Federal law requires employers to pay all employees a minimum hourly wage, currently $7.25 a year later. Each state is also free to impose its own minimum wage (and many do). In addition, some cities and counties have passed "living wage" laws, which may set an even higher minimum wage. Some of these laws apply only to companies that have contracts to do business with the local government; others apply more generally to all employers in the area. As an employer, you must pay whichever amount is highest -- federal, state, or local.
Although the minimum wage is an hourly wage, this doesn't mean that you have to pay employees by the hour. You may pay a salary, commission, wages plus tips, or piece rate, as long as the total amount paid divided by the total number of hours worked is equal to at least the minimum wage.
The main federal law that sets the minimum wage is the Fair Labor Standards Act (FLSA), found at 29 U.S.C. sections 201, and following. Although the FLSA covers most employers, some employers and employees are not covered.
Generally, your business must abide by the FLSA if you have $500,000 or more in annual sales or if your employees work in what Congress calls "interstate commerce" -- that is, if they do business between states. This includes making phone calls to or from another state, sending mail out of state, or handling goods that have come from or will go to another state.
Even if your business is covered, federal law does not require you to pay the following workers the federal minimum wage:
Even if your business or your employees are exempt from the federal minimum wage law, they may still be covered under your state or local law. To learn more about your state minimum wage law, contact your state labor department; you can find links to each state's department at the federal Department of Labor, here.
If your employees earn tips from customers, you may be able to pay them less than the minimum wage, as long as what you pay them plus the tips they actually earn add up to at least the minimum wage per hour worked. If you follow this procedure (often called a "tip credit"), you are legally required to adopt a policy explaining it to your employees. Not all states let employers take a tip credit, however.
For more on minimum wage requirements for tipped employees, see Nolo's article Paying Tipped Employees: Tip Credits and Tip Pooling.
For a complete guide to your legal rights and responsibilities as an employer, read The Employer's Legal Handbook: Manage Your Employees & Workplace Effectively, by Fred Steingold (Nolo).