How to Know if the Fair Labor Standards Act (FLSA) Applies to Your Business

As your small business ramps up and you hire more employees, you may be subject to the Fair Labor Standards Act (FLSA), which designates rules regarding minimum wage, child labor, overtime pay, employee leave, and more.

While you don’t want to be a tyrant of an employer who demands unrealistic hours for less-than-standard pay, it is nice to know that you have some flexibility to determine your own standards based on your needs and the capabilities of your employees.

Wading through the language of this employment law can be overwhelming, however, so let’s break it down.

Who Needs to Comply with the Fair Labor Standards Act?

Government agencies on the federal, state, and city level; hospitals and healthcare facilities; schools; and businesses/enterprises that have annual gross receipts exceeding $500,000 must comply with the FLSA. While most of those categories are relatively easy to define, the one regarding businesses remains problematic even though the differentiating factor has a specific dollar amount.

The main problem with determining whether a small business needs to comply with the Fair Labor Standards Act lies in whether or not the small business qualifies as an enterprise.

Fair Labor Standards Act: $500,000 Enterprise Coverage

If you own or operate more than one small business, together they could potentially count as an enterprise. Your businesses will likely qualify as an enterprise if they:

  • Perform related activities.
  • Are commonly controlled by one or more individuals.
  • Have a common business purpose.

In addition, if the companies are under unified operation, even if the owners are not the same person or entity, the FLSA considers them an enterprise.

Let’s break that down into plainer language with an example. Let’s say you manufacture t-shirts. If you also own a company that sells those t-shirts in a retail setting, your businesses would qualify together as an enterprise since they perform related activities that serve a single industry.

If your small businesses do qualify as an enterprise, you must add their sales volume together. If that value exceeds $500,000, then your businesses must adhere to the Fair Labor Standards Act.

Determining Annual Sales Volume for the Fair Labor Standards Act

According to the FLSA, all gross receipts from all sales types over the past 12 months count toward the $500,000 enterprise coverage test. The gross receipts include the “gross dollar volume (not limited to income) derived from all sales and business transactions including gross receipts from service, credit, or other similar charges, exclusive of the internal transactions between them,” according to the United States Department of Labor.

With that in mind, it is possible for a small business to continuously oscillate above and below the $500,000 mark. In this case, the employer (that’s you) would use the previous four quarters to determine whether or not FLSA coverage applies to the current fourth of the year. If this happens, you might experience years where you only needed to give your employees FLSA coverage for a portion of the year.


If your figurative t-shirt companies collectively had an annual sales volume of less than $500,000 from January-December in 2021, you would not have to provide your employees with FLSA coverage for the first quarter of 2022, even if you are on track to exceed $500,000 annual sales volume in 2022. You might want to give them some free t-shirts for working so hard, though.

Must Businesses Created in the Past Year Comply with the Fair Labor Standards Act?

If you have only just established your small business, you won’t have 12 months’ worth of records to determine whether or not your employees are entitled to FLSA coverage. In this case, you would use whatever information you have about your sales income to estimate your annual sales income.

For instance, if your t-shirt company had only been in business for three months and had made $100,000, your estimated annual sales income would be $400,000, so your employees would not be covered under the Fair Labor Standards Act. However, keep in mind that until you have 12 months of records, you must reevaluate that estimate each quarter.

Caveats and Additional Information about the Fair Labor Standards Act

Even if you are certain that your small business is exempt from the Fair Labor Standards Act on account of the $500,000 enterprise rule, your employees might still have individual coverage. You can find out more about individual coverage of employees under the FLSA here.

If you’d like some reassurance that you’re accounting for overtime pay and vacation time correctly, we’re only a phone call away. Contact Abacus Payroll at (856) 667-6225 or fill out our quote request form.

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