Overtime Rules for Small Businesses: What You Need to Know

Why Overtime Rules Keep Coming Up

If you employ people, overtime rules are one of those compliance areas that never quite goes away. The federal rules around who qualifies for overtime pay get revisited and updated periodically by the Department of Labor, and when they change, the impact on small businesses can be significant.

Getting overtime wrong is also one of the most expensive compliance mistakes a small business can make. Wage and hour lawsuits are among the most common employment claims filed in the United States, and the penalties for misclassifying employees or failing to pay proper overtime can add up fast, including back pay, liquidated damages, and legal fees.

This guide covers the fundamentals of federal overtime rules so you can understand your obligations and stay compliant even as the details evolve.

The Basics: The Fair Labor Standards Act

Federal overtime rules come from the Fair Labor Standards Act (FLSA), which has been around since 1938. The core rule is straightforward: employees who are covered by the FLSA must be paid at least one and a half times their regular rate of pay for any hours worked over 40 in a workweek.

That is the default. The complexity comes from the exemptions.

Exempt vs Non-Exempt: The Key Distinction

Under the FLSA, employees are either "exempt" or "non-exempt" from overtime requirements.

Non-Exempt Employees

Non-exempt employees are entitled to overtime pay. If they work more than 40 hours in a workweek, you must pay them time and a half for the extra hours. Most hourly workers fall into this category.

Exempt Employees

Exempt employees are not entitled to overtime pay under federal law. However, an employee does not become exempt just because you call them exempt or pay them a salary. To qualify for an exemption, an employee must meet specific tests established by the Department of Labor.

The most common exemptions are the "white collar" exemptions for executive, administrative, and professional employees. To qualify, an employee generally must meet all of the following criteria:

1. Salary basis test. The employee must be paid a predetermined, fixed salary that is not subject to reduction based on the quality or quantity of work.
2. Salary level test. The employee's salary must meet or exceed a minimum threshold set by the Department of Labor. This threshold is the number that changes when the DOL updates overtime rules, and it has been revised multiple times over the years. Always check the current DOL guidelines for the most up-to-date figure.
3. Duties test. The employee's primary job duties must meet the specific criteria for executive, administrative, or professional work as defined by the DOL regulations.

All three tests must be met. Paying someone a salary above the threshold does not automatically make them exempt. Their actual job duties must also qualify.

The Salary Threshold: A Moving Target

The salary threshold for the white collar exemptions is the part of overtime rules that changes most often. The Department of Labor periodically reviews and updates this figure to account for changes in wages and the economy.

Where the Threshold Stands Now

As of this writing, the federal salary threshold for executive, administrative, and professional exemptions is $684 per week ($35,568 annually). This is the figure that has been in effect since 2020.

In April 2024 the DOL finalized a rule that would have raised the threshold to $844 per week ($43,888 annually) on July 1, 2024, and then to $1,128 per week ($58,656 annually) on January 1, 2025, with automatic updates every three years thereafter. On November 15, 2024, the U.S. District Court for the Eastern District of Texas vacated that rule nationwide in State of Texas v. United States Department of Labor, finding that the DOL had exceeded its statutory authority. The vacatur returned the threshold to the 2019 figure of $684 per week / $35,568 annually, which is the controlling federal floor today.

The DOL's appeal of the vacatur is pending in the Fifth Circuit, and the rule could be reinstated, modified, or remain vacated depending on the outcome. Until then, the $684 / $35,568 figure is the one that applies.

What This Means for Your Business

When the threshold changes, employees who were previously classified as exempt may need to be reclassified as non-exempt if their salary falls below the new level. This is the change that tends to have the biggest operational impact on small businesses, because it can affect budgeting, scheduling, and how you structure roles.

If you had reclassified employees in 2024 in anticipation of the higher threshold, you can technically reclassify them back to exempt under the reverted rule, but for many businesses the practical and morale costs of reversing a raise outweigh the savings. Most employers who already implemented the increase have left it in place.

How to Stay Current

The Department of Labor publishes the current salary threshold on its website (dol.gov). Whenever a change is proposed or finalized, it goes through the federal rulemaking process and is published in the Federal Register. Pending litigation and any future DOL rulemaking could shift the threshold again, monitor the Fifth Circuit decision in the State of Texas v. DOL appeal as the next likely trigger.

State Overtime Rules Add Another Layer

Federal rules set the floor, but many states have their own overtime laws that are more protective of employees. Some states have:

• Lower salary thresholds for exemptions (meaning more employees must be paid overtime).
• Daily overtime rules (California, for example, requires overtime for hours worked beyond 8 in a single day, not just 40 in a week).
• Different exemption criteria that may be stricter than federal standards.

When state and federal rules conflict, you must follow whichever law provides greater protection to the employee. This means you need to know both the federal rules and the rules in every state where you have employees.

Common Overtime Mistakes Small Businesses Make

Misclassifying Employees as Exempt

This is the most common and most costly mistake. Giving someone a managerial title and paying them a salary does not make them exempt. Their actual day-to-day duties must meet the DOL's specific criteria. An employee whose primary duties are non-managerial work is likely non-exempt regardless of their title or salary.

Not Tracking Hours for Salaried Non-Exempt Employees

If an employee is non-exempt, you must track their hours and pay overtime, even if they are paid a salary. Salaried does not mean exempt. These are separate concepts.

Ignoring State Rules

A business that is compliant with federal overtime rules but ignores stricter state rules is still violating the law. This is especially important for businesses with employees in multiple states.

Averaging Hours Across Pay Periods

Overtime is calculated on a workweek basis. You cannot average hours across two weeks. If an employee works 50 hours one week and 30 the next, you owe overtime for the 10 extra hours in that first week, even though the average is 40.

Failing to Count All Hours Worked

Under the FLSA, "hours worked" includes time an employee is permitted or required to work, even if it was not explicitly authorized. This can include time spent responding to emails after hours, working through lunch, or completing tasks before or after a shift. If you know or should know an employee is working, those hours count.

How to Stay Compliant

Audit Your Classifications

Review every position you have classified as exempt. Does the employee meet all three tests, salary basis, salary level, and duties? If you are not sure, the safer course is to classify the position as non-exempt.

Track Hours Accurately

Use a reliable timekeeping system for all non-exempt employees. Paper timesheets work but are prone to errors. Digital time tracking tools reduce mistakes and create a clear record.

Monitor Regulatory Changes

Overtime rules are a moving target. The salary threshold, the duties tests, and state-level rules all change over time. You need a system for staying current. Overtime is one of many labor rules that shift, see our broader guide on how to monitor regulations for your business for a weekly workflow that covers labor, tax, licensing, and safety in one pass.

Bizmoon's compliance monitoring tracks federal and state regulatory changes, including updates to overtime rules, and alerts you when something relevant to your business changes. Instead of checking the DOL website yourself or waiting for your accountant to mention it, you get timely notifications with plain-language summaries of what changed and what it means for you.

See how it works or explore our pricing plans.

Consult When Necessary

For complex classification questions, especially for roles that are borderline between exempt and non-exempt, consulting an employment attorney or HR professional is worth the investment. The cost of getting advice upfront is a fraction of the cost of a wage and hour claim.

Do Not Wait for a Problem

Overtime compliance is one of those areas where the cost of getting it wrong far exceeds the cost of getting it right. Audit your employee classifications, make sure you are tracking hours properly, and stay on top of regulatory changes.

Create a free Bizmoon account to start monitoring the labor and employment regulations that affect your business.