Updated: 11/21/2024

FAQs: 

Background

The Fair Labor Standards Act (FLSA), also considered the federal Wage and Hour Law, regulates minimum wage, overtime, equal pay, recordkeeping and child labor. Under the FLSA, employees are classified as either exempt or non-exempt from minimum wage and overtime. 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. Where federal, state and local laws conflict, the law that is most beneficial to the employee prevails.

The FLSA applies to virtually all employers, including:

  • Employers with employees engaged in interstate commerce (defined broadly, such as assembling products that are sent out of state or regularly making phone calls to another state);
  • Enterprises (including non-profits) with gross sales or business of $500,000 or more per year;
  • Hospitals; enterprises engaged in the care of the sick, the aged, or the mentally ill who reside on the premises; a school for mentally or physically disabled or gifted children; a preschool, an elementary or secondary school, or an institution of higher education (whether operated for profit or not for profit); and
  • Public agencies.

Under the federal FLSA, a non-exempt employee is one who is entitled to at least the minimum wage for each hour worked and overtime whenever they work more than 40 hours in a workweek. Any employee may be classified as non-exempt. By contrast, an exempt employee isn't entitled to minimum wage or overtime, but the employee must satisfy certain tests to be classified as exempt.

Under federal law, the overtime rate is 1.5 times the employee's regular rate of pay. An employee's "regular rate of pay" includes their hourly rate plus the value of nondiscretionary bonuses, shift differentials, and certain other forms of compensation. However, there are certain types of compensation that are excluded from the regular rate of pay.

Note: Depending on the circumstances, some states have different overtime rates. For instance, California also requires employers to pay non-exempt employees double their regular rate of pay for all hours worked over 12 in a workday, and over eight on the seventh consecutive workday in a workweek.

Not necessarily. To be classified as exempt, executive, administrative and professional employees must generally satisfy all of the following tests:

  1. The employee must be paid on a salary basis;
  2. The employee must be paid at least a specified weekly salary level that meets or exceeds the minimum requirements for exemption;
  3. The employee must receive their full salary in any workweek in which they perform work; and
  4. The employee must perform specific job duties. Each type of exemption has its own set of primary duties that an employee must perform in order to qualify for the exemption.

There is also a special exemption for "highly-compensated employees" who are paid at least a total annual compensation of a specified amount and customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.

Being paid on a "salary basis" means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. This predetermined amount cannot be reduced because of variations in the quality or quantity of work.

Nondiscretionary Pay

Nondiscretionary bonuses are generally defined as those announced or promised in advance. For example, if you announce at the beginning of the year that employees will be entitled to a bonus for meeting certain production goals, this would be considered a nondiscretionary bonus.

By contrast, discretionary bonuses aren't announced or promised in advance. For example, if you decide at the end of the year to surprise employees with a bonus, this would generally be considered a discretionary bonus. Discretionary bonuses may not be counted toward meeting the minimum salary requirement.

Under the FLSA, employers continue to be permitted to use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the minimum salary requirement for the executive, administrative, and professional exemptions, as long as these forms of compensation are paid at least annually.

Note: Some states have their own rules on exemption from overtime. State rules may prohibit employers from using bonuses to satisfy part of the salary requirement. Therefore, to maintain the state exemption in these locations, employers must satisfy the state's requirement with a salary alone. Check your state law to ensure compliance.

Employers may make one final catch-up payment no later than the next pay period after the end of the year, if the bonus, incentive payment or commission ended up being less than anticipated. For example, if an employer chooses this option, each pay period, the employer must pay their exempt executive, administrative or professional employee at least 90 percent of the salary level. Then, if at the end of year, the employee's paid-out salary plus the nondiscretionary bonuses and incentive payments (including commissions) doesn't equal at least the minimum required, the employer would have one pay period to make up for the shortfall.