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Minimum wage, what small businesses need to know

Updated October 2019

Paying your small business employees fairly begins with gaining a good understanding of the minimum wage laws.

Read on to learn what minimum wage means and how to remain compliant at the federal, state and municipal levels.

What’s the minimum wage?

Minimum wage refers to the lowest hourly wage an employer can pay an employee, as set forth by the law to protect workers from unduly low compensation. At the federal level, the minimum hourly rate for non-exempt employees covered by the Fair Labor Standards Act (FLSA) has remained at $7.25 since 2009. The keyword here is employee. Only employees are entitled to the minimum wage established under the FLSA—not independent contractors.

Many states and even certain municipalities have established their specific minimum wage laws. Where an employee is subject to both federal and state minimum compensation rates, he or she is entitled to the higher of the two wage minimums.

Which businesses must pay the minimum wage?

Businesses must abide by the FLSA and pay the federal minimum wage if they are enterprises consisting of two or more employees and making $500,000 or more in annual sales. Or they could be individuals doing any form of business that the Department of Labor (DOL) defines as “interstate commerce.”

This category includes everyone from people who produce products that get delivered out of state to those who make phone calls to individuals in other states. Consequently, this means that paying the minimum wage is an obligation for a broad swath of businesses of different sizes and in various industries.

Where can I find my state’s or municipality’s minimum wage?

The DOL’s Minimum Wage Laws in the States website is the best resource for finding out whether your state has a minimum law, and if so, what it is. As you can see, state laws vary considerably, from $14.00 in Washington, D.C to no minimum hourly standard in Alabama. This fact, of course, doesn’t exempt qualifying businesses in Alabama from paying a minimum wage; they must still meet the federal standards.

Small businesses should additionally check the website of their city government for any applicable local minimum wage laws. These laws may differ, and in some cases, may be considerably higher than the state mandate.

In California, for example, the current state minimum wage is $12.00, but in San Francisco, it is $15.59. These higher standards at the municipal level can be attributed to local initiatives to pay what is known as a “living wage,” which refers to the lowest hourly earnings one must be paid to maintain a reasonable standard of living in a given locale.

Are there exceptions to the minimum wage?

Generally, businesses are exempt from paying the federal minimum wage if they meet the compliance criteria relating to revenues or interstate commerce. Besides, the federal minimum wage doesn’t apply to employees if the FLSA doesn’t cover them. Employees not covered  include the following, but are not limited to:

  • Commissioned sales employees
  • Farmworkers
  • Seasonal and recreational workers
  • Executive, administrative and professional workers
  • Babysitters on a casual basis
  • Companions for the elderly
  • Federal criminal investigators
  • Newspaper employees of limited circulation newspapers
  • Switchboard operators

You can find an exhaustive list of the types of employees who aren’t entitled to the federal minimum wage at the Department of Labor’s Fair Labor Standards Act Advisor website.

What if small businesses don’t comply with minimum wage laws?

It’s worthwhile for small businesses to stay up-to-date with changes in minimum wage laws at all levels of government. Then they can remain compliant with the law and pay their employees fairly.

Nonetheless, the enforcement of minimum wage laws is strict. For employers found in non-compliance, the DOL may recommend changes that will bring the offending business into compliance and ask for payment of back wages.

About the author

Manasa Reddigari

Manasa Reddigari has tackled topics ranging from computer software to home remodeling in her more-than-a-decade-long career as a writer and editor. During her stint as a scribe, she's been featured by MileIQ, Trulia, and other leading digital properties. Connect with her on to find out what she's been writing about lately.

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The Growth Center does not constitute professional tax or financial advice. You should contact your own tax or financial professional to discuss your situation.