FLSA Coverage Explained: Enterprise vs. Individual Basics
Context. The Fair Labor Standards Act (FLSA) is the main federal statute in the United States that governs minimum wage, overtime, and recordkeeping for covered workers. But the FLSA does not automatically apply to every single job or small business. Before we even talk about overtime (time-and-a-half after 40 hours in a workweek), we must answer the gateway question: “Is the employee covered?” The FLSA offers two big doors of coverage — enterprise coverage and individual coverage. If the employee fits through either door, the protections apply.
1. Why coverage matters
Coverage is the foundation of FLSA enforcement. If coverage exists, the employer must pay at least the federal minimum wage and overtime to non-exempt employees, keep proper records, and comply with child labor rules. If coverage does not exist, the FLSA’s federal protections may not apply (though state or local wage laws might still protect the worker). Many lawsuits and DOL investigations start with this precise issue: the business says “we’re too small” or “we don’t do interstate work,” and the worker or the Department of Labor (DOL) argues the opposite.
The FLSA is purposely written with broad coverage language. Congress wanted to reach not only large factories and department stores but also restaurants, cleaning companies, health-care providers, and other service businesses that participate in the national economy. That is why the Act uses two alternative paths to coverage.
2. Two paths to FLSA coverage
Enterprise coverage
If the business itself is a covered enterprise, all its employees who are not exempt are protected — even if a specific worker never crossed state lines.
Individual coverage
Even when the business is too small or too local, a worker can be covered individually if their own job puts them in interstate commerce.
Think of it like this: enterprise coverage is a big umbrella — once the company is under it, everyone standing there gets wet. Individual coverage is a personal umbrella — even if no one else qualifies, that one worker does.
3. Enterprise coverage explained
Under the FLSA, an employer is a covered enterprise engaged in commerce or in the production of goods for commerce if it meets two essential requirements (see 29 U.S.C. § 203(s)):
- It has at least $500,000 in annual gross volume of sales made or business done (the “$500,000 test”); and
- It has employees engaged in commerce or in the production of goods for commerce, or it has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce.
This second part is wider than it looks: most modern businesses handle goods or materials that have moved across state lines — cleaning supplies, office equipment, phones, food, uniforms, medical items. Because of that, the real fight is often over the $500,000 threshold.
3.1 The $500,000 gross volume test
The DOL looks at the business’s annual gross volume of sales or business done, not profit. It is a top-line number. If a restaurant, clinic, construction company, or small chain of shops has $500,000 or more in the relevant 12-month period, it likely meets the enterprise test (unless it is exempt for some special reason like being a small independently owned public agency, which is a different analysis).
Important clarifications:
- The $500,000 is usually measured on a rolling 12-month basis, not only by calendar year.
- Some receipts are excluded (for example, excise taxes at the retail level that are separately stated).
- Nonprofit organizations may or may not be covered, depending on whether they engage in ordinary commercial activities of the type performed by businesses.
3.2 What “handling goods that moved in commerce” really means
Even a purely local employer may have workers who receive, stock, unpack, deliver, or use goods that were shipped from another state (or from abroad). The FLSA says that is enough to satisfy the commerce prong for enterprise coverage. So, a local daycare, nail salon, or cleaning service that buys supplies from out-of-state distributors and hits $500,000 in yearly business can be a covered enterprise.
Illustration. “Sunrise Family Restaurant” makes $720,000 per year, buys its food through a supplier who brings produce, beverages, and packaging from several states, and employs 12 workers. Even if none of the servers ever leaves town, the restaurant is a covered enterprise, and the servers are protected by the FLSA.
4. Individual coverage explained
What if the business does not reach $500,000? What if it is a small family operation with $300,000 in annual sales? FLSA coverage may still attach if a specific worker is “engaged in commerce or in the production of goods for commerce.” This is individual coverage.
The DOL and federal courts interpret “engaged in commerce” broadly. An employee is individually covered when, as a regular and recurring part of their job, they:
- Make interstate phone calls or respond to calls from out-of-state customers;
- Send or receive emails, purchase orders, or faxes across state lines;
- Order goods from other states for the employer;
- Process credit-card payments or online transactions that travel through interstate banking systems;
- Ship or track products going to another state;
- Travel across state lines to serve customers or deliver goods.
Notice something important here: the employee does not have to spend 100% of the time on interstate work. The work must be regular and recurring, not occasional or isolated. An isolated phone call to a supplier in another state, once per year, would not usually establish individual coverage. But a receptionist who every week processes out-of-state reservations, or a billing clerk who every day receives electronic payments from out-of-state insurers, is typically covered individually.
4.1 Service workers and electronic commerce
Many small employers think: “We are local only; we don’t ship anything.” But they forget that the electronic infrastructure they use — credit-card networks, online booking platforms, interstate banking — is commerce. DOL guidance has consistently said that employees who regularly handle credit-card transactions or online sales as part of their job are engaged in interstate commerce and therefore can be individually covered even when the business is under $500,000.
Example. A small $250,000-a-year auto-detailing shop has one office assistant. That assistant all week long processes card payments from customers visiting from another state, orders supplies online from a vendor in Georgia, and answers scheduling emails from out-of-state car-rental agencies. Even though the shop itself is below the enterprise threshold, that office assistant is personally covered by the FLSA.
5. Enterprise vs. individual: which one do you test first?
Compliance officers, lawyers, and HR professionals typically start with the enterprise analysis. It is faster: if the business is a covered enterprise, the coverage question is over; all non-exempt workers are protected. Only if the business fails the enterprise test (for example, very small revenue) do we drill down to individual coverage.
This order matters because employees sometimes argue for individual coverage when enterprise coverage already exists — which is unnecessary. The reverse also happens: small employers deny coverage, thinking “we don’t make $500k,” but they forget that one or more employees work in interstate commerce every day.
6. What coverage does not do
Even when a worker is covered (by enterprise or individual coverage), the FLSA still allows an employer to argue that the person is exempt from overtime under one of the Act’s exemptions — for example, the executive, administrative, professional, outside sales, or computer employee exemptions, or a special industry exemption. Coverage answers the question “Does the FLSA reach this job?”; exemption answers “Does the FLSA nevertheless excuse this employer from paying overtime to this employee?” These are two different steps.
7. Common employer mistakes
- Using only the $500,000 rule. Employers stop the analysis at “we’re under $500k” and ignore individual coverage for office or sales staff.
- Ignoring credit-card processing. Front-desk, billing, and cashier employees often touch interstate commerce every day.
- Assuming nonprofits are always exempt. Some nonprofits engaged in commercial activities can have enterprise coverage.
- Failing to update revenue numbers. A business that was under $500k three years ago might be over it now; the analysis is not frozen.
- Classifying everyone as independent contractors. Coverage applies to “employees,” and the FLSA’s employee definition is very broad. Misclassification does not eliminate coverage risk.
8. Enforcement and proof
How is coverage actually proven in a case? The DOL or the employee’s lawyer will request:
- Tax returns / P&L statements to establish annual gross volume;
- Business license, website, marketing materials to show interstate reach or commercial activity;
- Invoices, purchase orders, shipping records to show handling of goods from out of state;
- Job descriptions and emails to show that workers communicated across state lines;
- Merchant account statements to show credit-card transactions routed interstate.
If the evidence shows either enterprise ≥ $500k with interstate goods/materials or recurring interstate tasks by the employee, the worker is covered. Once coverage is established, the burden shifts to the employer to show an exemption or to produce accurate time records.
9. Impact of coverage on damages
Coverage is what unlocks the FLSA’s back wages + liquidated damages model. A covered, non-exempt worker who was not paid overtime can recover:
- Unpaid overtime (usually the extra 0.5 or full 1.5 depending on the pay scheme);
- An equal amount as liquidated damages (doubling the award) unless the employer proves good-faith compliance;
- Attorney’s fees and costs.
This is why employers try to contest coverage at the start: if there is no coverage, there is no federal overtime claim. But because of the dual structure (enterprise + individual), that defense is often weak.
10. Conclusion
The FLSA was drafted with the clear intention to capture the broad flow of U.S. commerce, not just the biggest factories. It does this through two doors. Enterprise coverage looks at the business as a whole: do we have at least $500,000 in annual business and employees handling goods or materials that moved in commerce? If yes, we are in — every non-exempt employee is protected. Individual coverage looks at the worker: does this person, on a regular and recurring basis, work in or with interstate channels (calls, orders, shipments, credit-card processing, out-of-state customers)? If yes, the person is in — even if the business is small.
For employers, the safest compliance posture is to assume coverage when in doubt, especially in today’s digital economy where almost every transaction travels across states. For workers, the key insight is that being employed by a “local” shop or a small family business does not automatically remove federal wage protections. And for lawyers or HR professionals, the coverage analysis should be built into every onboarding, audit, or pay-practice review: first coverage, then exemption, then recordkeeping. That sequence is what prevents small payroll problems from becoming full-scale FLSA lawsuits.
Important notice: This material is for informational purposes only and does not replace legal advice. FLSA coverage can interact with state wage laws, public-sector rules, and industry-specific exemptions. For an actual case, consult an attorney or a qualified labor-law professional in your jurisdiction.
Quick Guide: Understanding FLSA Coverage
The Fair Labor Standards Act (FLSA) covers most workers in the United States, but its protection depends on whether the employee or the employer qualifies under two main categories: enterprise coverage and individual coverage. Both paths exist to ensure that the majority of employees involved in interstate commerce — directly or indirectly — receive federal minimum wage and overtime protections.
1. Enterprise Coverage
An employer is a covered enterprise if:
- The business has $500,000 or more in annual gross volume of sales or business done; and
- It has employees engaged in commerce or in the production of goods for commerce, or handling goods that have moved in commerce.
Examples include chain restaurants, construction firms, cleaning services, hospitals, and retail stores that sell or handle products shipped from out of state. Once enterprise coverage applies, every employee in that organization (unless exempt) is protected by the FLSA’s rules on minimum wage, overtime, and recordkeeping.
2. Individual Coverage
When the employer is too small or local to meet enterprise coverage, an individual worker may still be covered if their own job involves interstate activity. This includes employees who:
- Make or receive interstate phone calls or emails;
- Order or ship goods across state lines;
- Process credit-card payments through national banking systems;
- Travel to other states for work; or
- Handle goods that previously moved in interstate commerce.
Even local businesses like salons, auto shops, or restaurants may have individually covered workers if they use products or systems that cross state borders.
3. What Coverage Does Not Mean
Coverage under the FLSA does not automatically guarantee overtime pay — exemptions may apply (executive, administrative, professional, or others). Coverage simply means the FLSA’s standards can apply; exemption determines whether the worker is entitled to overtime.
4. Key Takeaway
If a business earns at least $500,000 annually or its employees regularly engage in interstate commerce, FLSA coverage almost certainly applies. The law’s definition of “commerce” is extremely broad in the modern economy — so most workers in the private sector are covered even if their employer operates locally.
Always analyze coverage first, before discussing exemptions or pay classifications. It’s the first step in any wage and hour compliance strategy.
FAQ – FLSA Coverage: Enterprise vs. Individual
1. What does “FLSA coverage” actually mean?
Coverage determines whether the Fair Labor Standards Act (FLSA) applies to a particular employer or employee. If coverage exists, the employer must comply with federal minimum wage, overtime, and recordkeeping requirements for non-exempt workers.
2. How does enterprise coverage differ from individual coverage?
Enterprise coverage applies when the business itself meets specific criteria—mainly $500,000 in annual revenue and employees engaged in interstate commerce. Individual coverage applies when a worker’s own duties involve interstate commerce, even if the employer is small or local.
3. What is the $500,000 threshold based on?
The $500,000 figure refers to the company’s gross annual sales or business volume, not profit. It’s calculated over a rolling 12-month period and includes all revenues from commercial activity.
4. Can a nonprofit organization be covered by the FLSA?
Yes, if the nonprofit engages in commercial activities that compete with ordinary businesses (such as operating a gift shop or medical clinic), it may have enterprise coverage even if it is tax-exempt.
5. What kinds of employees usually have individual coverage?
Office administrators, customer service representatives, salespeople, or logistics workers who regularly communicate with out-of-state clients, ship products, or process credit-card payments across state lines often qualify for individual coverage.
6. Are credit-card transactions enough to establish coverage?
Yes, the Department of Labor considers regular handling of credit-card transactions to be interstate commerce because such payments travel through national banking systems.
7. If my business doesn’t reach $500,000 and I don’t ship goods, am I exempt?
Not necessarily. Even small local employers may have individually covered employees if they engage in regular interstate communication or financial processing. The FLSA’s reach is intentionally broad.
8. How does FLSA coverage relate to exemptions?
Coverage and exemption are separate questions. Coverage determines whether the FLSA applies at all; exemption determines whether certain employees (like executives or professionals) are excluded from overtime requirements.
9. Who decides if coverage exists — the employer or the government?
The Department of Labor (DOL) enforces the FLSA and can audit or investigate employers to verify coverage. Ultimately, courts make the final determination when disputes arise.
10. What should employers do if they are unsure about coverage?
Employers should review annual sales data, analyze employee duties for interstate activities, and consult labor counsel or the DOL’s Wage and Hour Division for guidance. When in doubt, the safest course is to assume coverage applies and comply accordingly.
Technical Basis & Legal Sources — FLSA Coverage (Enterprise vs. Individual)
- Statutory foundation. FLSA coverage rules come primarily from the Fair Labor Standards Act, 29 U.S.C. §§ 201–219. The definition of “enterprise engaged in commerce or in the production of goods for commerce” is set out in 29 U.S.C. § 203(s). This provision explains when an employer, as a business unit, is covered.
- Enterprise coverage requirements. Under 29 U.S.C. § 203(s)(1)(A), an enterprise is covered if: (1) it has employees engaged in commerce or in the production of goods for commerce, or employees handling/selling/working on goods or materials that have moved in or been produced for commerce; and (2) it has an annual gross volume of sales made or business done of not less than $500,000 (exclusive of certain excise taxes). This is the source of the “$500k threshold.”
- Handling goods that moved in commerce. The statute and DOL guidance interpret “handling … goods or materials” broadly to include employees who unpack, store, deliver, or otherwise work with goods that previously moved across state lines. See DOL Field Operations Handbook (FOH) Ch. 11c; see also 29 C.F.R. § 779.238 (employees handling goods that have moved in commerce).
- Individual coverage. Even if the enterprise test is not met, employees are covered individually if they are “engaged in commerce or in the production of goods for commerce” under 29 U.S.C. §§ 206(a), 207(a). DOL regulations at 29 C.F.R. Part 776 and 29 C.F.R. Part 779 explain how ordinary clerical, sales, and service tasks can constitute interstate commerce (interstate phone calls, electronic payments, ordering goods from out of state, shipping and receiving).
- Case law expanding coverage. Federal courts have consistently acknowledged Congress’s intent to reach the broadest possible swath of the national economy. See, e.g., Mitchell v. Lublin, McGaughy & Assocs., 358 U.S. 207 (1959) (liberal construction of “engaged in commerce”); Tony & Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290 (1985) (nonprofit activities may still be covered when conducted in competition with commercial businesses).
- Credit-card and electronic transactions. DOL opinion letters and enforcement materials treat workers who regularly process credit-card payments as being engaged in interstate commerce because such transactions are routed through interstate banking systems. This is why front-desk/office/billing employees in small businesses can have individual coverage even when annual sales are low.
- Rolling annual test. The $500,000 enterprise threshold is typically applied on a rolling 12-month basis rather than only on a calendar-year basis, consistent with DOL enforcement practice (see FOH § 11a01). Employers must therefore re-evaluate coverage as revenues grow.
- Public agencies and special sectors. Certain employers, such as public agencies, hospitals, schools, and residential care facilities, are covered regardless of the $500,000 amount under 29 U.S.C. § 203(s)(1)(B)–(C), reflecting Congress’s judgment that these sectors are inherently tied to interstate commerce.
- Interaction with exemptions. Coverage comes first; exemptions come second. Once enterprise or individual coverage is established, employers must test whether a worker is exempt under 29 U.S.C. § 213 and 29 C.F.R. Part 541 (white-collar exemptions). An employer cannot avoid coverage just by labeling a worker “salaried” or “independent contractor.”
- Remedies and enforcement. When covered employees are not paid in compliance with 29 U.S.C. §§ 206–207, they may recover back wages and an equal amount as liquidated damages under 29 U.S.C. § 216(b), and the U.S. Department of Labor may bring actions under 29 U.S.C. § 217 for injunctive relief.
These sources together show that FLSA coverage was designed to be expansive and to capture most modern businesses, whether through the enterprise door ($500k + interstate goods) or the individual door (recurring interstate tasks).
Important notice: This material is for informational/educational purposes only and does not substitute for advice from a licensed attorney or the U.S. Department of Labor. Coverage outcomes can change based on industry, state law, nonprofit status, public-sector rules, and the specific facts of employment. Always consult a lawyer or qualified wage-and-hour professional for real cases.