This article is part of a larger series on How to Do Payroll.
Most employers are legally required to pay a certain minimum wage to their employees (at least $7.25 an hour to comply with federal laws) and pay overtime for hours worked over 40 in a workweek (at least 1.5 times the regular pay rate). However, the Fair Labor Standards Act (FLSA) provides minimum wage and overtime exemptions for certain jobs and demographics.
Your business may be exempt from minimum wage and/or overtime rules if you are in one of the following industries or pay the following types of workers:
Who Is Exempt From Both Minimum Wage Laws & Overtime Pay?
While the FLSA guidelines are wide-reaching, there are some industry exemptions to both minimum wage and overtime. Certain types of workers are also exempt from the minimum wage requirements in specific situations.
When in doubt, check with the Department of Labor (DOL) or the FAQ page at Workplace Fairness.
In The News: On Jan. 1, 2020, the DOL raised the “salary” test for employees to be exempt from overtime pay. Under the FLSA, employees are exempt from overtime if they can satisfy three tests:
- Salary Level: Meaning the employee’s salary is above a certain threshold
- Salary Basis: Meaning the employee is paid a fixed weekly salary that does not fluctuate
- Duties Test: Meaning the employee’s primary duties are exempt because they are primarily executive, professional or administrative, as defined by DOL regulations
If an employee does not “pass” all three tests, they are considered a nonexempt employee and must be paid overtime for all hours worked over 40 in a week.
Certain executives are exempt from minimum wage and overtime pay. In general, they must meet these requirements:
- Pass the salary test
- Have the primary duty of managing the enterprise or a recognized department or subdivision of the enterprise
- Customarily and regularly direct work of two or more full-time employees (or their equivalent)
- Have hiring and firing authority or weight in hiring and firing decisions
Some administrative jobs are also exempt from minimum wage and overtime pay. In general, they must meet these requirements:
- Pass the salary test
- Have the primary duty of office or non-manual work directly related to management or general business operations
- Have primary duties involving exercising discretion and independent judgment in matters significant to the business
Normally, this applies to doctors, lawyers, and teachers. However, the definition also includes learned or creative professionals. Learned professionals use advanced knowledge in science or learning and have an advanced degree or specialized instruction.
Creative professionals can include actors, musicians, writers, cartoonists, essayists, and, on some occasions, journalists. Again, the salary test applies.
Outside Sales Employees
Outside sales employees do not need to meet the salary test. However, their basic duties must involve making sales or obtaining orders and contracts, which must be done away from the employer’s place(s) of business.
Seasonal Industry Workers
Seasonal workers, whether on the farm or at the amusement park, are exempt from minimum wages. (Year-round employees will still be subject to minimum wage laws.)
Farm and Agricultural Workers
If you have a farm and used fewer than 500 man-days of farm labor in the previous calendar year, you are exempt from the minimum wage requirements. Employees of small fishing operations are also exempt.
Other Jobs Exempt From Minimum Wage and Overtime Pay
- Casual babysitters
- Persons employed as companions to the elderly or infirm
Who Is Exempt From Minimum Wage Laws Only?
Certain employee groups are exempt from federal minimum wage requirements, but still require overtime pay for work performed in excess of a standard workweek.
Tip-earning employees are defined as workers who engage in occupations where they regularly earn more than $30 a month in tips. Employers should consider tips in taxable wages but must pay at least $2.13 an hour in direct wages regardless of how much a worker earns in tips. Further, if an employee does not make the minimum hourly wage when combining the $2.13 and tips, the employer must make up the difference.
To provide employment opportunities for the mentally or physically disabled, minimum wage is sometimes waived if the disabled person’s capacity for the job is impaired. However, you need a certificate from the Department of Labor (DOL).
Student-learners, such as vocational education students, can be paid as little as 75% of minimum wage. Full-time students in retail or service establishments, agriculture, or institutions of higher education are also exempt. In these cases, you can pay as little as 85% of minimum wage as long as they are registered students. You need DOL certificates for this, so you must submit a request.
Interns are a special case. They may be covered under FLSA and thus must be paid minimum wage and overtime. It depends on the nature of the employment relationship, how much of the internship is devoted to learning, and other factors. Check with the DOL or the internship program you’re operating.
Workers Under 20
Workers under the age of 20 may be paid a special minimum wage of $4.25 per hour for the first 90 days of employment. This ends after 90 days or when the worker turns 20, whichever occurs first.
Some colleges and universities, as well as other nonprofit organizations, can pay as little as 85% of minimum wage. Again, you need a DOL certificate to do this.
Who Is Exempt From Overtime Pay Laws Only?
- Commissioned employees, such as vehicle salespeople (trucks, cars, farming machinery, boats, aircraft), vehicle parts salespeople, and mechanics
- Employees of railroads and air carriers, taxi, seamen on American vessels, and local delivery employees paid by trip rate
- Announcers, news editors, and chief engineers of non-metropolitan broadcast stations
- Live-in domestic service workers
- Employees of motion picture theaters
Partial Exemptions to Overtime Pay
There are also some partial exemptions.
- Those involved in distributing specified bulk petroleum products or agricultural commodities (such as truckers) may be exempt.
- Hospitals can adopt a 14-day workweek, with overtime at the 80-hour mark.
- First responders may adopt a work period of up to 28 days. In this case, overtime starts at the ratio of 212 hours per 28 days for fire personnel and 171 hours per 28 days for law enforcement. See the DOL fact sheet for details.
- Employees who lack a high school diploma don’t have to be paid overtime if the extra hours are part of a remedial reading or training program. (They should earn regular wages, however.)
What Businesses Have to Pay Minimum Wage and/or Overtime?
Most businesses must comply with minimum wage and overtime rules when doing payroll as most employees are “covered” under federal laws. The law holds accountable any businesses with employees engaged in interstate commerce; who produce or handle goods for interstate commerce; or who handle, sell, or otherwise work on goods or materials that have been moved or produced for commerce by any person, including those in communication and transportation. That’s nearly any business.
It also covers:
- Businesses that earn at least $500,000 annual gross volume of sales/business done
- Businesses that operate hospitals/institutions that care for the sick, aged, or mentally ill
- Schools and institutions of higher education (for-profit and some nonprofit)
- Public agencies
Workers such as guards, janitors, and maintenance employees who perform duties that are related to/essential for interstate activities are also covered by FLSA. These laws also generally apply to domestic workers.
If your business was covered by FLSA March 31, 1990, but does not meet the $500,000+ volume of sales or business, you may be exempt from the minimum wage requirement.
However, you are still subject to the overtime pay provisions of the FLSA.
Minimum wage and overtime pay are hot topics for businesses, and with good reason. It’s important not only to your employees but also for you to stay on the right side of the law. There are exemptions to the wage rules, but they are carefully defined by the FLSA.
Please note that this article provides general guidelines based on federal exemptions to overtime and minimum wage. If you think you may qualify for an exemption, check with your local DOL Wage and Hiring Office for more information and to apply for the necessary certificates.