and sick pay for unworked hours, gifts, discretionary bonuses and stock options. These items should be left out of the overtime calculation.

Let's take a look at an example of calculating overtime.

Example:
Joe earns $12 per hour and typically works a 40-hour workweek. Due to a busy schedule, he works 50 hours. During the week he earns a $50 production bonus. Here is how to calculate Joe's total compensation for the week:

  1. Total Pay for the Workweek ($12/hour x 50 hours) $600 – $50 Exclusions = $550 Regular Pay
  2. Regular Pay $550/50 Hours Worked = $11.00 Regular Rate of Pay
  3. Regular Rate of Pay $11.0 x 0.5 (Overtime Premium Rate) = $5.50 Overtime Premium Rate
  4. Overtime Premium Rate $5.50 x 10 Hours Overtime = $55 Premium Pay for Overtime
  5. Total Pay for the Workweek $550 + $55 Premium Pay for Overtime = $605 Total Weekly Compensation

Child Labor

The FLSA also sets guidelines for child labor. Children under the age of 18 are protected by several labor restrictions specifying type of work, hours worked and pay requirements that you'll need to follow should your small business have workers under the age of 18.

Restrictions (See the Department of Labor for details):

  • Under age 18: Work in dangerous industries is forbidden (mining, meat packing, etc.). There are some exceptions for this rule in certain learning and apprentice jobs where work is permitted for 16 and 17 year olds.
  • Age 14 and 15: Only nonhazardous jobs are permitted (grocery stores, food service). Hours are limited to 3 hours a day when school is in session (18 hours total per week). When school is not in session, 8-hour days and 40 hour weeks are allowed. Work is limited to the hours of 7:00 a.m. and 7 p.m. and longer during the summer, 7:00 a.m. and 9 p.m. June 1 through Labor Day.
  • Under age 14: The IRC generally restricts work for those under age 14. However, minors may work for a parent, but it cannot be hazardous.

 

Some of the rules are less restrictive in farming operations. Some states have further restrictions — check to ensure you are compliant with your state's rule.

There are standard FLSA rules to follow when processing payroll for minors. The minimum wage requirement is $7.25 per hour (be sure to check with your state's minimum wage requirements, which may be higher). The higher of the two wages must be used. Note that there is an "opportunity" wage for teenagers of $4.25 per hour, which is lower than the federal minimum wage rate. This rate can only be applied for the first 90 consecutive calendar days. After that, the wage must be raised to the federal minimum wage or state wage, whichever is higher.

With minors aged 16 and 17, you may have to pay overtime at a rate of one and one-half times the regular rate of pay for hours worked over 40 in the workweek. You will not have to pay overtime for ages less than 16 because the FLSA sets maximum hourly workweeks: 40 hours per week when school is in session and 18 hours when school is in session.