When do restaurants have to pay overtime under federal law?
In most cases, non-exempt employees must be paid overtime for hours worked over 40 in a workweek, at not less than 1.5x the employee's regular rate of pay.
Recent U.S. Overtime Rule Changes in Restaurants
The Baseline Federal Rule
In the U.S., the overtime baseline comes from the Fair Labor Standards Act (FLSA) - the federal wage-and-hour law that covers most private employers, including restaurants. Under the FLSA, non-exempt employees must be paid overtime for hours worked over 40 in a workweek, at a rate of at least 1.5x the employee's "regular rate of pay."
A few details matter a lot in restaurant payroll -
1. Overtime is based on the workweek, not the day. The FLSA does not require extra pay just because someone worked a long day, a weekend, or a holiday. If an employee works 8 hours on Saturday, that's not automatically overtime - what matters is whether the total hours in the defined workweek exceed 40.
2. "Regular rate" is broader than hourly wage. The overtime calculation is built on the employee's regular rate for that week, which generally includes most compensation the employee earns (with some exclusions). This is why restaurants can get tripped up when pay is a mix of hourly rates, shift premiums, or certain bonuses.
3. Exempt vs. non-exempt is the gatekeeper. If someone is properly classified as exempt, overtime isn't owed under federal law; if they're non-exempt, it is. Importantly, job titles don't decide exemption - the classification is based on pay method/level and actual duties tests under the DOL rules.
Why restaurants feel overtime rules so sharply - schedules change fast, shifts run long, people cover call-outs, and employees often work multiple roles and rates (server + shift lead, prep + line, etc.). Those realities don't change the basic overtime trigger (40+ hours), but they do make it easier to (1) accidentally cross 40, and (2) miscalculate the regular rate when pay is more complex.
The Biggest Recent Federal Change
When restaurant owners say "overtime rules are changing," they're often talking about the federal salary threshold used for the white-collar exemptions (executive, administrative, and professional - often shortened to "EAP"). These exemptions are the reason some salaried managers do not receive overtime under federal law. To be exempt, an employee generally has to (1) be paid on a salary basis, (2) meet a minimum salary level, and (3) primarily perform exempt duties.
In April 2024, the U.S. Department of Labor finalized a rule designed to raise the minimum salary level in stages - one increase planned for July 1, 2024, and a larger increase planned for January 1, 2025 - and to add an ongoing update mechanism going forward. For restaurants, the practical impact would have been straightforward- more salaried managers would have become overtime-eligible unless their pay was raised and their duties still met the exemption tests.
But the "where it stands now" part matters most for operators. Federal litigation challenged the 2024 rule, and the Department of Labor has publicly indicated that, for enforcement purposes, it is applying the 2019 salary levels while appeals and other lawsuits continue. That means many employers are operating under the prior federal baseline again (even if they briefly planned around the higher thresholds).
Here's what restaurant owners should take away from this federal back-and-forth -
1. Don't rely on job titles. "GM," "AGM," "Shift Lead," and "Kitchen Manager" titles don't determine exemption. The exemption depends on pay structure + pay level + actual duties performed.
2. Use the federal salary level as a floor - not your only rule. Even if the federal threshold is currently the 2019 level for enforcement, states can be stricter, and strict rules win.
3. Treat salary threshold changes as a budgeting trigger. Any time thresholds move (federal or state), you need a plan - raise salary to keep exemption (if duties qualify) or reclassify to non-exempt and manage overtime through scheduling and staffing.
4. Document your classification logic. If you keep a role exempt, be able to show - salary basis, salary level, and what duties the role actually performs week to week.
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State Overtime and Exemption Threshold Updates
Even when federal overtime rules feel unsettled, restaurants still have to deal with a consistent reality - state law can be stricter than federal law, and when it is, you generally must follow the rule that provides greater employee protections. In practice, that means you can't run overtime compliance off a single "national" standard if you operate in multiple states - or even if you have one location in a state with higher thresholds.
For restaurants, the most common state override isn't the 40-hour overtime trigger itself - it's the salary threshold for classifying certain salaried managers as exempt. Many states set their own exemption salary levels, and those levels can be higher than the federal minimum. If your salaried manager is below your state's threshold (even if they meet the duties test), they may become overtime-eligible under state law, which changes both payroll cost and scheduling strategy.
Here are a few state examples restaurant owners should understand because they commonly drive reclassification decisions -
1. New York (effective January 1, 2026) - The New York Department of Labor increased the minimum weekly salary thresholds for the executive and administrative exemptions. The weekly amount is $1,275 for employees in NYC, Long Island, and Westchester, and $1,199.10 for employees in the rest of New York State. If a salaried manager is below the applicable weekly threshold, they are generally not exempt under NY's executive/administrative salary test - even if they "feel like a manager" day to day.
2. Washington (effective January 1, 2026) - Washington ties exempt salary thresholds to a multiple of the state minimum wage. Washington's Department of Labor & Industries explains that with the 2026 minimum wage increase, the exemption thresholds rise as well. For 2026, that weekly salary threshold is $1,541.70 per week (based on the current multiplier).
3. California (effective January 1, 2026) - California's exempt salary threshold for many exemptions is built off a formula - at least 2x the state minimum wage for full-time work. With the 2026 minimum wage increase, the DIR calculates the minimum annual salary for exempt employees at $70,304 (equivalent to $1,352/week if you convert it).
The owner-level takeaway is simple - your overtime "change management" process should include state thresholds as a recurring checkpoint, not a once-a-year scramble. When a state threshold increases, you typically have three operational choices - (1) raise salary to maintain exemption (if duties qualify), (2) reclassify as non-exempt and plan for overtime, or (3) redesign the role/schedule to control hours while maintaining service standards.
Minimum Wage Increases That Affect Overtime and Exempt Status
Minimum wage changes don't just raise your base hourly payroll - they can also raise your overtime costs and force reclassification decisions for salaried managers in certain states. Even if the federal overtime trigger (40+ hours/week) stays the same, a higher minimum wage increases the cost of every overtime hour because overtime is typically 1.5x the employee's regular rate.
For restaurants, the bigger hidden impact is that some states effectively link exemption thresholds to minimum wage. When the minimum wage rises, the minimum salary required to keep certain employees overtime-exempt can rise too. That creates a familiar decision point- increase salary to maintain exemption (if duties qualify) or move the role to non-exempt and manage overtime with scheduling and coverage.
Here's what this looks like in practice in states that commonly affect restaurant operators -
1. California - California calculates the minimum salary for many exempt employees as at least 2 the state minimum wage for full-time work. When California's minimum wage moved to $16.90/hour effective January 1, 2026, that pushed the minimum exempt annual salary requirement to $70,304. If salary is below the threshold, the employee generally cannot be treated as exempt - regardless of title.
2. Washington - Washington sets its exemption salary threshold as a multiplier of the state minimum wage. Washington's guidance shows that on January 1, 2026, the minimum salary threshold rises to $1,541.70 per week (for small and large employers under the current framework).
3. New York - New York updates its own minimum weekly salary thresholds for certain exemptions, and those thresholds can differ by region (for example, NYC/Long Island/Westchester vs. the rest of the state). This is another reason minimum wage season often overlaps with exemption reviews in restaurant payroll.
Operationally, it helps to treat minimum wage updates as a trigger for two quick checks -
1. Overtime budget check - what will 1-3 "extra hours" per employee per week cost now?
2. Exempt role check - which salaried managers are near the state threshold - and what's your plan if the threshold jumps again next year?
Overtime Calculation Updates
For most restaurants, overtime issues don't happen because owners "forget" to pay time-and-a-half. They happen because time-and-a-half is calculated on the employee's regular rate, and the regular rate can be more complicated than a single hourly wage. Under the FLSA, the regular rate generally includes all remuneration for employment unless a specific exclusion applies. That means payroll setups that treat certain earnings as "separate" can accidentally understate the regular rate - and underpay overtime.
Here are the overtime calculation areas that most often create risk (and unexpected back-pay exposure) in restaurants -
1. The regular rate can include more than hourly pay. Certain non-discretionary bonuses, incentives, and premium pay tied to performance or attendance may need to be included when calculating overtime. If those amounts aren't handled correctly in payroll, you can end up paying overtime on too low of a base rate.
2. Multiple roles and multiple rates in the same week require careful math. If an employee works different jobs with different pay rates in the same workweek (for example, line cook shifts at one rate and shift-lead hours at another), overtime still applies after 40 hours - and the regular rate may be a weighted average depending on how you structure and document the rates.
3. "Extra pay" doesn't always count as overtime credit. Restaurants sometimes use premiums (like a flat shift bonus) assuming it "covers" overtime. But unless the premium is treated correctly and meets the rules for overtime credits, you can still owe overtime on top of it.
4. Workweek definitions must be consistent. Overtime is calculated based on a fixed workweek (a recurring 7-day period). Changing the workweek to avoid overtime can create compliance problems, especially if it looks like it's being manipulated around peak weeks.
5. Timekeeping practices affect regular-rate accuracy. Off-the-clock work, automatic deductions, inconsistent time edits, or poor job code usage can all distort the true hours and earnings that determine the regular rate.
A helpful way to think about it- overtime compliance is as much a data discipline problem as it is a payroll rule. Restaurants that keep clean job codes, clearly define which pay types are included in the regular rate, and consistently track work performed are much less likely to get surprised by overtime calculations - or disputes.
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Tipped Employees, Service Charges, and Overtime
Restaurants often assume overtime is simple for tipped roles because "their base rate is low." In reality, tipped pay creates more opportunities to miscalculate overtime because you're managing multiple pay components (cash wage, tips, and sometimes service charges), and the rules treat those components differently.
Here are the operational points that matter most -
1. Tipped employees still earn overtime - and the calculation depends on the regular rate. Under federal law, non-exempt employees are owed overtime after 40 hours in a workweek. That doesn't change because someone receives tips. The overtime premium is based on the employee's regular rate for the week, and the employer must ensure the total overtime pay obligations are met - even when part of the employee's earnings come from tips.
2. Tip credits create state-by-state complexity. Many states have their own rules on whether a tip credit is allowed, how it must be disclosed, and what happens if the employee's tips don't bring them up to the required minimum wage. When your restaurant operates in more than one state (or hires across state lines), you can't assume the "federal approach" is the full answer.
3. Service charges are not tips - and that affects overtime math. A mandatory service charge (for example, an automatic percentage added for large parties) is generally treated as wages paid by the employer, not as a tip. That means service charges typically flow through payroll differently than tips, and they can affect the regular-rate calculation depending on how they are paid and labeled. If your POS or payroll system mixes these categories - or staff are told "it's basically a tip" - you can create both compliance and employee-relations issues.
4. Tip pooling and tip sharing policies can collide with overtime accuracy. Tip pool distributions often happen after the shift or after the pay period. If your reporting and payroll exports don't reconcile tips, service charges, and job codes correctly, it's easy to end up with a regular-rate calculation that doesn't reflect what the employee actually earned for that workweek.
5. The operational fix is better setup, not more manual work. Restaurants that reduce overtime disputes usually do the same few things - clearly label tips vs. service charges in the POS, map every pay type correctly into payroll, keep job codes clean (especially when employees work multiple roles), and audit overtime calculations any time pay rules or pay types change.
If you want overtime rules to be predictable, treat tipped-pay compliance as a systems configuration problem - clear definitions, consistent categories, and clean reporting between POS, tip management, and payroll.
No Tax on Overtime and Related Tax Headlines
Over the last year, "no tax on overtime" has become one of the most common questions restaurant owners hear from employees - especially during hiring conversations and around tax season. The key is to separate tax law changes from labor law requirements. Overtime rules under the FLSA (40+ hours and time-and-a-half for non-exempt employees) are still the overtime rules. What changed is how some workers can treat certain overtime pay on their federal income tax return - not whether overtime is owed, and not whether overtime is subject to payroll tax.
Here's what has actually changed at the federal tax level. Under the "One Big Beautiful Bill Act," individuals can claim an above-the-line federal income tax deduction for qualified overtime compensation for tax years 2025 through 2028. Qualified overtime compensation is generally the premium portion of overtime pay (the half portion of time-and-a-half) required under the FLSA and reported to the worker (typically via Form W-2). The deduction has annual caps (commonly described as up to $12,500 for most filers and $25,000 for joint filers) and phases out for higher-income taxpayers. This is why employees may say "overtime isn't taxed anymore," even though the change is actually a limited deduction with eligibility rules and limits.
What this does not change is your restaurant's pay and withholding reality. Overtime is still generally subject to payroll taxes (Social Security and Medicare), and states can still tax overtime depending on their rules. In other words - payroll still runs normally, paystubs still show withholdings, and the "benefit" (if the employee qualifies) is realized when they file their federal return - not by eliminating all taxes from the paycheck.
Operationally, you can avoid confusion (and frustration) by setting expectations in plain language - "Overtime pay is still calculated and paid the same way. Some employees may qualify for a federal deduction related to the overtime premium portion when they file taxes." If employees ask for "proof," point them to IRS guidance rather than trying to interpret it yourself. And from a systems standpoint, make sure payroll can support any new reporting or documentation requirements that arise as IRS guidance evolves - especially if future years require clearer separation of qualified overtime amounts (even if 2025 has transitional relief).
Must-Read Content
Minimum wage
2026 Restaurant Minimum Wage Guide
Scheduling rules
2026 Restaurant Scheduling Rules Update
Labor compliance
Labor Compliance for Restaurants
Tip pooling law
Restaurant Tip Pooling Law in 2026
Frequently Asked Questions
Is overtime based on daily hours or weekly hours?
Under the FLSA, overtime is generally based on weekly hours (40+), not on how long a single shift is. Federal law also doesn't require overtime just because someone works a weekend or holiday. (Some states do have daily overtime rules.)
Do tipped employees get overtime?
Yes - tipped employees can still be non-exempt and overtime-eligible. The tip credit rules affect how wages are paid, but they don't eliminate overtime obligations for non-exempt workers.
If I operate in multiple states, which overtime rules do I follow?
You generally need to follow the applicable state and local rules for the work location - especially where state exemption thresholds or other overtime protections are stricter than federal.
Are tip pool distributions included when calculating overtime?
Tips received by employees are treated differently than wages paid by the employer. Overtime obligations still apply for non-exempt employees, but the details can depend on whether the restaurant takes a tip credit and how amounts are paid/recorded.
