How can employers avoid salary compression when raising the minimum salary for exempt employees under the proposed overtime regulations?

​Editor's Note: On Sept. 8, 2023, the Department of Labor (DOL) issued a proposed rule increasing the Fair Labor Standards Act's (FLSA's) annual salary-level threshold to $55,068 from $35,568 for white-collar exemptions to overtime requirements. The department also is proposing automatic increases every three years to the overtime threshold. A public comment period will be open until Nov. 7, 2023.

Salary compression occurs when the pay of one or more employees is very close to the pay of more experienced employees in the same job or when employees in lower-level jobs are paid almost as much as their colleagues in higher-level jobs, including managerial positions.

An employer that increases the salaries of employees to retain exempt status may need to look at increasing internal salary ranges as a whole, not just salaries of individuals who fall below the new threshold, to ensure continued equity.

For example, Faheem is classified as an exempt professional employee earning $52,000 and his supervisor, Maria, is classified as an exempt executive employee earning $58,000. The difference between subordinate and supervisor pay is $6,000. If Faheem receives a pay increase to $55,068 to remain exempt under the proposed rule, the difference between subordinate and supervisor pay is compressed to only $2,932.

Employers should consider an adjustment to all related salary scales to avoid salary compression. Alternatively, if budgeting does not allow for such broad salary increases, employers may need to consider whether increasing salaries solely to retain exempt status is an appropriate response to the proposed rule. It may make more sense to pay overtime at a lower pay rate for a select few than to increase salary scales across the board.