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DOL Overtime Rules: What Small Businesses Need to Know in 2026

February 14, 2026

11 min read

Understanding the Federal Overtime Rules

The Fair Labor Standards Act (FLSA) requires employers to pay non-exempt employees overtime—1.5 times their regular rate of pay—for any hours worked beyond 40 in a workweek. The Department of Labor (DOL) sets the rules for which employees qualify as exempt from overtime and which do not. These rules have been a moving target in recent years, with several proposed and implemented changes that directly affect small businesses.

Getting overtime classification wrong is one of the most expensive compliance mistakes a small business can make. Back-pay liability, liquidated damages (double damages), and attorney fees can quickly reach six figures even for small employers. This guide explains the current rules, how to classify your employees correctly, and practical strategies for compliance.

For a personalized compliance checklist that includes overtime and other labor law requirements, take our free compliance assessment.

The Current Salary Threshold

What Is the Salary Threshold?

To be exempt from overtime, an employee must meet three criteria:

Salary basis test: The employee is paid a predetermined, fixed salary that is not reduced based on quality or quantity of work
Salary level test: The employee's salary meets or exceeds the minimum threshold set by the DOL
Duties test: The employee's primary duties meet the requirements for one of the FLSA's white-collar exemptions (executive, administrative, professional, computer, or outside sales)

All three tests must be satisfied. Failing any one means the employee is non-exempt and entitled to overtime.

2026 Salary Threshold

The DOL has been working to update the salary threshold for overtime exemptions. The regulatory landscape has seen several changes:

Pre-2019: The salary threshold was $455 per week ($23,660 annually)
2020 update: Raised to $684 per week ($35,568 annually)
2024 proposed rule: The DOL proposed raising the threshold significantly, with phased increases
Current status (2026): Small business owners should verify the current threshold on the DOL website, as court challenges and regulatory updates have created uncertainty

Regardless of where the threshold lands, the trend is clearly upward. If you have salaried employees near any recent threshold, review their classification now.

Highly Compensated Employee (HCE) Exemption

Employees who earn above a higher threshold (historically $107,432 annually, with proposed increases) may qualify for a streamlined exemption test. HCE employees still must perform at least one exempt duty, but the duties test is less stringent than for standard exemptions.

The Duties Tests Explained

Executive Exemption

To qualify as an exempt executive, an employee must:

Have a primary duty of managing the business or a recognized department
Customarily direct the work of two or more full-time employees (or equivalents)
Have authority to hire or fire, or have significant influence over employment decisions

Common mistake: Calling someone a "manager" or "supervisor" does not make them exempt. If they spend most of their time performing the same work as their subordinates (e.g., a restaurant shift manager who primarily cooks and serves), they likely do not meet the executive exemption.

Administrative Exemption

To qualify as an exempt administrative employee, the employee must:

Have a primary duty of performing office or non-manual work directly related to management or general business operations
Exercise discretion and independent judgment on matters of significance

Common mistake: This is the most commonly misapplied exemption. Employees who follow established procedures, even if their work is important, generally do not meet the "discretion and independent judgment" requirement. A bookkeeper following standard procedures is not typically exempt; a financial analyst making strategic recommendations may be.

Professional Exemption

Two types of professional exemptions exist:

Learned professional: Requires advanced knowledge in a field of science or learning, customarily acquired by prolonged, specialized instruction (e.g., doctors, lawyers, engineers, accountants)
Creative professional: Requires invention, imagination, originality, or talent in a recognized creative field (e.g., writers, musicians, graphic designers)

Computer Employee Exemption

Computer professionals may be exempt if they:

Are paid at least the salary threshold (or $27.63 per hour)
Have a primary duty of systems analysis, programming, software engineering, or similar computer-related work
Exercise discretion and independent judgment

Common mistake: Help desk technicians, IT support staff, and hardware repair technicians generally do not qualify for this exemption.

Outside Sales Exemption

Outside sales employees are exempt if their primary duty is making sales or obtaining orders away from the employer's place of business. There is no salary threshold for this exemption. Inside sales employees and customer service representatives do not qualify.

State Overtime Rules

Federal rules set the floor, but many states have their own overtime requirements that may be more favorable to employees:

California: Requires overtime after 8 hours in a single day (not just 40 hours per week) and double time after 12 hours in a day. California also has a higher salary threshold for exemption.
Alaska: Requires overtime after 8 hours in a day for most employees
Colorado: Has its own salary threshold and duties tests that may differ from federal standards
Washington: Has a salary threshold that exceeds the federal minimum, adjusted annually
New York: Has a higher salary threshold for administrative and executive exemptions

If you operate in multiple states, you must comply with the most favorable law for employees in each location. Visit our state compliance pages for state-specific overtime rules.

Common Overtime Violations and How to Avoid Them

1. Misclassifying Employees as Exempt

This is the number one overtime violation. Review every exempt classification against all three tests (salary basis, salary level, and duties). When in doubt, classify the employee as non-exempt—it is always safer to pay overtime than to face a wage-and-hour lawsuit.

2. Off-the-Clock Work

All time that an employer "suffers or permits" an employee to work must be counted and compensated. Common off-the-clock violations include:

Requiring employees to arrive early for setup or stay late for cleanup without clocking in
Allowing employees to check email or respond to messages outside work hours
Requiring pre-shift meetings or training without pay
Automatically deducting lunch breaks even when employees work through them

3. Improper Calculation of Regular Rate

The regular rate of pay for overtime purposes includes more than just the base hourly wage. It also includes:

Non-discretionary bonuses and commissions
Shift differentials
Piece-rate earnings
Some types of incentive pay

Excluding these from the overtime calculation results in underpayment and liability.

4. Averaging Hours Across Workweeks

Overtime is calculated on a workweek-by-workweek basis. You cannot average hours across two or more weeks. If an employee works 50 hours one week and 30 the next, you owe overtime for the 10 extra hours in the first week, even though the average is 40.

5. Comp Time in the Private Sector

Private-sector employers generally cannot offer compensatory time off instead of overtime pay. This practice is common but illegal under the FLSA. Only government employers may offer comp time under specific conditions.

Compliance Strategies for Small Businesses

Conduct an Overtime Audit

Review all salaried positions to verify they meet exemption requirements. For each position:

Confirm the salary meets or exceeds the current threshold
Review the actual duties performed (not just the job description)
Document your analysis and the basis for each classification
Reclassify any positions that do not clearly meet all three tests

Implement Time Tracking

Even for salaried non-exempt employees, you must track hours worked. Use a reliable time-tracking system and train employees on proper clock-in and clock-out procedures. Establish clear policies about overtime authorization.

Budget for Overtime Costs

If reclassifying employees from exempt to non-exempt, calculate the potential overtime costs. In some cases, it may be more cost-effective to:

Raise the employee's salary above the exemption threshold (if they meet the duties test)
Hire additional staff to reduce overtime hours
Redistribute workload to keep all employees at or near 40 hours per week

Train Managers

Frontline managers often unknowingly create overtime liability by asking employees to perform off-the-clock work, improperly adjusting time records, or misunderstanding the rules. Regular training is essential.

What to Do If You Discover a Violation

If you realize you have been misclassifying employees or failing to pay proper overtime:

Correct the classification immediately going forward
Calculate back pay owed (the statute of limitations is 2 years for unintentional violations, 3 years for willful violations)
Consider voluntary payment of back wages—the DOL is generally more lenient with employers who self-correct
Consult an employment attorney for significant exposure
Document your corrective actions to demonstrate good faith

Use SMBRegs to Stay Compliant

Overtime rules are just one piece of the employment law puzzle. Your obligations depend on your state, industry, number of employees, and business structure. [Take the free SMBRegs compliance assessment](/wizard) to get a personalized checklist covering overtime, minimum wage, workplace safety, and every other compliance area that applies to your business.

You can also use our compliance checker to verify your current status, or explore our pricing plans for ongoing monitoring that alerts you when rules change. See how we compare to traditional options in our SMBRegs vs. hiring a lawyer analysis.

Don't wait for a DOL audit to find out you're out of compliance. [Get your personalized compliance roadmap today](/wizard).