US overtime law for small businesses: the FLSA rules, the exemptions and the salary thresholds

European employers arrive with working-time law in their heads: daily limits, rest periods, overtime capped by a collective agreement. American federal law works differently. It does not limit how many hours an adult may work. It sets a price: for every hour beyond forty in a workweek, a non-exempt employee earns at least one and a half times the regular rate. Getting that price right, and knowing who is exempt from it, is one of the first compliance tasks of any US company with staff.

The basic rule in one paragraph

Section 7 of the Fair Labor Standards Act says that no covered employer may employ an employee for a workweek longer than forty hours unless the employee is paid for the hours above forty at a rate of not less than one and one-half times the regular rate. Three details matter in practice:

• The workweek counts. A workweek is a fixed and regularly recurring period of 168 hours, seven consecutive 24-hour periods. It can start on any day and at any hour, but once set it stays fixed. Under federal law, a ten-hour day followed by a six-hour day creates no overtime as long as the week stays at forty.
• No averaging. Each workweek stands alone. Fifty hours one week and thirty the next means ten overtime hours, even though the two weeks average forty.
• No time off instead of pay. The FLSA allows compensatory time off in lieu of overtime pay only for employees of public agencies such as states and their political subdivisions. A private company pays overtime in money.

The federal minimum wage is still $7.25 an hour, but many states and cities set higher minimums, and the FLSA expressly does not excuse an employer from a state or local law that sets a higher minimum wage or a shorter maximum workweek.

Who is covered

Coverage comes in two ways. Enterprise coverage applies to a business with employees engaged in commerce or handling goods that moved in commerce, and annual gross sales or business of at least $500,000, along with certain institutions such as hospitals and schools regardless of size. Individual coverage protects employees who are themselves engaged in commerce or in the production of goods for commerce, even when their employer is below the $500,000 line; section 7 applies to both groups.

We work on the assumption that every employee of a European-owned US company is covered. These companies trade across borders by definition, and arguing about coverage is rarely worth the risk. The question that matters is whether a particular employee is exempt.

Exempt or non-exempt: the three tests and the 2026 numbers

The white-collar exemptions for executive, administrative and professional employees require three things at once: the employee is paid a predetermined, fixed salary that is not reduced because of the quality or quantity of the work (salary basis), the salary is at least the minimum level (salary level), and the primary duty is executive, administrative or professional work as the regulations define it (duties test). A job title proves nothing; the duties do.

These are the 2019 figures, and the history explains why they are still in force. The Department of Labor's 2024 rule raised the levels, but federal courts vacated it; the Eastern District of Texas set it aside nationwide on November 15, 2024. On May 15, 2026 the Department published a technical amendment that removed the vacated text from the Code of Federal Regulations and restored the earlier regulatory text. Highly compensated employees need to perform at least one exempt duty customarily and regularly, a lighter duties test.

The salary level is only a floor. A receptionist paid $60,000 a year is still non-exempt, because answering phones is not exempt work. Classify every position against the duties test, write the reasoning down, and review it when the job changes.

Calculating the regular rate: a worked example

The regular rate is an hourly rate even for employees who are not paid by the hour. It is total remuneration for the workweek, minus the payments the statute excludes, divided by the hours actually worked. Discretionary bonuses, gifts on special occasions and certain benefit plan contributions are excluded; bonuses that are promised or tied to targets are not, and must be included.

Example: a warehouse employee earns $24 an hour, works 46 hours in a week and receives a $92 production bonus for that week under a published bonus scheme.

An employer who pays the overtime at 1.5 x $24 and ignores the bonus underpays by $6 that week. Multiply that by every employee and every week for three years, and a small mistake becomes a lawsuit. Payroll software does the arithmetic, but only if bonuses are coded correctly; our payroll service for foreign-owned companies sets that up from the first pay run.

State overtime rules: California as the strict example

The federal rule is the minimum. States can add their own, and the stricter rule wins. California is the best-known case. Under its rules:

• Hours over eight in a workday, up to twelve, are paid at one and a half times the regular rate.
• Hours over forty in a workweek are paid at one and a half times.
• The first eight hours on the seventh consecutive day of work in a workweek are paid at one and a half times.
• Hours over twelve in a workday, and hours over eight on the seventh consecutive day, are paid at double the regular rate.

A California employee working four ten-hour days has eight hours of overtime under state law and none under federal law. If your US company hires remote employees in several states, check the wage and hour rules of each state where someone works before the first hire, not after the first claim. Our page on hiring staff for a new US company covers the other state-level steps, such as registering for unemployment insurance.

Records, back pay and the cost of getting it wrong

Every employer must keep payroll records for each non-exempt employee, including hours worked each workday and workweek, the regular rate, straight-time and overtime earnings and the pay period. Payroll records are kept for at least three years; supplementary records such as time cards for at least two.

Hours count even when nobody asked for them. The regulations say that work not requested but suffered or permitted is work time, and that a rule against overtime is not enough: management has to enforce it. An employee who answers email from home every evening, with the employer's knowledge, is working.

If overtime was not paid, the employer owes the unpaid overtime and an additional equal amount as liquidated damages, so in effect double, plus the employee's reasonable attorney's fees and costs. Claims can be brought within two years, or three years for a willful violation. That fee-shifting rule is why overtime cases are attractive to plaintiffs' lawyers even when the amounts per employee are small. Our page on protection against employee lawsuits explains how insurance and good records reduce the exposure.

No tax on overtime: what changed for employees

The One Big Beautiful Bill Act of July 2025 added a federal income tax deduction for qualified overtime compensation, section 225 of the Internal Revenue Code. It is the employee's deduction, not the employer's, but employers report the figures and employees will ask about it.

• What counts: overtime pay required by section 7 of the FLSA that exceeds the regular rate, in effect the half in time and a half. Overtime paid voluntarily above the FLSA requirement, for example under a daily overtime policy, does not count, and state-law overtime that goes beyond the FLSA is not covered either.
• How much: up to $12,500 a year, or $25,000 on a joint return. The cap is reduced by $100 for each $1,000 of modified adjusted gross income above $150,000, or $300,000 for joint filers.
• Who: the taxpayer must include a Social Security number on the return, and married taxpayers must file jointly.
• How long: taxable years 2025 through 2028.

The deduction reduces federal income tax only. For 2025, the IRS did not require employers to report qualified overtime separately on Form W-2. Make sure your payroll provider tracks the FLSA premium portion separately from any extra overtime you pay, because that is the number employees need.

Mistakes we see in European-owned companies

1. Salaried means exempt. It does not. Paying a salary only passes one of three tests.
2. Overtime by contract. An employment contract that says "overtime is included in the salary" does not replace the calculation for a non-exempt employee in the US. The FLSA premium is owed for each hour over forty in each workweek.
3. Time off in lieu. Normal in many European companies, not available to private employers under the FLSA.
4. Seconded staff left unclassified. People sent over by the European parent and employed by the US company need the same exempt or non-exempt analysis as local hires. Our guide to sending employees to the US covers secondments.
5. Bonuses left out of the regular rate. A regular rate error, repeated every week.
6. No time records for office staff. Non-exempt office employees need records of their hours just like warehouse staff.

None of this is difficult once it is set up. The setup is what matters: a classification memo for each position, a timekeeping tool, correct bonus coding and a payroll provider that knows each state you hire in. Our overview of payroll in the US explains the rest of the employer's obligations.