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

Editor's Note: Effective July 1, the Fair Labor Standard Act’s (FLSA’s) annual salary-level threshold for white-collar exemptions to overtime requirements will increase from $35,568 to $43,888. As of Jan. 1, 2025, the annual salary threshold will rise to $58,656.

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.

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. 



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