Overtime pay: Does your small business follow the Fair Labor Standards Act?

    The Federal Reserve recently announced that the U.S. economy appears to be improving.[1] Improved economic activity may lead to more work hours for employees this summer and potential growth for small businesses.

    All businesses should be careful to accurately track the time worked by employees and to pay employees who are not exempt from overtime law at the rate of time and one-half for all overtime worked. The Federal Fair Labor Standards Act (the Act) requires payment of overtime and applies to employees even of small businesses unless certain exceptions are met.     

    Specifically, the Act provides that employers must pay employees “engaged in commerce or in the production of goods for commerce” at one and one-half times his or her regular rate for all hours worked in excess of 40 hours during a work week.[2] Employers are also required to keep accurate time records of hours actually worked by its hourly employees.[3]

    However, the Act does not apply to an employee who is not engaged in interstate commerce or in the production of goods for interstate commerce unless his or her employer is an “enterprise engaged in commerce.”[4] Under the Act’s enterprise test, the Act’s overtime and record keeping provisions cover all employees of an enterprise engaged in interstate commerce regardless of whether the individual employees are so engaged. To be such an enterprise under the Act, a business must have an annual gross sales volume in excess of $500,000.[5] This means if a small business has less than $500,000 in gross sales and has no employees producing goods for interstate commerce or engaged in interstate commerce, then the small business is not subject to the Act’s overtime and record keeping provisions.

    Small businesses and start-ups must be mindful of the Act’s threshold of $500,000 in gross revenue. Once that threshold is met, a small business is covered by the Act and must comply with its overtime and record keeping requirements in the subsequent year.[6] Alternatively, if a small business has employees who are engaged in interstate commerce, then the business must follow the FLSA for those employees.

   Penalties for violating the FLSA are stiff and include liquidated damages, or double damages and payment of fees to an employee’s attorney. Any small business facing the prospect of FLSA coverage should consult with an employment attorney to ensure that employees are being paid properly. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client Alert authored by: Ryan A. Haas