Salary Doesn’t Make Someone Exempt. Here’s the Test That Does.

Jun 1

Every HR audit I run starts the same way. I ask the owner: “What’s the breakdown between exempt and non-exempt at your company?” And the answer, almost every time, is some version of: “I don’t think we have that.” They do. Every employer does. They just hadn’t been told there was a federal test for it.

After 20 years of HR work, I have never once seen a small business get classification and pay equity completely right. Not because owners are negligent, and not because they’re trying to cut corners. Because nobody hands you the manual when you hire your first person — and the Department of Labor doesn’t care if the mistake was intentional.

The three-part FLSA exemption test

To classify someone as exempt — meaning they’re salaried and don’t qualify for overtime — they have to pass all three of these 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.

The most common classification 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 conversation. It’s a compliance one.

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. If your handbook still says otherwise, take it out.

What every compensation structure needs

You don’t need a compensation consultant to start. You need three things: a benchmark, a range, and a philosophy. 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. 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.

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, document it, communicate it. Having intentionality about your compensation structure is something to be proud of.

Most small businesses are running on arbitrary raises and surprise bonuses, then wondering why money isn’t spitting out the other side for the tech investments and growth they’re trying to make. Surprise raises feel great. Surprise you’re not getting a raise does not. Be intentional.

The three audit 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 you explain their pay relative to others in the same role?

Third, do you 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.

Not sure where your classification or comp gaps are? Take the free HR Audit and see exactly where you stand in 5 minutes: saltandlightadvisors.com/hraudit

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Resources to keep building:

🎯 Take the free HR Audit — Score your HR systems in 5 minutes and see exactly where your gaps are.

👉 saltandlightadvisors.com/hraudit

🎙️ Listen to Don’t Waste the Chaos — The podcast for small business owners building strong people operations.

👉 kerrimroberts.com/podcast

📖 Get The HR Easy Button — Kerri’s book on building HR systems that actually work for small businesses.

👉 https://amzn.to/4cPyrFh

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