When Do I Have to Pay the Minimum Wage?

Most employers must pay their workers at least the federal minimum wage.

Federal law requires employers to pay all employees a minimum hourly wage, which is $5.15 per hour until July 24, 2007, when it rises to $5.85. (It will increase again, to $6.55, on July 24, 2008, and to $7.25 a year later.) Each state is also free to impose its own minimum wage (and many do). In addition, some cities and counties have passed "living wage" laws, which may set an even higher minimum wage. Some of these laws apply only to companies that have contracts to do business with the local government; others apply more generally to all employers in the area. As an employer, you must pay whichever amount is highest -- federal, state, or local.

Although the minimum wage is an hourly wage, this doesn't mean that you have to pay your employees by the hour. You may choose to pay a salary, commission, wages plus tips, or piece rate, as long as the total amount paid divided by the total number of hours worked is equal to at least the minimum wage.

Which Employers Must Pay the Federal Minimum Wage?

The main federal law that sets the minimum wage is the Fair Labor Standards Act (FLSA), found at 29 U.S.C. sections 201, and following. Although the FLSA covers most employers, some employers and employees are not covered.

Generally, your business must abide by the FLSA if you have $500,000 or more in annual sales or if your employees work in what Congress calls "interstate commerce" -- meaning conducting business between states. This includes making phone calls to or from another state, sending mail out of state, or handling goods that have come from or will go to another state.

Which Workers Are Exempt From the Federal Minimum Wage?

Even if your business is covered, federal law does not require you to pay the following workers the federal minimum wage:

independent contractors (only employees are entitled to the minimum wage)
outside salespeople (a salesperson who works a route, for example)
workers on small farms
switchboard operators employed by phone companies with no more than 750 stations
employees of seasonal amusement or recreational businesses
employees of local newspapers having a circulation of less than 4,000
newspaper deliverers, and
apprentices, students, and learners, as defined by federal law.

Even if your business or your employees are exempt from the federal minimum wage law, they may still be covered under your state or local law. To learn more about your state minimum wage law, contact your state labor department.

Paying Employees Who Receive Tips

If your employees earn tips from customers, you may be able to pay them less than the minimum wage, as long as what you pay them plus the tips they actually earn add up to at least the minimum wage per hour worked. If you follow this procedure (often called a "tip credit"), you are legally required to adopt a policy explaining it to your employees.

Not all states let employers take a tip credit. Among the states where a tip credit is allowed, the rules vary as to which workers qualify and how much you must pay those workers before adding in their tips. To find out whether and how you can take a tip credit, contact your state labor department.

Do the minimum wage laws apply to small businesses?

Yes, for the most part. The Fair Labor Standards Act (FLSA), the federal law that requires payment of the minimum wage, applies to all businesses that have $500,000 or more in annual sales. Even if your sales don't reach this threshold, your employees may still be covered if they work in "interstate commerce" -- commerce between states. Although this term might sound fairly restrictive, courts have interpreted it very broadly to include sending or receiving mail from out of state, making interstate phone calls, or handling goods that have moved interstate.

Even if your business is so small and local that it doesn't fall within these parameters, you may be subject to your state's minimum wage law. Some cities and counties also impose minimum wage requirements on businesses within their borders.

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