Small Business and the Minimum Wage Increase
Across the country, labor groups are pushing to raise minimum wages to $15 per hour. These changes would affect the most low-paid workers in the economy.
Many careful economic studies have found that increasing the minimum wage does not significantly harm employment rates. However, there are some concerns. Among them are:
Increased Wage Amounts
Many economists believe that raising the minimum wage increases the costs of doing business and therefore forces businesses to cut jobs. However, the evidence indicates that this effect is much smaller than commonly believed.
In addition, there are workers who earn wages below the minimum wage that could benefit from a increase in the minimum wage. In a state like New York, for example, a full-time worker earning the current minimum wage would have enough money to pay for about 7 months of groceries and 5 months of rent if the minimum wage were raised to $15.
Many employers also have concerns that a minimum wage increase will cause prices to rise and thus slow consumer spending and economic growth. However, evidence suggests that this is unlikely to happen. Indeed, a recent Upjohn Institute working paper examining price effects of minimum wage increases finds that there is no evidence of significant pass-through to prices. The reason is that most consumers spend a substantial portion of their income on food away from home, which is not affected by the minimum wage.
The increase will have an impact on tipped workers, such as servers and bartenders, but also valets, gaming dealers, porters/bellhops, and other tipped employees. These jobs usually pay less than the regular minimum wage, because employers can count on tips to cover their wages.
In some cases, these tipped workers will be able to continue working, since they already earn enough tips to meet the new minimum wage (or more). But others may not be able to find another job that pays as well and will have to stop work.
Advocates of minimum wage increases often overlook tipped worker issues, but studies such as Allegretto’s show that raising the tipped wage to the same level as the regular minimum would not harm restaurant employment and might even boost it in places with no subminimum wage. This is an idea that deserves more serious consideration. In fact, it’s one that the Raise the Wage Act takes up on.
Employers with nonexempt hourly employees will need to ensure that they are paying their workers at least the new minimum wage. Those with exempt “administrative” and “executive” employees may need to evaluate whether those employees’ salaries are falling below the newly increased threshold and consider either bumping their salaries or reclassifying them as nonexempt and overtime-eligible.
Finally, employers should be aware that many states have separate salary thresholds for exempt white-collar employees that do not always align with the federal Fair Labor Standards Act’s exemption criteria. In Oregon, for example, the state’s exempt employee salary threshold will rise to exceed the federal threshold for 2021, but it is expected to return to a level below the federal standard following the election cycle.
Employers can contact any of the authors of this alert or their regular Venable attorney with questions about compliance with these changes. We are also happy to assist with review of compensation levels, pay practices, and exempt status to ensure compliance.
Many states exclude very small businesses and certain occupational categories from minimum wage increases. These exclusions can increase the cost of compliance for employers that are subject to these rules. It is important for small business owners to carefully consider their operations and determine if there are ways they can cut costs in advance of an anticipated labor increase. Examples of these types of expenses to look at include energy consumption, excess inventory and service contracts.
A higher minimum wage has been estimated to lift a significant number of workers out of poverty. This, in turn, has been projected to reduce the need for government assistance programs and boost local economies.
However, a major concern has been the impact on employment rates. While the unemployment situation has improved since its peak during the COVID-19 pandemic, Black and Hispanic communities continue to be disproportionately affected by job loss. A large minimum wage increase could price these workers out of the labor market, leading to additional layoffs or job cuts.