Episode 125: Salary Doesn’t Mean What You Think It Means
I haven’t worked with a single client in 20 years who had this completely right. Not one. That’s not me trying to scare you. It’s just the truth — and it’s why I devoted an entire episode of Don’t Waste the Chaos this week to a topic most owners don’t realize is broken in their business until someone files a claim: employee classification and pay equity.
This is Episode 5 of the 13 HR Foundations series. It’s where we move out of foundational systems and into operational systems — the day-to-day work that actually runs your people operation. And of all the operational categories, compensation is the one I see most owners doing on autopilot. Here’s what I mean. Just yesterday I kicked off an HR audit with a new client and asked her, “What’s the breakdown between exempt and non-exempt at your company?” She said, “I don’t think we have that.” She did. Every employer does. She just hadn’t been told there was a federal test for it.
The exemption test most owners don’t know exists
To classify someone as exempt — meaning they’re salaried and don’t qualify for overtime — they have to pass three tests under the Fair Labor Standards Act.
First, the salary basis test: they’re paid a fixed salary and not docked for partial-day absences.
Second, the salary level test: at least $684 a week, or $35,568 a year — the current federal minimum.
Third, the duties test: they perform executive, administrative, or professional duties as defined by the DOL.
Three tests. All three. Not “they have a college degree.” Not “they’re a manager.” Not “they prefer it.” Classification isn’t a preference — it’s a federal mandate, and the Department of Labor doesn’t care if the mistake was intentional. The most common mistakes I see in audits: putting someone on salary because it’s easier than tracking hours. Calling someone a “manager” who doesn’t actually manage people. Letting an employee be a 1099 because they want to be — when you’re telling them what tech to use and when to be available. Or docking a salaried employee’s pay when they leave early, which can void their exempt status entirely. If any of those sound familiar, you may have overtime liability stacking up in your business right now.
Pay equity isn’t a DEI program
I want to be clear here because the phrase gets loaded. Pay equity is not the same conversation as diversity, equity, and inclusion. Pay equity is a legal requirement under the Equal Pay Act and Title VII. It means pay differences in your organization need to be explainable and defensible. Not the same — explainable. If you have six people in the same role and three are paid below market and three are at or above, and the three below happen to all be women — that’s a pattern. The intent doesn’t matter. The pattern does. And once it’s reported, you’re in an investigation. The fix isn’t paying everyone the same. It’s having a documented reason for where each person falls in the range. And yes — your employees can talk about their pay with each other. That’s protected, and has been for over a decade now. If your handbook says otherwise, take it out.
What every compensation structure needs
You don’t need a comp consultant to start. You need three things.
First, a benchmark. What does this role pay in your market, industry, and company size? BLS.gov, LinkedIn Salary, Indeed, and Glassdoor are free starting points. Be consistent about where you pull from.
Second, a range built around the midpoint. 80% of midpoint for someone still learning the role. 100% for someone fully competent. 120% for someone who exceeds expectations.
Third, a philosophy. How do raises work? Are they tied to cost of living, performance, both? Are you paying at the 50th percentile and investing heavily in development? Below market with premium benefits? Whatever it is — own it and communicate it. I don’t know why this is treated like a secret. Having intentionality about your comp structure is something to be proud of.
Most small businesses are giving arbitrary raises and surprise bonuses, then wondering why money isn’t spitting out the other side for the tech investments they want to make. Surprise raises feel great. Surprise you’re not getting a raise does not. Be intentional.
The three questions to ask this week
Before this week is out, pull up your team list and answer these for every single person.
First: what’s their classification — exempt, non-exempt, 1099, W-2 — and is it correct?
Second: can I explain their pay relative to others in the same role?
Third: do I have documented rationale for where they fall in the range?
If you answered no to any of them, it’s not a problem. It’s a project. Start with the roles that have multiple people in the same title — that’s where equity issues show up first. 70% of small business owners who get hit with an employee claim never recover financially. Almost never because they were being malicious. Almost always because they didn’t know what they didn’t know. Ignorance is not bliss when you have employees on your payroll. This isn’t year-long work. It’s a few weeks of focused effort that can save you from a six-figure mistake.
Listen to the full episode wherever you get your podcasts. And friend — the work is worth it. Don’t waste the chaos. Embrace it.
If you’re staring down a comp project now, the Monday newsletter is where I walk founders through HR systems one piece at a time: saltandlight.myflodesk.com/saltandlightadvisors
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