6.2 Federal vs State Wage-Hour Laws & FLSA Overtime
Key Takeaways
- The federal FLSA minimum wage remains $7.25 an hour unless a higher state or local minimum applies; covered nonexempt employees must receive overtime at not less than 1.5 times the regular rate for hours worked over 40 in a workweek.
- A workweek is a fixed 168-hour period of seven consecutive 24-hour periods; hours may not be averaged across two weeks, and Saturday, Sunday, or a holiday is not automatically overtime under the FLSA.
- The regular rate includes nearly all remuneration for employment except listed statutory exclusions; non-discretionary bonuses, commissions, and shift differentials must be folded into the regular rate before the extra half-time is computed.
- When federal and state wage-hour rules differ, follow the standard that is more favorable to the employee for that item (higher minimum wage, more generous overtime); tax withholding is a different system and requires complying with both federal and state tax rules.
- The FLSA does not require vacation, holiday, or weekend premium pay, a particular private-sector payday frequency, or compensatory time in place of cash overtime for most private employers.
Why bookkeepers keep two wage-hour books in their head
AIPB's payroll workbook splits federal versus state laws from paying employees under federal law because they fail in different ways. Federal employment taxes (FIT, FICA, FUTA) and state income-tax withholding are cumulative: you generally comply with both. Wage-hour rules—minimum wage, overtime, hours worked, youth employment—are different. When a state or city grants a higher minimum wage or a more generous overtime formula, the employee gets that better wage-hour result. You do not average the federal $7.25 with a state $15 floor, and you do not tell a technician "the FLSA only requires 40-hour overtime, so we can ignore daily overtime in a state that requires it."
This independent OpenExamPrep section uses DOL Wage and Hour Division overtime basics, 29 CFR Part 778 on the regular rate, and the still-current federal minimum wage of $7.25 an hour (effective July 24, 2009). It is not an AIPB publication. Section 6.4 covers FICA dollars; Chapter 7 covers employer FUTA/SUTA and deposit forms.
What the FLSA does—and what it does not
The Fair Labor Standards Act sets federal minimum wage, overtime, recordkeeping, and youth employment standards for covered employment in the private sector and in government. Covered nonexempt workers must be paid at least $7.25 per hour and must receive overtime pay of at least one and one-half times their regular rates of pay for hours worked over 40 in a workweek.
DOL's overtime page is just as important for what the Act does not do:
- There is no FLSA limit on the number of hours employees aged 16 and older may work in a workweek.
- The FLSA does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest unless overtime hours are worked on those days.
- The Act applies on a workweek basis. Averaging hours over two or more weeks is not permitted.
- Overtime earned in a workweek is normally paid on the regular payday for the pay period that includes that workweek.
The FLSA also does not require private-sector vacation pay, holiday pay, severance, meal breaks as a general rule, or a particular payday frequency (weekly versus biweekly). Many of those items are state law or a contract. Compensatory time in lieu of cash overtime is a public-agency concept; a private HVAC firm generally cannot bank FLSA overtime as future time off instead of paying the cash premium.
Exempt versus nonexempt. Overtime is a nonexempt rule. White-collar exemptions (executive, administrative, professional, and related tests) use a duties test and, for many of those exemptions, a salary-basis test. Those salary thresholds have been the subject of recent litigation and rulemaking. Do not memorize a vacated or not-yet-effective dollar amount from a news summary. On the exam, first decide whether the stem's worker is nonexempt; if the stem says hourly installer, warehouse picker, or staff bookkeeper paid by the hour, compute overtime. Officers who are true executives may be exempt, but calling someone a "manager" does not create an exemption if the duties are hourly production work.
The workweek is a 168-hour box
An employee's workweek is a fixed and regularly recurring period of 168 hours—seven consecutive 24-hour periods. It need not be the calendar week. It may begin on any day and at any hour. Different workweeks may be established for different employees or groups. Once fixed, it is not a toy you spin each month to shove hours out of overtime.
Harbor Street HVAC (the same 12-person contractor used earlier in this guide) starts its technician workweek Sunday 12:01 a.m. through Saturday midnight. Maya, a nonexempt installer, works:
| Day | Hours worked |
|---|---|
| Sunday | 0 |
| Monday | 10 |
| Tuesday | 10 |
| Wednesday | 10 |
| Thursday | 10 |
| Friday | 8 |
| Saturday | 0 |
| Workweek total | 48 |
Federal overtime hours = 48 − 40 = 8. Saturday being "the weekend" is irrelevant; Maya did not work Saturday. If a later week Maya works Saturday 8 hours and only 32 hours Monday–Friday, federal overtime is still zero unless a state daily-overtime or seventh-day rule applies. That is the FLSA weekend trap.
Hours worked (DOL Fact Sheet 22) are the hours the employee is employed—suffered or permitted to work. Short rest breaks generally count. A bona fide meal period of 30 minutes or more generally does not count if the employee is completely relieved of duty. Required training, waiting that the employer controls, and off-the-clock "finish the invoice at home" time can be hours worked. If Maya spends 20 minutes after the last job uploading photos because Harbor Street requires it, those minutes belong in the 48.
Federal minimum wage versus a higher state or city floor
| Rule | Amount / test | What the bookkeeper does |
|---|---|---|
| Federal FLSA minimum | $7.25 per hour | Never pay covered nonexempt employees less than this for hours worked, before lawful tip credits |
| State or local minimum | Often higher than $7.25 | Pay the higher floor for hours worked in that jurisdiction |
| Federal overtime | 1.5 × regular rate after 40 hours in the workweek | Compute the regular rate, then the extra half-time |
| State overtime | Some states use daily overtime, seventh-day overtime, or a higher multiplier | Apply the more employee-favorable wage-hour result that actually covers that employee |
| Federal tipped floor | Federal tipped cash wage can be $2.13 if tips bring the employee to $7.25 and the employer follows tip-credit rules | Many states ban a tip credit or set a higher tipped cash wage; follow the stricter employer-side rule |
Do not invent a particular state's 2026 dollar minimum in an answer unless the stem gives it. The exam skill is: higher employee-favorable wage-hour standard wins; tax systems are not "pick one."
Tipped illustration, labeled as such. If a stem gives a server $2.13 plus $6.00 of tips in an hour, federal minimum wage is met ($8.13 ≥ $7.25) if the employer is allowed to take a tip credit. If the same server works in a state that requires the full state minimum in cash wages before tips, the $2.13 federal tipped wage is not enough. The bookkeeper does not "blend" the two cash wages.
The regular rate: inclusions, exclusions, and a clean 48-hour week
Section 7(e) of the FLSA requires the regular rate to include all remuneration for employment except listed exclusions. DOL Part 778 is the regulation bookkeepers are being tested against when a bonus appears in an overtime stem.
Include in the regular rate (among other amounts): hourly straight-time pay for hours worked, shift differentials, commissions, piece-rate earnings, and non-discretionary bonuses (production, attendance, or other bonuses the employee has a right to expect if conditions are met). Add the included amounts for the workweek and divide by total hours worked in that workweek.
Exclude (among the statutory list): gifts and payments in the nature of gifts on special occasions; payments for time not worked such as bona fide vacation, holiday, or sick pay when those hours are not hours worked; true discretionary bonuses; certain bona fide profit-sharing, thrift, or savings-plan payments that meet DOL rules; and true expense reimbursements. Premium pay that already satisfies the Act's overtime requirements is handled under the credit rules in Part 778; do not double-count the extra half-time as if it were a new inclusion.
A discretionary bonus is one the employer retains the discretion to pay, in amount and as to payment, until near the end of the period—not a "you'll get $2 per completed install if quality passes" promise. Production and attendance bonuses are the classic non-discretionary inclusions.
Worked example — Maya's regular rate
Maya's hourly wage is $22. She works 48 hours in the Sunday–Saturday workweek. Harbor Street also pays a non-discretionary weekly production bonus of $96 if the crew hits the scheduled install count. Maya hit the count.
Step 1 — Straight-time already paid at $22 for all hours worked (including the 8 overtime hours):
48 × $22 = $1,056
Step 2 — Add required inclusions:
$1,056 + $96 bonus = $1,152 total remuneration counted toward the regular rate.
Step 3 — Regular rate:
$1,152 ÷ 48 hours = $24.00 per hour.
Step 4 — Extra half-time for hours over 40:
Overtime hours = 8. 8 × 0.5 × $24.00 = $96.00 overtime premium.
Step 5 — Gross pay for the workweek:
$1,056 straight-time + $96 bonus + $96 extra half-time = $1,248.
Cross-check: 40 × $24 + 8 × $36 = $960 + $288 = $1,248.
Wrong method (underpays): compute overtime as 1.5 × the $22 hourly rate and then tack the bonus on: 40 × $22 + 8 × $33 + $96 = $880 + $264 + $96 = $1,240. That method ignores the bonus in the regular rate and underpays Maya by $8. That $8 is the exam point.
If Harbor Street had also paid Maya 8 hours of unused vacation in the same check, and she did not work those hours, bona fide vacation pay is generally excluded from the regular-rate fraction and those hours are not hours worked. Do not dump vacation dollars into the $1,152 numerator and do not put vacation hours in the 48-hour denominator.
A shift differential is included. If a helper earns $18 plus $2 evening differential for all 42 hours worked: total included pay $20 × 42 = $840, regular rate $20, extra half-time for 2 hours = $20, gross $860 (plus any other inclusions).
State overlays bookkeepers actually see
A state may require overtime after 8 hours in a day, overtime on the seventh consecutive day, reporting-time pay, split-shift premiums, or a higher minimum wage. The FLSA still requires the 40-hour workweek premium. When both apply, compute each required premium and pay what the covering law demands—never the lesser of the two overtime amounts as a "compromise."
Illustration (state daily overtime, not a federal table). Suppose a covering state requires daily overtime after 8 hours. Maya's 10 + 10 + 10 + 10 + 8 week is 4 hours of daily overtime on each of four days = 16 daily overtime hours under that state rule, versus 8 FLSA weekly overtime hours. The bookkeeper does not get to pick the federal 8 because it is cheaper. Confirm the actual state statute in practice; on the exam, obey the stem's state rule when it is more favorable to the employee.
Pay frequency and final pay are mostly state law. The FLSA cares that overtime for a workweek is paid on the regular payday for that period. A state may require weekly pay for manual workers or next-day final pay after a discharge. Those clocks belong next to the FLSA clock, not instead of it.
Youth employment is federal and state. The FLSA restricts hours and occupations for minors. A state may be stricter. The stricter youth rule wins.
Exam traps
- Weekend trap. Saturday hours are not federal overtime unless they push the workweek over 40 (or a state rule says otherwise).
- Two-week average trap. 36 hours this week and 44 next week is 4 hours of FLSA overtime in week two, not "80 hours over two weeks, no overtime."
- Salary-equals-exempt trap. Paying a weekly salary does not erase overtime if the employee is nonexempt; you may have to determine an equivalent regular rate and still pay extra half-time.
- Bonus-ignored trap. Maya's $96 production bonus belongs in the regular rate.
- Federal-only trap. A higher state minimum or daily overtime is not optional because "we are a federal contractor" or "we use a national payroll service."
- Tax-versus-wage-hour mash-up. You cannot skip state income-tax withholding because you already withheld federal FIT. Wage-hour uses the employee-favorable standard; tax withholding requires both systems.
- Qualified overtime income-tax deduction trap (2025–2028 returns). IRS Publication 15 (2026) states that overtime remains subject to Social Security, Medicare, FUTA, and FIT withholding. A later Form 1040 deduction for certain qualified overtime (the extra "half" portion, with statutory caps) does not let Harbor Street skip the overtime premium or skip payroll withholding. If the employee updates Form W-4, use Pub. 15-T so extra withholding or credit entries can reflect the expected deduction; do not drop overtime from FICA wages.
Maya, a covered nonexempt installer, works 48 hours in a fixed Sunday–Saturday workweek at $22 per hour plus a $96 non-discretionary production bonus for that week. Harbor Street already paid $22 for every hour worked. What is her FLSA regular rate and overtime premium?
Which payment must be included when computing a nonexempt employee's FLSA regular rate for a workweek?
Harbor Street's shop is in a state whose minimum wage is higher than the federal $7.25 rate, and that state also requires daily overtime after 8 hours for the same nonexempt technicians. Which statement is correct?