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 most do). In addition, many 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). (29 U.S.C. § 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. In today’s world, this means that nearly all employers are covered by the FLSA.
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 might still be covered under your state or local law. To learn more about your state minimum wage law, select your state from our state wage and hour page. Most, but not all, states allow cities and counties to set minimum wage rates higher than the state rate. To find out whether your area has a higher rate, contact your local government.
If your employees regularly earn tips from customers, you might be able to pay them less than the minimum wage, Federal law allows employers to pay a special hourly rate to tipped workers, as long as they earn enough in tips to make at least minimum wage for each hour worked. If you follow this procedure (called taking 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. To learn more on this topic, see our article on how tip credits work.
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).