What Is Federal Payroll Law? How Payroll Actually Works Under Federal Rules

WHAT THIS IS

Federal payroll law is the set of United States federal statutes and regulations that legally require employers to calculate, withhold, report, and pay wages and payroll taxes according to defined standards.
Federal payroll law is mandatory. It is administered by federal agencies like the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS).
Federal payroll law determines when wages must be paid, how overtime must be calculated, how employee classifications work, and what records employers must keep.

WHAT THIS IS NOT

Federal payroll law is not:

• Optional guidance

• Software defaults

• Employer “best practices”

• A handbook policy

• A state payroll rule

If federal payroll law conflicts with an employer policy, the law always governs.

WHO IT APPLIES TO

Federal payroll law applies to all employers in the United States who pay wages except where specific legal exemptions exist.
This includes private businesses, nonprofits, government entities, and domestic employers.

Coverage is determined based on economic activity, interstate commerce, or business volume — meaning even small employers with interstate transactions may be covered.

WHO IT DOES NOT APPLY TO

Federal payroll law does not apply to:

• Independence contractors when properly classified under federal law

• Employees entirely exempted under specific statutory tests (e.g., some executive or professional exemptions under the FLSA) if they meet all criteria

• Workers outside U.S. jurisdiction

Misclassifying workers does not remove payroll obligations — misclassification itself can trigger violations.

WHY IT EXISTS

Federal payroll law exists to:

• Ensure workers receive fair wages and lawful pay

• Standardize payroll treatment across the country

• Protect workers from wage theft and discriminatory pay

• Guarantee funding of Social Security and Medicare

• Maintain lawful tax collection

The Fair Labor Standards Act (FLSA), enacted in 1938, was designed to protect workers and establish consistent labor standards nationwide.

IMPORTANT FACTS AND DATA

Federal minimum wage
The federal minimum wage is set by the FLSA and is currently $7.25 per hour, effective July 24, 2009.

Overtime pay
Federal law requires overtime pay of at least one and one-half (1.5) times the regular rate for non-exempt employees who work more than 40 hours in a workweek.

Recordkeeping
Employers covered under the FLSA must retain accurate payroll records, including hours worked and wages paid. These records must reflect all additions and deductions from wages and the date of payment.

Child labor protections
The FLSA includes rules restricting hours and occupations for workers under 18 to protect their health and schooling.

Enforcement
The U.S. Department of Labor’s Wage and Hour Division enforces the FLSA. Violations can lead to back payments, penalties, and legal liability.

COMMON MISUNDERSTANDINGS

“Payroll laws are just guidelines.”
No. Federal payroll laws are enforceable statutes with penalties for noncompliance.

“State laws override federal payroll law.”
False. Federal law sets the minimum. States may expand protections, but cannot undercut federal standards.

“Salaried means no overtime.”
Incorrect. Determining overtime eligibility depends on job duties and exemptions, not simply being paid a salary.

“Payroll software ensures compliance.”
Software can assist, but the employer bears legal responsibility for federal payroll compliance.

REAL-WORLD EXAMPLES

Overtime – retail employee
A retail clerk works 45 hours in a single workweek. Federal law mandates overtime pay for the extra 5 hours at 1.5×, regardless of job title.

Recordkeeping – HR failure
An employer fails to maintain required payroll records. A DOL audit finds missing hours and wages data. This leads to penalties and back wages.

Child labor – teen workers
A 15-year-old is scheduled overnight shifts. Federal payroll law restricts hours and prohibits certain hazardous duties for minors.

Each example reflects enforceable federal rules, not suggestions.

WHAT EMPLOYERS SHOULD DO

Employers must:

• Classify workers correctly under the FLSA

• Track hours accurately

• Calculate overtime per federal standards

• Withhold federal taxes correctly

• Maintain required payroll records

• Post official DOL workplace notices

• Stay updated on federal guidance

Training your payroll and HR teams on these requirements eliminates common compliance issues.

WHAT EMPLOYEES SHOULD KNOW

Employees should understand:

• Their rights to minimum wage and overtime

• How hours worked are counted

• What records employers are required to keep

• How to report possible violations to the Wage and Hour Division

Federal law protects employee wages regardless of employer size.

HOW JOURNEY PAYROLL & HR CAN HELP

Journey Payroll & HR can:

• Build systems based on statutory requirements, not defaults

• Provide documented compliance processes

• Offer federal law updates to clients

• Detect classification errors

• Audit payroll accuracy before final processing

Journey Payroll & HR structures payroll operations around federal law, ensuring clients avoid punitive payroll mistakes that can cost employers and employees alike.