The Fair Labor Standards Act (FLSA) is one of the most litigated federal employment laws in the United States. Every year, the Department of Labor (DOL) recovers hundreds of millions of dollars in back wages from employers who misclassify workers, miscalculate overtime, or fail to keep proper records. In 2023 alone, the DOL’s Wage and Hour Division recovered more than $274 million in back wages for over 163,000 workers.
For employers in 2026, FLSA compliance is more critical than ever. The DOL has updated salary thresholds, enforcement actions are increasing, and class-action overtime lawsuits continue to rise. Whether you run a 10-person small business or a multi-state enterprise, this guide gives you everything you need to understand FLSA overtime rules, classify employees correctly, meet recordkeeping requirements, and avoid costly violations.
What Is the FLSA? Fast Facts for Employers
The Fair Labor Standards Act was enacted in 1938 and is administered by the Department of Labor’s Wage and Hour Division. It sets federal standards for minimum wage, overtime pay, recordkeeping, and child labor that apply to most private-sector and government employers in the United States.
| FLSA Fast Fact | Detail |
|---|---|
| Enacted | 1938 |
| Administered by | U.S. Department of Labor, Wage and Hour Division (WHD) |
| Federal minimum wage | $7.25/hour (unchanged since 2009; many states are higher) |
| Overtime rate | 1.5x regular rate of pay for hours over 40 in a workweek |
| Overtime salary threshold (2025–2026) | $684/week ($35,568/year) — see 2026 update below |
| Highly Compensated Employee (HCE) threshold | $107,432/year total annual compensation |
| Coverage | Most private employers + federal, state, and local government |
| Enforcement agency | DOL Wage and Hour Division |
| Statute of limitations | 2 years (3 years for willful violations) |
| Back wages recovered (2023) | $274 million for 163,000+ workers |
The FLSA applies to enterprises with annual gross sales or business done of at least $500,000, as well as to hospitals, businesses providing medical or nursing care, schools and preschools, and government agencies — regardless of revenue. It also applies on an individual employee basis to any worker engaged in interstate commerce.
FLSA Overtime Pay Requirements
The overtime rule under the FLSA is straightforward in principle: non-exempt employees must receive overtime pay of at least 1.5 times their regular rate of pay for all hours worked over 40 in a single workweek.
Several nuances catch employers off guard:
The Workweek Is the Unit of Measure
The FLSA measures overtime on a workweek basis — a fixed, regularly recurring period of 168 hours (seven consecutive 24-hour periods). You cannot average hours over two weeks. If an employee works 50 hours one week and 30 hours the next, they are owed 10 hours of overtime for the first week, regardless of the second week’s total.
Employers set the workweek — it doesn’t have to be Monday through Sunday. It can be Wednesday through Tuesday, or any other seven-day stretch, as long as it’s fixed and consistent.
Calculating the Regular Rate of Pay
The regular rate of pay is not simply the hourly wage. It must include all remuneration for employment except certain statutory exclusions. What must be included:
- Hourly wages
- Salary
- Shift differentials
- Non-discretionary bonuses (production bonuses, attendance bonuses, incentive pay promised in advance)
- Commission payments
- On-call pay
What can be excluded from the regular rate:
- Discretionary bonuses (true holiday bonuses where amount is determined at employer’s sole discretion)
- Gifts
- Overtime premiums already paid at 1.5x
- Payments for idle time (vacation, sick leave, holidays) if paid separately
- Expense reimbursements
- 401(k) and other benefit contributions
Calculating overtime incorrectly by excluding non-discretionary bonuses is one of the most common FLSA violations employers face.
Overtime for Salaried Non-Exempt Employees
Being paid on a salary basis does not automatically make an employee exempt from overtime. Many employers assume that if they pay someone a salary, no overtime is owed — this is incorrect. Salaried non-exempt employees are still entitled to overtime for hours over 40 in a workweek. The regular rate for a salaried non-exempt employee is calculated by dividing the weekly salary by the hours the salary is intended to cover, then multiplying overtime hours by 0.5 (the half-time premium, since the straight-time portion is already included in the salary).
The 2026 FLSA Salary Threshold: Current DOL Figures
The salary threshold is the minimum weekly salary an employee must earn to qualify for the white collar overtime exemptions (executive, administrative, professional). Employees earning below this threshold are automatically entitled to overtime regardless of their job duties.
Here is the current state of the salary threshold as of 2026:
| Threshold | Weekly Rate | Annual Equivalent | Effective Date |
|---|---|---|---|
| Previous threshold (pre-2024) | $684/week | $35,568/year | January 1, 2020 |
| DOL July 2024 rule (First increase) | $844/week | $43,888/year | July 1, 2024 |
| DOL July 2024 rule (Second increase) | $1,128/week | $58,656/year | January 1, 2025 |
| Current threshold (2026) | $1,128/week | $58,656/year | Effective January 1, 2025 — in force for 2026 |
| HCE threshold (2025–2026) | N/A | $151,164/year | January 1, 2025 |
Important legal note for 2026: The DOL’s 2024 rule that raised the threshold to $1,128/week has faced legal challenges in federal court. In November 2024, a federal judge in the Eastern District of Texas (State of Texas v. DOL) vacated the July 2024 rule nationally, reverting the threshold to $684/week ($35,568/year). The DOL appealed, and the litigation continued into 2025 and 2026. Employers should monitor this closely — check the DOL website (dol.gov/agencies/whd) and consult employment counsel, as the applicable threshold in your jurisdiction may depend on the status of ongoing appeals.
In practice, many employers voluntarily maintain the higher $58,656 threshold to future-proof compliance and reduce reclassification risk, particularly given the DOL’s stated intent to update thresholds more regularly going forward.
The salary threshold can be met in part with nondiscretionary bonuses, incentive pay, and commissions — but only up to 10% of the standard salary level, and those payments must be made at least quarterly.
FLSA Overtime Exemptions: White Collar Tests
The most complex area of FLSA compliance is determining which employees are exempt from overtime. The primary overtime exemptions — known as the “white collar” exemptions — cover executive, administrative, professional, computer, and outside sales employees. These are also called “EAP exemptions.”
To qualify for a white collar exemption, an employee must generally satisfy three tests:
- Salary basis test: The employee is paid on a salary basis (not docked for partial-day absences)
- Salary level test: The employee earns at least the minimum salary threshold per week
- Duties test: The employee’s primary duty meets the specific criteria for their exemption category
All three tests must be satisfied. An employee with a high salary but the wrong duties is not exempt. An employee with qualifying duties but a salary below the threshold is not exempt.
Executive Exemption
The executive exemption applies to employees who:
- Are compensated on a salary basis at not less than the current threshold
- Have a primary duty of managing the enterprise or a customarily recognized department or subdivision
- Customarily and regularly direct the work of at least two or more other full-time employees (or their equivalent)
- Have the authority to hire or fire employees, or their recommendations as to hiring, firing, advancement, or other status changes are given particular weight
Job title alone does not determine exempt status. A “manager” who spends most of their time performing non-managerial tasks alongside other employees does not qualify. The duties test looks at the employee’s primary duty — the principal, main, major, or most important duty that the employee performs.
Administrative Exemption
The administrative exemption is the most frequently misapplied. It covers employees who:
- Are compensated on a salary basis at not less than the current threshold
- Have a primary duty of performing office or non-manual work directly related to the management or general business operations of the employer or its customers
- Have a primary duty that includes the exercise of discretion and independent judgment with respect to matters of significance
The “discretion and independent judgment” requirement is what trips employers up. An employee who merely follows established procedures, uses skill in applying techniques, or refers matters to a supervisor does not exercise the requisite discretion. Discretion and independent judgment means the authority to make an independent choice — even if that choice is reviewed later.
Examples of roles that typically qualify: HR managers, marketing directors, financial analysts with real authority, compliance officers. Examples that typically do not qualify: accounts payable clerks, customer service representatives, administrative assistants who primarily schedule and support.
Professional Exemption
There are two types of professional exemptions:
Learned professional: Primary duty is the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. This includes doctors, lawyers, engineers, accountants (CPAs), teachers, architects, scientists, and pharmacists.
Creative professional: Primary duty is the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. This applies to artists, writers, musicians, actors, and composers — but only for work that is truly creative in character, not work that can be done by following a template or formula.
Computer Employee Exemption
The computer employee exemption is unique because it has both a salary test alternative and an hourly rate alternative. An employee qualifies if they:
- Are compensated on a salary basis at not less than the current threshold OR on an hourly basis at not less than $27.63/hour
- Are employed as a computer systems analyst, computer programmer, software engineer, or similarly skilled worker in the computer field
- Have a primary duty that is one of the following: application of systems analysis techniques; design, development, documentation, analysis, creation, testing, or modification of computer systems or programs; or design of computer hardware or related equipment
Help desk technicians, IT support staff, and employees who merely operate computers or input data do not qualify for this exemption.
Outside Sales Exemption
The outside sales exemption has no minimum salary requirement — it is a duties-only test. An employee qualifies if their primary duty is making sales or obtaining orders or contracts for services, and they are customarily and regularly engaged away from the employer’s place of business in performing these duties.
Inside sales representatives who work from an office, even if they make calls or video sales, do not qualify. A mixed inside/outside salesperson qualifies only if the outside sales activity is their primary duty.
Highly Compensated Employee (HCE) Exemption
The HCE exemption provides a simplified path to exemption for very high earners. As of January 1, 2025, and currently in effect for 2026, the HCE threshold is $151,164 in total annual compensation (subject to the same litigation notes as the standard threshold above). Under the pre-2024 rule, the HCE threshold was $107,432/year.
An HCE employee must:
- Receive total annual compensation of at least $151,164 (or $107,432 under the court-reverted threshold)
- Receive at least the standard weekly salary amount on a salary or fee basis
- Customarily and regularly perform at least one of the exempt duties of an executive, administrative, or professional employee
The HCE test requires less rigorous satisfaction of the duties test — the employee only needs to customarily and regularly perform one qualifying duty, not have it as a primary duty. This makes it easier to classify highly paid employees as exempt when their duties are mixed.
Exempt vs Non-Exempt: How to Classify Employees Correctly
Employee classification is the single most consequential FLSA decision an employer makes. Misclassification — calling a non-exempt employee exempt — exposes the employer to back pay for up to three years of unpaid overtime, plus liquidated (double) damages, attorney’s fees, and civil penalties. Getting it right requires a structured approach.
Step-by-Step Classification Analysis
- Start with coverage: Does the FLSA apply to this employee? (Enterprise coverage: $500K+ revenue; individual coverage: engaged in interstate commerce)
- Check the salary level: Does the employee earn at least $684/week (or the current applicable threshold)? If no, they are non-exempt and entitled to overtime. Full stop.
- Check the salary basis: Is the employee paid a predetermined, fixed salary that is not subject to reduction based on quality or quantity of work? If no, they fail the salary basis test and are non-exempt.
- Apply the duties test: Does the employee’s primary duty fit the criteria for executive, administrative, professional, computer, or outside sales exemptions?
- Document your analysis: Write down the reasons for your classification decision. If you’re audited, documentation demonstrating a good-faith analysis can reduce or eliminate liquidated damages.
Common Misclassification Red Flags
Watch for these situations that often signal a misclassification problem:
- The “manager” who doesn’t manage: An employee with a manager title who spends most of their time doing the same production work as the people they nominally supervise
- The reclassified employee: A worker who was non-exempt and then reclassified to exempt without a genuine change in duties
- The new position that mirrors an old non-exempt role: Creating a new job title with slightly different language but the same core duties as a previously non-exempt position
- Blanket classification by job title: Classifying all employees with the same title the same way without analyzing individual duties
- Docking exempt employees’ pay: Making deductions from an exempt employee’s salary for partial-day absences or other reasons that violate the salary basis test
Exempt vs Non-Exempt: Key Differences at a Glance
| Characteristic | Non-Exempt Employee | Exempt Employee |
|---|---|---|
| Overtime eligibility | Yes — 1.5x for hours over 40/week | No federal overtime requirement |
| Timekeeping required | Yes — employer must track all hours | Not required by FLSA (but best practice) |
| Salary deductions | Can dock for any time not worked | Cannot dock for partial-day absences (with limited exceptions) |
| Minimum wage | Must receive at least federal/state minimum wage | Must receive at least the salary threshold |
| Typical roles | Hourly workers, retail, manufacturing, admin staff | Managers, executives, licensed professionals |
FLSA Recordkeeping Requirements
Under the FLSA, employers are required to maintain accurate records for all covered employees. Recordkeeping requirements differ for exempt and non-exempt employees.
Required Records for Non-Exempt Employees
For every non-exempt employee, employers must maintain:
- Employee’s full name and Social Security number
- Address, including zip code
- Date of birth (if under 19)
- Sex and occupation
- Time and day of week when employee’s workweek begins
- Hours worked each day
- Total hours worked each workweek
- Basis on which employee’s wages are paid (hourly, salary, piece rate)
- Regular hourly pay rate
- Total daily or weekly straight-time earnings
- Total overtime earnings for the workweek
- All additions to or deductions from the employee’s wages
- Total wages paid each pay period
- Date of payment and the pay period covered by the payment
Records for Exempt Employees
For exempt employees, the FLSA does not require tracking of hours worked — only the employee’s name, address, occupation, date of birth (if under 19), sex, time of day and day of week when the workweek begins, and total wages paid each pay period. However, employers should still document the basis for exempt classification in case of a challenge.
Record Retention Periods
| Record Type | Retention Period |
|---|---|
| Payroll records (wages, hours, deductions) | 3 years |
| Time cards and schedules | 2 years |
| Wage rate tables and work time schedules | 2 years |
| Order, shipping, and billing records | 2 years |
| Records of additions/deductions from pay | 2 years |
Records can be kept at the place of employment or in a central records office, in any format (paper or electronic). They must be available for inspection by the DOL’s Wage and Hour Division. Failure to maintain required records can result in civil money penalties and can make it harder to defend against an overtime claim — in some cases, courts will accept an employee’s estimate of hours worked if the employer has no records.
Common FLSA Violations and Penalties
Understanding the most common FLSA violations is essential for prevention. The DOL and plaintiff attorneys are well aware of these patterns, and litigation is expensive regardless of outcome.
The Most Common FLSA Violations
- Employee misclassification: Classifying non-exempt employees as exempt. This is the highest-dollar violation category and the most litigated. A single misclassified employee can generate years of back overtime pay.
- Off-the-clock work: Requiring or allowing employees to perform work before clocking in, after clocking out, or during meal breaks without compensation. Common in healthcare, retail, and customer service.
- Improper deductions from exempt salaries: Docking an exempt employee’s pay for partial-day absences, temporary slowdowns, or disciplinary suspensions of less than a full week (except for safety rule violations) destroys the salary basis and converts the employee to non-exempt for the entire workweek.
- Regular rate miscalculation: Failing to include non-discretionary bonuses, commissions, or shift differentials in the regular rate before calculating overtime.
- Unauthorized rounding: Time rounding practices that consistently favor the employer over time can violate the FLSA.
- Tip credit violations: In tipped industries, employers who take the tip credit must meet strict notice, pooling, and wage requirements. Side work (non-tipped duties) exceeding 20% of work time can void the tip credit.
- Misclassification as independent contractors: Treating employees as 1099 contractors to avoid overtime obligations. Courts use an economic reality test: if the worker is economically dependent on the employer, they are an employee under the FLSA regardless of what the contract says.
- Averaging hours across workweeks: Trying to offset overtime by scheduling fewer hours in subsequent weeks. Illegal under the FLSA — each workweek stands alone.
- Failing to count all hours worked: Failing to count time spent donning and doffing required equipment, mandatory training, pre-shift and post-shift duties, and travel time between job sites during the workday.
- Retaliation: Retaliating against an employee who files a complaint or cooperates with a DOL investigation is a separate, serious violation that can result in additional liability.
FLSA Penalties and Liability
| Violation Type | Potential Liability |
|---|---|
| Back wages (non-willful) | 2 years of unpaid overtime |
| Back wages (willful violation) | 3 years of unpaid overtime |
| Liquidated damages | Equal amount of back wages (effectively doubling the liability) |
| Civil money penalties (repeat/willful violations) | Up to $2,374 per violation (as of 2024; adjusted for inflation) |
| Child labor violations | Up to $15,138 per violation |
| Retaliation | Reinstatement, lost wages, additional damages |
| Attorney’s fees | Paid by employer if employee prevails |
The good news: employers who can demonstrate good faith and reasonable grounds for believing their pay practices were FLSA-compliant may be able to avoid liquidated damages. This is why documenting your classification analysis matters — it’s not just good practice, it’s a potential legal defense.
State Overtime Laws That Go Further Than Federal FLSA
The FLSA sets a federal floor. States can — and frequently do — enact more protective overtime laws. When state law is more favorable to employees than federal law, employers must comply with the higher standard.
States With Stricter Overtime Requirements
| State | Key Overtime Difference from FLSA |
|---|---|
| California | Overtime required for hours over 8/day (not just 40/week); double time for hours over 12/day; 7th consecutive workday rules apply |
| Alaska | Overtime required for hours over 8/day as well as 40/week |
| Nevada | Overtime for hours over 8/day if employee earns less than 1.5x the state minimum wage |
| Colorado | Overtime for hours over 12/day, 12 consecutive hours worked, or 40/week (whichever is greater); applies to most industries |
| Kentucky | Overtime applies after 40/week and on the 7th consecutive day in a workweek |
| Maine | Higher state minimum wage affects regular rate calculations; also has its own exempt salary threshold |
| New York | State minimum wage exceeds federal; NYC, Long Island, and Westchester have higher minimums; own white collar exemption salary thresholds |
| Washington | State salary threshold for exempt employees: $1,332.80/week ($69,305.60/year) for 2026 for employers with 51+ employees |
California’s daily overtime rules are a particular trap for multi-state employers. A California-based employee who works 9 hours one day and 31 hours the rest of the week has 1 hour of daily overtime, even though their weekly total is only 40 hours. Payroll systems that only track weekly totals will miss this.
Employers with operations in multiple states need payroll software that is configured to handle both federal FLSA requirements and applicable state law — and to apply whichever standard is more favorable to the employee.
Related US Employer Compliance Guides
This guide is part of the Spotsaas US Employer Compliance series. Each article covers a distinct federal compliance area for US employers:
- FMLA Compliance Guide for Employers — Leave requirements, intermittent leave rules, notice deadlines, and common violations
- ACA Compliance Guide for Employers — Employer mandate, affordability thresholds, 1095-C reporting, and ESRP penalties in 2026
- I-9 Compliance Guide for Employers — Document verification, remote I-9 rules, E-Verify requirements, and ICE audit preparation
- COBRA Administration Guide for Employers — Qualifying events, notice deadlines, premium calculation, and excise tax penalties
- OSHA Compliance Guide for Employers — Recordkeeping forms, injury reporting deadlines, inspection process, and 2026 penalty amounts
