When hiring new employees, one of the most important decisions a small business owner has to make is how much to pay them. When you set pay rates, especially for hourly employees, you need to know the laws regarding how much they have to be paid. Federal and state minimum wage laws impose a baseline for how much you have to pay your employees. These laws don’t prevent you from paying employees more than the minimum wage but from paying less than it.
The minimum wage is the lowest rate at which you can pay your employees. It is a violation of the law to pay employees at rates below the minimum wage.
Currently, the federal minimum wage for nonexempt employees is $7.25 per hour. Besides the federal minimum wage, each state has its own minimum wage ― and, in some cases, a city’s minimum wage law may differ from state law. If your company operates in a location with multiple minimum wage laws, you must pay your employees at least the highest of all these minimum wages.
Minimum wage is the lowest legal employee pay rate and it differs by state and sometimes city.
Minimum wage laws are intended to foster an acceptable standard of living for all working people. They were introduced to stimulate the economy following the Great Depression and, today, they serve to protect employees, although their provisions have changed considerably since the 1930s. In the near-century since they were established, federal and state minimum wage laws have often diverged.
The federal minimum wage law is part of the Fair Labor Standards Act (FLSA). According to the FLSA, the federal minimum wage is $7.25 per hour for all qualified employees. The FLSA also includes provisions for overtime law (the minimum wages you must pay employees who work overtime), overtime exemptions and minimum wage exemptions.
Under the FLSA, employers must pay all nonexempt employees additional wages for overtime. Nonexempt employees who work more than 40 hours in a workweek are entitled to overtime rates of at least 1.5 times their usual wages. (Note that weekend work doesn’t automatically count as overtime; it’s only overtime if the employee works more than 40 hours in a workweek, regardless of the days.)
Not all employees are entitled to overtime pay under the FLSA. There are six major FLSA overtime exemptions:
The United States Department of Labor also lists partial overtime pay exemptions that may apply if your company is in the agricultural, petroleum, healthcare or public service sectors.
Some U.S. employees are exempt from federal minimum wage requirements. All these employees are also exempt from the FLSA’s overtime pay requirements:
Employers should be particularly aware of the first of these groups since most desk jobs fall into the “executive, administrative and professional employees” realm. If you’ve never heard of paying overtime to startup employees, this category’s inclusion on the minimum wage and overtime exemptions list explains why. Of course, if you offer these employees salaries even close to just the minimum wage, they’ll likely look elsewhere for work.
As an employer, you don’t just have to follow federal minimum wage laws. You must also comply with your state’s minimum wage laws ― and, occasionally, local municipal minimum wage laws.
To complicate matters, no two states have the same minimum wage laws. A handful of states ― Alabama, Louisiana, Mississippi, South Carolina and Tennessee ― have no minimum wage laws. In those states, the minimum wage defaults to federal law.
In Georgia and Wyoming, the state minimum wage is lower than the federal minimum wage at $5.15/hour. However, as mentioned earlier, in any region with more than one minimum wage law, employers must pay at least the highest minimum wage requirement. Thus, the federal minimum wage applies in Georgia and Wyoming.
Other states have minimum wages higher than the federal minimum wage. Washington, California and Massachusetts have minimum wage rates of $15 or more, with Washington reflecting the highest at $15.74/hour. Many other states have also established schedules for future minimum wage increases.
These variances point to a key facet of state minimum wage laws: If your city mandates a higher minimum wage than your state, the city law supersedes the state law. [Need a payroll service to ensure you pay your employees the proper amount? Check out our recommendations for the best online payroll services.]
Federal minimum wage laws encompass wages, overtime pay and exemptions to both. Some states and cities mandate higher wages than the federal minimum.
Federal minimum wage increases are determined by a congressional vote. In 2019, a bill to increase the federal minimum wage to $15 per hour passed in the U.S. House of Representatives but, as of 2023, the federal minimum wage in the U.S. remains at $7.25 per hour. The rate has not increased since 2009. In 2021, Democrats introduced the Raise the Wage Act, proposing a gradual increase of the minimum wage to $5 per hour by 2025. The bill did not pass. In 2023, two new bills were introduced. One bill by Sens. Bernie Sanders and Robert C. Scott proposed to raise the federal minimum wage to $17 by 2028. Another bill by Sens. Mitt Romney, Tom Cotton, Bill Cassidy, Susan Collins, Shelley Moore Capito and JD Vance proposed a gradual rate increase to $11, along with future increases tied to inflation.
It’s important to note, however, that even absent a move on the federal level to increase the minimum wage, states, cities and counties are free to set their own higher minimum wage rates.
As the name indicates, minimum wage is the very least you must pay your employees ― if you can offer a higher salary range, then you almost always should. That said, certain jobs usually earn minimum wage or slightly above it, such as these:
Almost all jobs that earn minimum wage are paid hourly rather than on an annual salary basis. In general, employers pay salaried employees at rates higher than the minimum wage.
Almost all minimum wage jobs are roles in which the employee provides a service to clients and customers or interacts directly with them every day.
As minimum wage laws change regularly, especially at the state and local level, it’s important for organizations to continually monitor these rates to ensure that they stay compliant. Paying a competitive wage, of course, isn’t important only to be compliant, it’s also important to attract and retain employees.
Linda Pophal contributed to the reporting and writing in this article.