When it comes to Payroll, it's important to understand the Fair Labor Standards Act (FLSA) and how it applies to Exempt and Nonexempt employees.

Violations of the FLSA can be extremely costly to companies. Nearly 75% of all Department of Labor Wages & Hours Division audits are initiated by an employee complaint or notification. Ensuring that regulations are adhered to is vital to protect the business from litigation.

Continue reading to learn more about the FLSA, calculating the Regular Rate of Pay, and how it all applies to your firm.

What is the Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) was put into law to provide workers with employment protections. The FLSA consists of five components:

Minimum Wage
Record Keeping
Child Labor
Equal Pay
Overtime Pay

Minimum Wage

The federal minimum wage is currently at $7.25 per hour. This means all nonexempt employees must be paid a minimum of $7.25/hr, however, many states and local jurisdictions have their own minimum wage regulations. In these cases, generally, the employer must pay whichever is most beneficial to the employee.

Record Keeping

The FLSA also requires employers to maintain certain records used to calculate the regular rate of pay and overtime. These include (but are not limited to):

Record Type	Record Attributes
Employee Data	Name Address Gender Birthdate SSN Occupation State where services are performed
Employment Data	Hire date Termination date Payment date(s) Hourly rate of pay Additions to or deductions from pay Frequency of payment(s) Hours worked per day and per workweek Basis of the workweek Straight-time hours & pay Overtime hours & pay Shift premium or differentials
Tax & Payroll Data	Filing status Deductions claimed Credits claimed Exempt status (Form W-4 information)
Pay Period & Calendar Year	Total wages subject to federal, state &/or local income taxes Total wages subject to social security & Medicare taxes

Child Labor

In the U.S., compulsory education ends at the age of 16. After the age of 16, there are no restrictions on the number of hours an employee can work. There are restrictions on the type of labor that can be done by minors over the age of 16 but under 18 with fines assessed to employers for violating these restrictions.

Equal Pay

It is a violation of the FLSA to bind an employee's wages to their sex. Employees performing a job with substantially similar skill, effort, and responsibility must not suffer sex-based wage discrimination.

Overtime Pay

The requirements of the FLSA necessitate paying all nonexempt employees (see discussion below) 1 ½ times their regular rate of pay for all hours actually worked over 40 during each workweek. This can be especially difficult to calculate if employees are paid at different rates for different types of work, are paid shift differentials for part of the hours worked, or are paid commissions, bonuses, tips, or other types of compensation in addition to their regular pay.

🎓 Check out this article for more information on calculating Overtime pay.

Exempt and Nonexempt Employee Statuses

Not all employees of a company are subject to the FLSA regulations - these employees are considered Exempt employees. Nonexempt employees are paid hourly and are eligible for minimum wage and overtime pay. The differentiating factors have to do with the type of work being performed by the employee.

The four types of exempt employees are:

Executive
Administrative
Professional
Outside Sales

The table below details the requirements of each type. Please reference the U.S. Wage and Hour Division Fact Sheet for more information.

Exempt Type	Requirements for Exemption
Executive	The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $684* per week; The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight. [1] [1] U.S. Wage and Hour Division Fact Sheet #17B
Administrative	The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684* per week; The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. [2] U.S. Wage and Hour Division Fact Sheet #17C
Professional	There are multiple subtypes for the professional type. Their requirements are detailed below. Learned Professional Exemption: The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684* per week; The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; The advanced knowledge must be in a field of science or learning; and The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction. Creative Professional Exemption: The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684* per week; and The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. Teachers: Teachers are exempt if their primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge, and if they are employed and engaged in this activity as a teacher in an educational establishment. Exempt teachers include, but are not limited to: Regular academic teachers Kindergarten or nursery school teachers Teachers of gifted or disabled children Teachers of skilled and semi-skilled trades and occupations Teachers engaged in automobile driving instruction Aircraft flight instructors Home economics teachers Vocal or instrument music teachers Law or Medicine Practice: An employee holding a valid license or certificate permitting the practice of law or medicine is exempt if the employee is actually engaged in such a practice. An employee who holds the requisite academic degree for the general practice of medicine is also exempt if they are engaged in an internship or resident program for the profession. The salary and salary basis requirements do not apply to bona fide practitioners of law or medicine. [3] [3] U.S. Wage and Hour Division Fact Sheet #17D
Outside Sales	The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and The employee must be customarily and regularly engaged away from the employer’s place or places of business. The salary requirements of the regulation do not apply to the outside sales exemption. An employee who does not satisfy the requirements of the outside sales exemption may still qualify as an exempt employee under one of the other exemptions allowed by Section 13(a)(1) of the FLSA and the Part 541 regulations if all the criteria for the exemption is met.

Calculating the Regular Rate of Pay

Under the FLSA, overtime pay must be paid at the regular rate of pay. There are instances when this is not necessarily a straightforward calculation. If the employee only has one rate of pay and no additional compensation components that need to be taken into consideration, then the calculation is straightforward. However, there are a number of different types of compensation components which must be added in before the regular rate of pay can be calculated.

Some components may or may not have to be added to the regular rate of pay when calculating overtime:

Components to Include	Shift differentials or premiums Nondiscretionary bonuses (e.g., production, promised, contractual) Payments in forms other than cash (e.g., fair market value of goods or services) Retroactive pay On-call pay Call-back pay Cash in lieu of benefits Per diem pay
Components Not to Include	Discretionary bonuses Gifts Paid-time off Reimbursed expenses Referral bonuses Benefit plan contributionsImputed income for group-term life insurance Stock options Overtime pay (for time worked outside of FLSA) Premium pay for extra days worked Union pay premiums

The formula for calculating the regular rate of pay under the FLSA is Pay for all hours worked (less exceptions) divided by All hours worked.

🎓 Click here to learn more about calculating the regular rate of pay.

Calculating Time Worked & Overtime

Withholding Taxes