1.3 Fair Labor Standards Payroll Concepts Study Guide

Overview of the Fair Labor Standards Act (FLSA)

• The Fair Labor Standards Act (FLSA), also known as the Federal Wage-Hour Law, is the foundational payroll and employment law in the United States.

• Primary mandates of the FLSA include:

  • Setting the federal minimum wage and overtime rates for covered employees.

  • Requiring thorough recordkeeping by all covered employers.

  • Placing restrictions on the types of work minors can perform and the hours they are permitted to work.

  • Mandating equal pay for equal work.

• Items specifically NOT covered by the FLSA (often regulated by state laws):

  • Requirements to provide paid vacations, sick days, jury duty leave, holidays, lunch breaks, or coffee breaks (though some states require paid sick leave).

  • Regulations on how often an employee must be paid or the timing of final pay after termination.

  • Restriction of hours for employees aged 16 and 17.

• The FLSA does not require wages to be paid within a specific timeframe after services, but federal courts have ruled that wages are legally "unpaid" unless paid on the employee’s regular payday. Late payment violates minimum wage and overtime requirements.

Employer and Employee Coverage Tests

• Enterprise Coverage Test: All employees of a business are covered if:

  1. At least two employees are engaged in jobs closely related to interstate commerce or the production of goods for interstate commerce.

  2. The business has annual gross sales of at least $500,000$.

• Individual Employee Coverage Test: Even if the enterprise is not covered, individual employees are protected if they are engaged in interstate commerce, which refers to any trade, transportation, or communication between one state and another state or a foreign country.

Exempt vs. Nonexempt Classifications

• Nonexempt Employees:

  • Must be paid at least the federal minimum wage for all hours worked.

  • Must receive an overtime premium for all time worked over $40$ hours in a single workweek.

• Exempt Employees:

  • Are NOT protected by FLSA minimum wage or overtime provisions.

  • Employers have reduced recordkeeping requirements for these individuals.

  • Exemptions are determined by actual job duties and salary level, not job titles.

  • Salary Level Requirement: As of January 1, 2026, the minimum weekly salary for most exempt employees is $684.00$.

  • Highly Compensated Employees (HCE): Total annual compensation of at least $107,432$ (including at least $684.00$ per week base salary). HCEs are exempt if they customarily perform at least one of the exempt duties of an executive, administrative, or professional employee.

White Collar Exemption Categories

Administrative Employees

• Primary Duty: Performing office or non-manual work directly related to management or general business operations of the employer or customers; OR performing work related to academic instruction in a school system.

• Discretion: Must include the exercise of discretion and independent judgment regarding matters of significance.

• Salary: Minimum $684.00$ per week.

• Functional Areas: Accounting, advertising, budgeting, HR, legal/compliance, tax, etc.

• Examples:

  • Insurance claims adjusters generally meet the test if they evaluate coverage and negotiate settlements.

  • Executive Assistants to business owners/senior executives meet the test if delegated authority on significant matters.

  • Purchasing agents with authority to bind the company meet the test.

Executive Employees

• Primary Duty: Management of the business or a recognized department.

• Supervision: Must regularly direct the work of at least two or more full-time equivalent (FTE) employees.

• Authority: Must have authority to hire/fire or have their recommendations given particular weight.

• Owners: Any employee owning at least $20\%$ of an enterprise is an exempt executive regardless of salary level.

Professional Employees

• Learned Professionals: Require knowledge of an advanced type in a field of science or learning acquired by prolonged specialized instruction.

  • Includes: Registered Nurses (RNs), Physician Assistants, CPAs, and Executive Chefs with 4-year degrees.

  • Excludes: Licensed Practical Nurses (LPNs), bookkeepers, or paralegals (unless they have an advanced degree in another field like engineering).

• Creative Professionals: Primary duty involves invention, imagination, originality, or talent in a recognized artistic/creative field. Includes actors, musicians, and certain investigative journalists.

• Teachers/Law/Medicine: Salary requirements do NOT apply to these specific professional exemptions.

Computer Professionals

• Must be highly skilled in systems analysis, programming, or software engineering.

• Compensation: Must be paid at least $27.63$ per hour OR $684.00$ per week salary.

Outside Sales Employees

• Primary duty is making sales or obtaining orders away from the employer’s place of business.

• Salary: There are no salary requirements for this exemption.

The Salary Basis Test and Deductions

• Exempt employees must receive their full salary for any week in which they perform work, regardless of quantity or quality.

• Permissible Deductions:

  • Absences of one or more full days for personal reasons.

  • Absences of one or more full days for sickness/disability if made under a bona fide plan (e.g., used up all sick leave).

  • To offset jury fees, witness fees, or military pay.

  • Penalties for infractions of safety rules of major significance.

  • Unpaid disciplinary suspensions of one or more full days for workplace conduct infractions.

• Safe Harbor: Employers do not lose an exemption for improper deductions if they have a written policy, a complaint mechanism, reimburse the employee, and commit to future compliance.

Minimum Wage Requirements

• Standard Federal Minimum Wage: $7.25$ per hour since July 24, 2009.

• Opportunity Wage: $4.25$ per hour for employees under age $20$ during their first $90$ consecutive calendar days of employment.

• Federal Contractors: Required to pay at least $13.30$ per hour ($9.30$ for tipped employees).

• Averaging Prohibited: Compliance is measured by the workweek; pay cannot be averaged over multiple weeks.

• State Law: If state and federal laws differ, the higher (more favorable to the employee) wage must be paid.

Tipped Employees and Tip Credits

• Minimum Cash Wage: $2.13$ per hour.

• Maximum Tip Credit: $5.12$ per hour ($7.25 - 2.13 = 5.12$).

• Conditions: Employees must receive at least $30.00$ in tips per month. If cash wage ($2.13$) + tips does not equal at least $7.25$, the employer must pay the difference.

• Overtime Note: The tip credit ($5.12$) does not increase during overtime. For an OT hour, the required cash payment is $5.76$ ($10.88 - 5.12 = 5.76$).

Regular Rate of Pay (RROP)

• The RROP is the hourly rate used to calculate overtime premiums: $\text{RROP} = \frac{\text{Total Regular Pay Earned}}{\text{Total Hours Worked}}$.

• Payments Included in RROP:

  • Shift differentials/premiums.

  • Nondiscretionary bonuses (tied to production/efficiency/attendance).

  • On-call pay (if the employee is constrained on premises).

  • Retroactive pay.

  • Fair market value of non-cash payments (room and board).

• Payments Excluded from RROP:

  • Gifts (e.g., holiday bonuses not tied to work).

  • Paid Time Off (PTO, holiday, sick leave - these hours also do not count toward the $40$-hour OT threshold).

  • Reimbursed business expenses.

  • Discretionary bonuses (where the employer has sole discretion on the amount and timing near the end of the period).

  • Benefit plan contributions.

  • Stock options and Employee Stock Purchase Plans (ESPP).

  • Wellness perks (gym memberships, EAPs, vaccination clinics).

The Workweek and Overtime Rules

• Workweek: A fixed, recurring period of $168$ hours (7 consecutive 24-hour periods). Each workweek stands alone for OT purposes.

• Standard Overtime: At least $1.5$ times the RROP for hours physically worked over $40$ in a workweek.

• 8/80 Rule (Hospitals/Nursing Homes): Allows a 14-day period for OT. OT is paid for hours over $8$ in a day OR over $80$ in the 14-day period, whichever is higher.

• Fluctuating Workweek: Used for employees with varying hours who receive a fixed salary. Overtime is paid at $0.5$ times the RROP (since the salary is deemed to cover all hours at straight time).

Compensatory Time Off (Comp Time)

• Private Sector: Generally prohibited unless the time off is taken within the same pay period it was earned. Calculation: $1.5$ hours off for every $1$ hour of overtime.

• Public Sector (State/Local Gov): Allowed if agreed upon beforehand.

  • Max accumulation: $240$ hours ($160$ OT hours worked).

  • Public safety/emergency/seasonal: Max $480$ hours ($320$ OT hours worked).

  • Termination: Must be paid out at the higher of the current rate or average rate over the last 3 years.

Child Labor Restrictions

• Under 14: Employment generally prohibited except for specific exemptions (actors, news carriers, family farms).

• Ages 14-15:

  • School in session: Max $3$ hours/day, $18$ hours/week.

  • School out: Max $8$ hours/day, $40$ hours/week.

  • Work limited to non-hazardous jobs.

• Ages 16-17: May work unlimited hours in non-hazardous jobs.

• Age 18+: No FLSA restrictions on hazardous work or hours.

Family and Medical Leave Act (FMLA)

• Coverage: Private employers with $50$ or more employees (within a 75-mile radius); all public agencies/schools.

• Eligibility: Must have worked for employer for $12$ months and at least $1,250$ hours in the previous $12$-month period.

• Entitlement:

  • $12$ weeks of unpaid, job-protected leave per year for birth/adoption, serious health condition (self/family), or military exigency.

  • $26$ weeks for military caregiver leave.

• Serious Health Condition: Inpatient care OR continuing treatment involving incapacity of more than $3$ consecutive calendar days.

• Intermittent Leave: Can be taken in blocks or reduced hours. For exempt employees, salary can be docked for partial-day FMLA absences without losing the exemption.

• Health Insurance: Must continue during leave. Employer can recover premiums if the employee fails to return for reasons other than health/circumstances beyond control.

Enforcement and Other Federal Acts

• Statute of Limitations: $2$ years for standard violations; $3$ years for willful violations.

• Liquidated Damages: Courts may award an amount equal to back wages as a penalty (totaling double the back wages).

• Walsh-Healey Act: Federal contracts over $10,000$ for goods; requires OT over $40$ hours.

• Davis-Bacon Act: Federal construction contracts over $2,000$; requires prevailing wages and specific OT rates including fringe benefits.

• McNamara-O’Hara Service Contract Act: Federal service contracts over $2,500$; requires prevailing minimum wages and fringe benefits.

• Contract Work Hours and Safety Standards Act: Requires $1.5$ times pay for OT on federal contracts; violation penalty is $10$ per day per employee.