Do Small Businesses Have to Pay Overtime? The Real Rules
Overtime laws don’t stop at your tiny payroll. Here’s what small businesses really need to know.
Published under The HR Hat on HatStacked.com
Small businesses don’t get a “get out of jail free” card just because they only have three employees and a Keurig. Overtime laws apply, but the “how” and “when” are more confusing than that mystery button on your office copier.
Why This Question Never Dies
Every business owner eventually stares down payroll and wonders if they’ve accidentally become a villain in an after-school special about workers’ rights. “Overtime” feels like it belongs to big corporations with HR teams, not to your bakery with six part-timers. But here’s the truth: the law doesn’t care how many hats you wear, it still expects you to know when to pay time-and-a-half.
What the Law Actually Says About Overtime
The Fair Labor Standards Act (FLSA) sets the baseline: employees who are not exempt must be paid time and a half for every hour over 40 in a workweek. There’s no magical “small business” exemption where you can shrug and say, “Sorry, we’re tiny, so we don’t do overtime.” If your employees are covered, you’re on the hook.
But, and this is a pretty big but, coverage depends on two factors:
- Enterprise coverage: If your business does $500,000 or more in annual sales, or if you’re in certain industries (think healthcare, schools, government), you’re automatically covered.
- Individual coverage: Even if your business is smaller, employees themselves may still be covered if their work involves interstate commerce. Before you say, “Well, we don’t ship anything,” remember that using email, credit cards, or ordering from Amazon counts.
In other words, almost everyone is covered. Sorry.
The Myth of “Small Business Doesn’t Have to Pay Overtime”
I’ve heard it repeated like gospel: “If you have under 10 employees, you don’t have to pay overtime.” That’s flat-out wrong. The number of employees doesn’t matter. What matters is coverage under the FLSA or state law. And spoiler alert: many state laws are stricter than federal.
Exempt vs Non-Exempt: The Real Test
Not every employee qualifies for overtime. That’s where the exempt vs non-exempt categories come in:
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Exempt employees: These are your salaried folks who meet three tests:
- Paid on a salary basis.
- Earn at least $684 per week ($35,568 annually).
- Perform specific job duties (executive, administrative, or professional roles).
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Non-exempt employees: Everyone else. Hourly workers, part-timers, and even salaried workers who don’t meet all three tests are owed overtime.
If you think slapping “manager” on someone’s job title automatically makes them exempt, think again. Calling your cashier “Director of Point-of-Sale Operations” won’t cut it.
Related: Hiring Mistakes That Can Cost You: How We Beat a False Unemployment Claim
The State Law Curveball
Even if you manage to squeeze through a federal loophole, your state might have its own overtime rules. For example:
- California demands overtime after 8 hours in a single day, not just after 40 in a week.
- Colorado has its own salary threshold that’s higher than the federal one.
- Some states also mandate daily overtime or double time.
That means you can’t just Google “overtime rules” once and call it a day. You need to check both federal and state requirements.
What Happens If You Ignore Overtime Laws
Best case, you get a strongly worded letter. Worst case, you owe back wages, penalties, and maybe attorney fees. The Department of Labor doesn’t exactly have a sense of humor. Even if you “didn’t know,” that excuse won’t stop them from collecting.
And yes, employees can (and do) sue small businesses over unpaid overtime. It’s a fast way to turn your family-run shop into a legal case study.
How to Stay Out of Trouble
- Track hours accurately. Whether you use a time clock, app, or a legal pad, you need records.
- Classify employees correctly. Don’t assume salary = exempt. Review the actual job duties.
- Check state laws. Federal rules are the floor, not the ceiling.
- Budget for overtime. If someone regularly works 50 hours a week, that’s not “dedication.” That’s an unpaid liability waiting to explode.
- Communicate clearly. Let employees know your overtime policy (yes, you can require pre-approval) but remember: if they work it, you still have to pay it.
Related: The Week I Forgot to Pay Us All
A Real-Life Example
Imagine you run a coffee shop. Your barista pulls doubles every weekend, hitting 50 hours. You pay them for 50 straight hours at $15/hour. Seems fine, right? Wrong. You’ve underpaid them 10 hours of overtime at $22.50/hour. That’s $75 every week. Over a year, that’s nearly $4,000 in back pay you now owe. Multiply that by multiple employees, plus fines, and suddenly your pumpkin spice latte season is ruined.
The Bottom Line
Yes, small businesses have to pay overtime. No, you can’t hide behind “we’re too small.” The law is clear, and ignoring it is a fast track to losing money, morale, and possibly your business. The best move isn’t dodging overtime but learning how to manage it. Budget smart, set boundaries, and don’t let your ignorance turn into an expensive lesson.
