What it means
Passed in 1938, the FLSA created a floor for pay and a ceiling on ordinary working hours. Employers covered by the law must pay at least the federal minimum wage, which is set by statute and can be raised by Congress, and states can set higher rates that employers must then follow.
Where the two differ, the higher standard applies. Its best-known rule is overtime.
Employees who are classified as non-exempt must be paid at least one and a half times their regular rate for hours worked beyond 40 in a workweek. The regular rate includes most non-discretionary bonuses, so it can be higher than the plain hourly wage.
Whether an employee is exempt or non-exempt is the most common point of confusion. Exempt roles, usually executive, administrative, professional or certain sales and computer positions, must pass both a salary test and a duties test, and a job title alone is never enough.
Misclassifying staff as exempt to avoid paying overtime is one of the most frequent and costly violations. Employers also need to keep accurate records of hours and pay, and they must pay employees for all time worked, including some preparation tasks and travel during the day.
The law restricts the hours and types of work that young people can do, and it sets rules on equal pay between men and women for equal work. Penalties for violations can include back wages, an equal amount in damages, legal fees and, for repeated or wilful breaches, fines.
Claims can usually be brought within two years, extended to three for wilful violations, so a payroll error can create a long tail of liability. Finance teams therefore treat compliance as part of controlling labour cost.
For finance teams, the practical impact is on budgeting and forecasting labour cost. Overtime premiums, back pay risks and reclassification of roles can all change the cost of a team, so compliance belongs in headcount planning rather than being treated as an HR afterthought.
Sensible controls include timekeeping systems, regular classification reviews and clear approval of overtime.
In practice
Real-world examples.
Example
A retail chain schedules a cashier for 45 hours in a busy week. The employee is non-exempt, so the chain must pay five hours at one and a half times the regular rate. The extra cost should be built into the labour budget for the busy season.
Example
A software company classifies a junior support analyst as exempt because of the title "manager", even though the role has no authority and is paid hourly. An audit finds the person should have been classified as non-exempt, and the company owes back overtime. The cost of correcting the error is far greater than the saving it appeared to deliver.
Example
A restaurant pays a prep cook a weekly bonus tied to attendance. Because the bonus is non-discretionary, it must be included when the overtime rate is calculated, which raises the cost of each overtime hour. A payroll review that overlooks such items can create a hidden liability.
Formula
Calculation
Overtime pay = Overtime hours x 1.5 x Regular hourly rate
Total weekly pay = (40 x Regular rate) + Overtime pay
A warehouse employee at Brightline Freight, a fictional company, earns $20 an hour and works 48 hours in a week. Straight-time pay is 40 x $20 = $800. Overtime is 8 hours at 1.5 x $20 = $30 an hour, so overtime pay is 8 x $30 = $240. Total weekly pay is $800 + $240 = $1,040. Paying all 48 hours at $20 would have given only $960, an underpayment of $80 for the week.Case study
Seen in the real world.
Redwood Staffing is an illustrative, fictional agency with 120 hourly workers. A routine payroll review found that a weekly attendance bonus of $40 had been left out of the regular rate used to calculate overtime.
The error affected about 30 people who regularly worked overtime. Correcting the calculation and paying the back wages for the two-year look-back period cost roughly $52,000, plus the time of an outside adviser.
In the illustrative aftermath, the finance director added an overtime calculation check to the payroll process and trained supervisors on timekeeping rules. The company also reviewed every exempt classification against the duties test, and moved three roles to hourly pay. The company also adopted a rule that any new bonus plan is reviewed for its effect on overtime before it is announced.
Watch out
Common mistakes.
- Treating anyone paid a salary as exempt, when the duties test must also be satisfied.
- Leaving non-discretionary bonuses out of the regular rate when calculating overtime.
- Letting employees work unrecorded time before or after shifts, which still counts as hours worked.
Questions
People also ask.
Who does the FLSA cover?
It covers most private and public sector employees, though certain categories are exempt from some rules.
Does the FLSA require overtime for hours over eight a day?
No, the federal rule applies to hours beyond 40 in a workweek, although some states have daily overtime rules.
Do states have their own wage laws?
Yes, many do, and where a state law is more generous than the federal law the employer must follow the state law.
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