Minimum Wage
Definition, rules and examples

For businesses with hourly teams, minimum wage compliance is about more than the posted rate. It also depends on whether every hour of work is recorded and paid, whether deductions push pay below the floor, and whether the business is following the correct state or city rate for each worksite. This guide covers the federal baseline, tipped wage rules, state differences, and practical steps for staying compliant.

How minimum wage works

The Department of Labor's minimum wage page states: "The federal minimum wage is $7.25 per hour effective July 24, 2009." It also says that "some state laws provide greater employee protections; employers must comply with both." When a state or local minimum is higher than $7.25, employers in that location pay the higher rate.

Minimum wage applies to hours worked, which include more than scheduled shift time. The Department of Labor's hours worked fact sheet says short rest periods are paid work time, and that work "suffered or permitted" must be paid even if it was not requested.

Worked example: tipped employee

The Department of Labor's Fact Sheet #15 says tipped employees are those who "customarily and regularly receive more than $30 a month in tips." Employers may pay a direct cash wage of "at least $2.13 per hour" and claim a tip credit of up to "$5.12 per hour." If tips and direct wages do not reach the minimum wage in a workweek, "the employer must make up the difference."

Suppose a server in a state that follows the federal tipped wage rules works 30 hours in a workweek at a $2.13 cash wage and receives $120.00 in tips.

If the same server received $160.00 in tips, cash wages plus tips would total $223.90, which exceeds $217.50, so no make-up payment would be due. Many states do not allow a tip credit or set a higher cash wage, so check your state's rules before using this approach. See our tip credit glossary entry for more.

Federal minimum wage rules

• Rate: $7.25 per hour under the FLSA, per the Department of Labor.
• Coverage: Applies to non-exempt employees covered by the FLSA. Exempt employees and independent contractors are treated differently.
• Overtime link: The Department of Labor's regular rate fact sheet says the regular rate used for overtime cannot be lower than the federal minimum wage or any higher applicable state or local minimum wage.
• Records: The recordkeeping fact sheet requires employers to keep records such as hours worked each day, total hours each workweek, the regular hourly rate, and total wages paid each pay period.

State and local differences

State and local minimum wages vary widely and often change on January 1 or July 1. Some are indexed to inflation. As one example, the California Division of Labor Standards Enforcement's minimum wage FAQ states that effective January 1, 2026, the state minimum wage is $16.90 per hour for all employers, with higher rates for some fast food and health care workers and higher local rates in some cities and counties. If your business has locations in several states or cities, maintain a list of the rate that applies to each site and review it before each scheduled increase.

Best practices

• Map rates to locations. Assign each worksite its applicable federal, state, and local minimum.
• Calendar scheduled increases. Update pay rates before the effective date, not after the first payroll that misses it.
• Capture all work time. Pre-shift tasks, required meetings, and short breaks count as hours worked.
• Watch deductions. Deductions for items such as uniforms or shortages can create minimum wage problems for low-wage employees. Review deductions against your state's rules before taking them.
• Audit tipped pay weekly. If you use a tip credit, confirm tips plus cash wages meet the minimum every workweek.
• Post required notices. Federal and state laws require workplace posters about minimum wage rights.

Common mistakes

• Paying the federal rate in a higher-wage state or city. The most protective rate applies.
• Missing a mid-year local increase. Some cities adjust rates on dates other than January 1.
• Unpaid "off-the-clock" time. Opening, closing, and training time that is not recorded can push effective hourly pay below the minimum.
• Taking a tip credit without meeting the conditions. Tip credit rules have notice and eligibility requirements, and some states prohibit tip credits entirely.
• Rounding that always favors the employer. Systematic rounding down can reduce paid hours below what was worked. See time clock rounding rules.

Minimum wage and scheduling

Minimum wage increases change labor budgets. When rates rise, many employers review schedules to match staffing to demand more closely, rather than cutting hours across the board. Tracking labor cost percentage by location helps show where schedule adjustments make the most sense. Accurate time data also helps you spot shifts that are consistently overstaffed or understaffed.

Minimum wage checklist

Use this quick review whenever a rate changes or you open a new location: confirm the federal, state, and local rate for the site; confirm any separate rates for tipped, youth, or specific industry workers; update pay rates in payroll before the effective date; and spot-check the first payroll after the change.

How EZTime helps

EZTime helps make sure every minute of work is captured, using a GPS mobile time clock with geofencing, NFC tags, a tablet kiosk, or biometric clocks. Overtime and break alerts help managers stay ahead of compliance issues, timecard corrections are tracked with an audit trail, and AI shift scheduling with shift templates helps you match staffing to demand when wage rates change. Payroll-ready Excel and PDF exports work with any payroll software, which applies your pay rates; EZTime does not run payroll. Plans start at $2 per employee per month with a 14-day trial. See the attendance clock and pricing, or estimate weekly hours with the time card calculator.

This is general information, not legal advice.