New DOL guidance on overtime: What small business employers need to know

Published Thursday 20 August 2026

Table of contents

• What are the federal overtime rules?
• Who's exempt from overtime pay?
• The current salary threshold for 2026
• 4 new DOL opinion letters you need to know about
• How to classify your employees correctly
• Common overtime mistakes small businesses make
• What to do if you're not sure you're compliant
• Stay on top of overtime compliance with Xero
• FAQs on overtime rules for small businesses

Key takeaways

• The federal overtime salary threshold stays at $684 per week ($35,568 per year) in 2026 after courts blocked proposed increases, but six states have set higher thresholds you may need to follow.
• The DOL issued four new opinion letters on May 29, 2026 that clarify rules on dual-role employees, bonus calculations, meal breaks, and pre-shift time tracking.
• The cost of misclassifying employees as exempt can reach $10,000 per violation in civil penalties, plus back pay and liquidated damages.
• The simplest way to reduce your overtime compliance risk is to audit employee classifications, document time-tracking policies, and review bonus structures against the latest guidance.

What are the federal overtime rules?

If your employees work more than 40 hours in a workweek, you're required to pay them at least 1.5 times their regular rate for those extra hours. This is the core overtime pay requirement under the Fair Labor Standards Act (FLSA), and it applies to most small businesses in the United States.

The 40-hour workweek rule

Under the FLSA, a workweek is any fixed, recurring 168-hour period. It doesn't have to run Monday through Friday or match your pay period. You choose when your workweek starts, but once you set it, you need to keep it consistent.

Overtime is calculated per workweek, not averaged across two or more weeks. So if an employee works 50 hours one week and 30 the next, you still owe overtime for the first week. You can't offset the extra hours against the lighter week.

The overtime rate is straightforward: 1.5 times the employee's regular hourly rate for every hour beyond 40. If someone earns $20 per hour, their overtime rate is $30 per hour.

Which businesses must follow FLSA overtime rules?

There are two ways the FLSA applies to your business. The first is enterprise coverage, which applies if your business has at least two employees and annual gross revenue of $500,000 or more. The second is individual coverage, which applies to any employee who's engaged in interstate commerce or produces goods for interstate commerce.

In practice, individual coverage is broad. If your employees make phone calls across state lines, send emails to clients in other states, or handle goods that have moved across state lines, they're likely covered. Most small businesses meet one of these two standards.

Who's exempt from overtime pay?

Some employees are exempt from overtime if they meet all three parts of the federal exemption test. Failing any one part means the employee is non-exempt and entitled to overtime pay.

The 3-part exemption test

To classify an employee as exempt from overtime, you need to confirm three things:

• Salary basis test: The employee receives a fixed salary that isn't reduced based on the quality or quantity of their work.
• Salary level test: The salary meets or exceeds the federal minimum threshold, currently $684 per week ($35,568 per year).
• Duties test: The employee's primary duties qualify under one of the recognized exemption categories, which are executive, administrative, or professional.

All three tests must be met. A high salary alone doesn't make someone exempt, and neither does a managerial job title.

Executive, administrative, and professional exemptions

Each exemption category has its own duties requirements:

• Executive: The employee manages a recognized department or subdivision, regularly supervises at least two full-time employees, and has genuine input into hiring, firing, or promotion decisions.
• Administrative: The employee performs office or non-manual work directly related to business operations or management policies, and exercises independent judgment and discretion on significant matters.
• Professional: The employee's work requires advanced knowledge in a field of science or learning, typically acquired through a prolonged course of specialized study.

These definitions are based on what your employee actually does day to day, not what their job description says. The Department of Labor (DOL) will look at real duties, not paperwork. If you're still getting your payroll basics in place, start there before tackling exemption classifications.

Other exemptions to know about

Beyond the main three categories, a few other exemptions under the FLSA may apply to your business:

• Outside sales: Employees whose primary duty is making sales or obtaining orders away from the employer's place of business. This exemption has no salary threshold.
• Computer employees: Systems analysts, programmers, and software engineers who earn at least $684 per week or $27.63 per hour.
• Highly compensated employees (HCE): Workers earning $107,432 or more per year may qualify for a streamlined exemption if they regularly perform at least one duty from the executive, administrative, or professional categories.

The current salary threshold for 2026

The federal salary threshold for overtime exemption in 2026 is $684 per week, or $35,568 per year. This is the same level that's been in place since January 2020, despite efforts to raise it.

Why the federal threshold hasn't changed

In 2024, the DOL finalized a rule that would have increased the salary threshold in two stages: first to $844 per week ($43,888 per year) on July 1, 2024, and then to $1,128 per week ($58,656 per year) on January 1, 2025. Federal courts blocked both increases, and the threshold reverted to $684 per week.

As of mid-2026, there's no pending federal rulemaking to change the threshold. For now, $684 per week is the number to use for federal compliance.

State thresholds that may apply to your business

Several states have set their own overtime salary thresholds that are higher than the federal level. If your business operates in any of these states, you're required to follow whichever threshold is higher:

• California: approximately $70,304 per year
• Colorado: approximately $57,748 per year
• New York (New York City): approximately $66,300 per year
• Washington: approximately $80,172
• Massachusetts: approximately $35,568 per year
• Alaska: approximately $68,640 per year

Always check your state's current threshold, as these figures are updated annually. The rule is simple: apply whichever threshold is higher, federal or state.

4 new DOL opinion letters you need to know about

On May 29, 2026, the DOL's Wage and Hour Division released four opinion letters that address some of the trickiest areas of FLSA compliance. These letters don't change the law, but they clarify how the DOL interprets it. That matters if you're ever audited or face a complaint.

Dual-role employees can stay exempt (FLSA2026-5)

If you have a salaried manager who also handles some hourly-type tasks, this letter is directly relevant to you. The DOL confirmed that an exempt employee doesn't lose their exempt status just because they occasionally perform nonexempt work in a secondary role.

The catch is that the employee's exempt duties must still be their primary duty. If your office manager spends most of their week on administrative work that qualifies for an exemption, but also covers the front desk for a few hours, they can remain exempt. The key is documenting that the exempt work is genuinely the primary role, both in terms of time and importance.

Bonus calculations and overtime (FLSA2026-6)

This letter addresses a common source of confusion for small businesses: how non-discretionary bonuses interact with overtime pay. The DOL confirmed that a "percentage of total earnings" bonus doesn't require a separate overtime recalculation, as long as the bonus already includes both straight-time and overtime earnings in its base.

What this means for you: if you pay bonuses based on total earnings and that total already reflects overtime premiums, you don't need to go back and recalculate overtime on top of the bonus. Review your bonus structure to make sure overtime earnings are included in the calculation, and document your method. The DOL has noted that it will scrutinize bonus arrangements that lack clear documentation.

Meal break rules clarified (FLSA2026-7)

The DOL addressed a specific scenario: when an employee voluntarily leaves the workplace during a 30-minute meal break, shortening their available break time by the time spent walking to and from the exit. Do you need to compensate for that travel time?

The answer is no, provided you offer a full 30-minute, uninterrupted meal period on-site as the default option. If an employee chooses to leave the premises, the time spent crossing the property is their choice, not compensable work time. Make sure your meal break policy is documented and that employees have a genuine option to take their full break on-site.

Pre-shift time and clock rounding (FLSA2026-8)

This letter tackles two related issues. First, the DOL confirmed that pre-shift activities integral to an employee's principal duties are compensable time. If your employees receive work assignments, review handoff reports, or gear up before their shift officially starts, that time counts as hours worked.

Second, the DOL raised a red flag about clock-rounding practices. If your rounding system consistently benefits the employer, cutting minutes from employees' recorded time, it may violate the FLSA. The DOL expects "exacting scrutiny" of any de minimis claims involving regular off-clock work, particularly given today's digital time-tracking tools.

The practical takeaway: audit your time-rounding policies and make sure any pre-shift work activities are being tracked and paid.

How to classify your employees correctly

Getting employee classification right is one of the most effective ways to avoid overtime violations. The process isn't complicated, but it does require you to look at what each employee actually does, not just their title or salary.

Step-by-step classification process

Follow these five steps for each position in your business:

1. Determine whether your business is covered by the FLSA. Check if you meet the $500,000 annual revenue threshold for enterprise coverage, or if individual employees are engaged in interstate commerce.
2. Review each employee's actual job duties. Sit down and map out what they spend their time on during a typical week. Focus on their primary responsibilities, not occasional tasks.
3. Check whether their salary meets the current threshold. The federal threshold is $684 per week ($35,568 per year). If you're in a state with a higher threshold, use that figure.
4. Apply the duties test for the specific exemption category. Match the employee's real duties against the executive, administrative, or professional exemption criteria.
5. Document your classification decision and the reasoning behind it. Keep records of the duties analysis, salary level, and which exemption applies. This documentation is your best defense if the classification is ever questioned.

When job titles don't match exemption status

A job title doesn't determine exempt status. Someone with "manager" in their title isn't automatically exempt, and someone called a "coordinator" isn't automatically non-exempt.

The DOL looks at what the employee actually does, not what their business card says. If your "assistant manager" spends 80% of their time stocking shelves and ringing up customers, they're likely non-exempt regardless of their title. Review titles against actual duties at least once a year, and any time an employee's responsibilities change significantly.

Common overtime mistakes small businesses make

Even well-intentioned employers run into trouble with overtime compliance. Here are six of the most frequent mistakes that lead to costly violations:

• Classifying by title alone: Using a job title to determine exempt status without applying the three-part test.
• Skipping hour tracking for salaried staff: Failing to track hours for salaried non-exempt employees, assuming a salary means no overtime obligation.
• Averaging hours across weeks: Averaging hours across two or more workweeks instead of calculating overtime weekly.
• Ignoring bonuses in overtime calculation:. Not including non-discretionary bonuses in the regular rate of pay when calculating overtime.
• Overlooking state rules: Ignoring state overtime rules that set higher thresholds or stricter requirements than federal law.
• Rounding time in your favor; Using time-rounding practices that systematically shortchange employees on recorded hours.

The cost of getting it wrong

Overtime violations carry serious financial consequences. If you've been underpaying employees, here's what you could face:

• Back pay: You may owe up to three years of unpaid overtime if the violation is considered willful, or two years for non-willful violations.
• Liquidated damages: Courts can award an additional amount equal to the unpaid wages, effectively doubling the back pay.
• DOL penalties: Civil penalties can reach $10,000 per violation.
• Defense costs: Employers typically spend between $75,000 and $125,000 defending a wage and hour lawsuit, even before any judgment or settlement.

These figures add up quickly, especially when multiple employees are affected. For a small business, a single misclassification mistake can threaten your financial stability.

What to do if you're not sure you're compliant

If any of the issues in this guide raised a question mark for you, you're not alone. Overtime compliance can feel overwhelming, but there are concrete steps you can take right now to get on solid ground:

• Audit classifications/ Review your current employee classifications against the three-part exemption test. Focus on roles where the classification feels uncertain.
• Review time tracking. Check your time-tracking and recordkeeping systems to make sure you're capturing all hours worked, including pre-shift and post-shift activities.
• Check state thresholds. Look up state-specific overtime thresholds for every state where you have employees. Apply whichever threshold is higher.
• Update policies. Revise your meal break and pre-shift policies in light of the new DOL opinion letters. Document these policies in writing.
• Review bonus structures. Confirm that non-discretionary bonuses properly account for overtime earnings.
• Consult a professional. Reach out to a qualified employment attorney or HR professional if you have complex classifications or multi-state operations.

These steps are straightforward and don't require an attorney for most small businesses. If you have employees working remotely across different states, pay extra attention to the state-by-state threshold differences, as remote work can create overtime obligations you might not expect.

Document everything. Written records of your classification decisions, time-tracking policies, and bonus calculations are your strongest protection in an audit. Keeping your payroll and accounting connected makes it easier to track hours and flag discrepancies before they become compliance issues.

Stay on top of overtime compliance with Xero

Tracking employee hours and staying on top of payroll compliance doesn't have to be a manual headache. Xero's accounting software integrates with Gusto payroll to help you manage payroll, track time, and calculate overtime automatically. That means fewer manual errors and more confidence that you're paying your team correctly.

Whether you're reviewing your employee classifications or updating your bonus policies, having accurate, up-to-date financial data in one place makes compliance simpler.

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FAQs on overtime rules for small businesses

Here are answers to some of the most common overtime questions small business employers ask.

Do small businesses have to pay overtime?

Yes, if your business meets FLSA coverage requirements. Most small businesses qualify through either the $500,000 annual revenue test or individual employee coverage through interstate commerce activities.

What happens if you don't pay overtime correctly?

You could face a DOL investigation, back-pay orders covering up to three years, liquidated damages that double the owed amount, and civil penalties. Many cases also result in class-action lawsuits when multiple employees are affected.

Do the new DOL opinion letters change the overtime salary threshold?

No. The four opinion letters issued on May 29, 2026 clarify how existing rules apply to specific situations, such as dual-role employees and bonus calculations. They don't change the $684 per week salary threshold.

How do state overtime rules interact with federal rules?

When your state has a higher salary threshold or stricter overtime requirements than federal law, you must follow the state rules. Several states, including California, Colorado, and New York, currently require higher salary thresholds than the federal $684 per week.