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Minimum Wage 101: What Small Businesses Need to Know

By Neetal Parekh | Last updated on

In just a few days, on July 24th 2009, the federal minimum wage rate will increase from $6.55 to $7.25.  What is minimum wage? What does this mean for your small business? How does federal law correspond to state laws? Does your small business have to pay minimum wage to independent contractors and summer interns?

This is a good time to get plugged in on the basics, welcome to Minimum Wage 101.

What is Minimum Wage?  Minimum wage refers to state and federal laws which require to pay employees a minimum hourly wage.  The federal government sets and updates this wage, but states, counties, and cities may also put forth a minimum hourly rate of pay or "living wage".


Applicable Law: The Fair Labor Standards Act (FLSA) establishes most of the law related to the federal minimum wage.  Generally, an employer must adhere to FLSA provisions if: (1) it has more than $500,000 in annual sales; or 2) if its employees conduct business between states (i.e. engage in "interstate commerce") - interstate commerce is broad, including calling, mailing, and shipping or receiving items to or from out-of-state. 


The Bigger Half:  When both state and federal minimum wage laws apply to an employee, the employer must pay the higher one.


What's In a Name: Whether you decide to call a worker an is semantic.  But what they are, in terms of wage and employment, is based on .  Sometimes, businesses are tempted to avoid taxing and minimum wage requirements by classifying workers as independent contractors; however, be warned if the work relationship satisfies DOL's employer-employee classification, the small business can be liable for back wages, unpaid overtime for two or three years depending on whether the employer was willfully trying to avoid FLSA. 


Excepted: Below are important exceptions to the federal minimum wage law.

Full-time students - employers  in retail, service, or at higher education institutions can apply with the Department of Labor to pay students at least 85% of minimum wage and to employ the student for no more than 20 hours a week while school is in session and 40 hours when school is out of session.

The Under-20 crowd - The Youth Minimum Wage Program requires that employees under teh age of 20 be paid at least $4.25 for their first 90 days on the job.  After that or when the employee turns 20, the federal minimum wage law applies.

Employees receiving tips - Employees who customarily and regularly receive more than $30 in tips per month from the employer, if that amount plus tips received equals the applicable minimum wage and the employee gets all of the tips.

Workers with disabilities - In certain circumstances employers may apply for a  for compensating workers whose earning or productive capacity is impaired by disability.

Volunteers or interns - if the the worker is a volunteer or unpaid intern, federal minimum wage law does not apply.


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