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[en-US] Do small businesses have to pay minimum wage?

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Last editedMay 20222 min read

Federal law requires employers to pay all employees a minimum hourly wage. This is currently set at $7.25/hour for 2022. However, each state can also enforce their own minimum wage. The minimum wage in California, for example, is more than double the federal minimum at $15/hour. As an employer, you are obliged to pay whichever wage is higher — either federal or state.

When it comes to minimum wage and small businesses, matters are not always straightforward. Whether or not you have to pay your employees minimum wage depends on a number of factors. These include: your annual sales revenue, whether or not you trade in more than one state, whether your staff earn tips, among others.

In this post, we’ll guide you through all the relevant criteria to determine whether you, as a small business owner, are obliged to pay your employees minimum wage or not.

When do small business owners have to pay minimum wage?

The minimum wage is part of the Fair Labor Standards Act (FLSA) in federal law. Your small business is subject to the rules of the FLSA so long as it generates at least $500,000 or more in annual sales, and if your employees operate business across and between states. This latter stipulation doesn’t necessarily mean they travel between states, but simply make phone calls, send emails or take online orders from customers located in a different state. In the digital age, this invariably means that most small businesses are covered by the FLSA.

Minimum wage exemptions for small businesses

Even if your business is covered by the FLSA, you may still be exempt from paying your employees minimum age if you you meet the following criteria:

  • You employ independent contractors and freelancers (only official company employees can claim minimum wage)

  • You employ workers on a small farm

  • Your employees are switchboard operators and your phone company has a maximum of 750 stations

  • You employ staff at a seasonal amusement or attraction park (e.g. a traveling fair)

  • Your business is a local newspaper with low circulation (less than 4,000 papers)

  • You employ newspaper deliverers

  • You employ apprentices, students, and/or interns

However, it’s important to note that even if you meet this federal criteria, you may still be obliged to pay minimum wage according to varying state laws. You can find specific information related to your local state law and minimum wagehere.

Minimum wage for employees who earn tips

If you own a restaurant, food establishment or any business where your employees earn a supplementary income through tips, then you may be able to pay them a lower wage than the federal or state minimum. This is called “tip credit” and is a policy which allows you to pay less than minimum wage as long as employees earn enough in tips to compensate. If you take this approach, however, you are legally required to explain how it works in detail to your employees.

Do I have to pay employees the minimum wage as an hourly wage?

Although the minimum wage is shown as an hourly value, this doesn’t necessarily mean you have to pay employees by the hour. Instead, you can pay employees in the form of a salary, commission or on a wage-plus-tip basis, so long as their total pay divided by the number of hours they work equates to — or exceeds — minimum wage.

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