Exempt Salary Updates: Understanding the Latest Changes in Exempt Salaries

The upcoming changes to the minimum salary requirements for exempt employees will impact over 3 million employees and up to 5 million in the next 12 months, which means it's likely going to impact you as an employer. My name is Matt Vadie. I'm the CEO of Guru Payroll and HR. In this video, I'm going to walk you through what those changes are, what you should consider as you look at whether or not you're going to need to make updates to your team's pay and how you track their time and what possible liabilities you could have. And then I'm going to give you actionable steps that you can take to work forward. I've worked with hundreds of small businesses over the last 10 years as the CEO of Guru, helping them to maintain HR compliance. And I've served thousands of organizations in my career. And during this conversation, I'm going to make sure you know everything you need to know and have actionable steps forward. But before we get into it, these videos are only for our subscribers. So take just a moment, go ahead and smash that subscribe button. Don't worry, I'll wait. All right, perfect. See, it just took a second. Let's go ahead and dive in and take a look at what these updates are and what you can do to make sure that you're in compliance and taking the best possible care of your team. About 20 years ago, I was a bar manager. I thought it was the coolest job in the world. I made $25,000 a year in salary. I was classified as exempt. I had another $10,000 a year in tips, 35 grand a year. I was living high on the hog. I was hanging out with the boys every weekend, having a great old time. But then one day I sat down and I started doing the math. Then I kind of realized that $35,000 a year Divided by 60 hours a week of grueling hard labor where I was having to not only do a bunch of dirty, disgusting work in the back of the house, but also take care of 30 employees who didn't want to be there and were angry most of the time and angry customers and just long days, 16-hour shifts. It was tough work. And I was getting paid on average $9 an hour as a "manager." Whew, man. I realized right then and there that I was being taken advantage of, and I'm not the only one. And that's why the long-awaited updates to the salary requirements for the FLSA are finally starting to take effect in July of 2024 and January of 2025, ultimately with the goal of giving individuals a fair day's pay for a fair day's work. And it's important to understand where these requirements came from, so I'm going to talk through what the philosophy was when they look at making these types of adjustments, how it's gonna impact you, and some things you can consider as you move forward as an employer. So first, what's happening? Well, we're having some updates to the minimum salary requirements for exempt employees. And I've got another great video on our channel about how to classify your employees as exempt versus non-exempt. I'm gonna touch it at a high level in this video, but I highly suggest you go spend the 15 minutes Every employer should watch this video because it is critical that you have your employees properly classified, or it could cost you tens of thousands, if not hundreds of thousands of dollars in back wages, taxes, and penalties down the road. All right, so the update in July will be a new salary threshold of $43,888, moving up from the current salary threshold, which sits about $35,000. And we will also see an increase to the highly compensated employees' minimum salary or minimum compensation requirements. They only have $43,888 required to be salary, but in order to qualify as highly compensated employee exemption, they need to be at $132,964. Now, how did they get to this number? How did the Department of Labor get to this number? Well, they took the 20th percentile of the lowest wage census region. The 20% earning band. So that means everybody else in this region who classifies as exempt earns 80— the other 80% earn more than $43,888. So I always want to stop and emphasize that because anytime somebody's giving me pushback that they can't afford this or it's too high, and again, I don't, you know, I'm not part of the government. I don't come up with these things. I'm just delivering the message. So don't kill the messenger. But It's the 20th percentile, the lowest wage census region. When we look at the exemptions, these are critical roles in our organization. Are you not willing to pay what the 20th percentile is paying? And then we bump up to the 35th percentile. Do you want to be below the 35th percentile mark for critical teammates in your organization? If you do, you got a whole different philosophy on business than I do. All right. So next up, January 1st, we're bumping up to $58,656. And again, that's the 35th percentile at that point. So the 35th percentile of the lowest wage earning region, which is the South, is where this band is at. So everybody else in that region earns— the other 65% earn more than $58,656. And we're seeing the highly compensated employee salary bump up to— or total earnings bump up to $151,164. And an important thing to note is that up to 10% of this can be paid in bonuses. They do need to be paid annually inside of the year. So there needs to be that calendar year. They need to show that $58,000 plus. You will have to do makeups if they don't, and you could have potential loss because if somebody leaves in the middle of the year, they need to be averaging to have gotten to that $58,000 plus. So I would not rely too heavily on the 10% to make it up unless it's a certain thing that you've got monthly or quarterly bonuses and you have no problem truing them up and it's going to stay pretty close to that throughout the year. But for my money, it's not worth the hassle of trying to worry about reconciling that when somebody leaves. So how does somebody qualify as exempt? And what's the point of this? So exemptions are put in place, it goes back in the Fair Labor Standards Act of the 1930s when it originally came in place to establish fair labor standards for our employees, right? And so we were trying to get rid of unpaid overtime or people not getting time and a half for overtime and trying to make sure that people weren't being overworked, you know, you're going back to FDR delivering this thing via a fireside chat. So it goes a ways back, but there's two parts to this. So to qualify as exempt from overtime and minimum wage, I have to have a certain salary, a minimum salary, and I have to perform specific duties. So you might not be only missing out on, you might not only be misclassifying your employees based on this salary piece, But you might— and the duties as well. So I would highly suggest going over to that other video where I break down the duties for each of the exemptions, because there are 5 different exemptions plus highly compensated employees. There are executive exemptions, which are leadership, key leadership employees, administrative, which tend to be managers, computer personnel, which tend to be developers, programmers, things like that, professional or creative, which have to be people who have earned certain professional or creative certifications, things like that. But again, That's not the only thing. So I would highly recommend going over to that video and watching that. Every employer should. And outside sales, important thing to note there is outside sales are not required to hit the minimum salary threshold. They could be fully commissioned, but they are required to earn above that in the total comp package. So let's talk about what you can do moving forward here. So I need to identify who could potentially be impacted inside my organization. And so when I'm running reports to determine who inside the organization could potentially be impacted, I also want to make sure I'm bumping that salary or annual compensation range up a little bit into the low 60s because what I don't want is wage compression. So if I look at if I'm going to reclassify my employees who are close to, you know, maybe they're $55,000 and I can't afford to get them to $58,000, I'm going to reclassify them as nonexempt. Or the opposite would be maybe I'm going to bump them up to the $58,000 plus. Well, what if I had somebody else at $60,000 and there was a nice little wage gap there because of the duties and the responsibilities, and now I've bumped somebody employee's salary up to get very close, and I've created what's called wage compression. And now I have to look at the impact on that other teammate, and do I need to also bump their salary up? So there's a lot of implication when we start to analyze the numbers about what changes we should make as an organization. So now once I have all my employees who are potentially impacted this, it's time to make a decision. I've got a couple different routes I can go on what I can do here. But one of the things that's important to note before we talk about the paths forward It's unlikely that a large number of people are going to be impacted by this if you reclassify your employees. So one of the options you have is to reclassify an exempt employee as non-exempt. Well, only about 20% of people regularly work overtime. 20% occasionally work overtime, and the other 60% don't work any overtime. So don't just simply worry about whether or not somebody's close to that salary threshold. Look at how many hours a week they work as part of this equation as well. And that will help you to determine what your path forward is because you really have 3 options. You can raise their wages if they're close but are going to need to get bumped up and make sure that they're over that minimum salary threshold, assuming that they are qualifying on the duty side. Now, you could also reclassify the employee based on the fact that, hey, look, I— this job, I only have $45,000 a year budgeted for it. I just can't go that far. You're going to need to reclassify them as non-exempt and then start tracking their hours. And this is the part that most employers don't like to hear from me, but you're going to have to track their hours. Non-exempt employees' hours have to be tracked. They have to be paid overtime for anything over whatever your local or federal overtime rules and regulations are, which are typically 40 hours in a week. But we have some variances based on region. So you could reclassify as non-exempt. Pay them an hourly rate and make sure that you track their time. Or you could, if you have that many people, if you're in that 20% of people that are regularly working overtime and you have a batch of those, then it might be worth it to reclassify and then add some employees or, you know, maybe take some pressure off of them and just add a teammate. So if I've got 3 people that are all working a ton of overtime, but classify as exempt and will meet the salary requirements, I may look at eliminating some of that burden. You know, quite frankly, the cost of turnover is probably going to be very high in an environment like that where you're working people more than 60 hours a week. So you may want to look at possibly adding employees as option number 3. And if you need help looking at what solution makes the most sense for your organization, check out our website, Guru.co. That's G-U-R-U-O-O.co. We work with employers as the extension of their team, as their HR department, We also provide payroll, HR, and benefits outsourcing. So we're a turnkey HR department for small businesses, and these are exactly the types of solutions that we help with. Thank you so much for stopping by today and checking out this video. Please again, make sure you subscribe and like it and share it with someone that you care about. Thank you again for your time. We'll be back with the next one.