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Responding to Minimum-Wage Hikes
Manage the impact on pay structures of state/local increases

By Joanne Sammer  2/4/2014

Whether or not Congress votes to boost the federal minimum wage of $7.25 per hour, plenty of employers are responding to minimum-wage increases being imposed at the state and local levels, some of which are subject to automatic raises tied to inflation. Washington state may have the highest minimum wage in the country, at $9.32 per hour, but other states are catching up, some local governments are going even further, and jurisdictions nationwide are considering many proposals. For example:

  • California will increase its $8 minimum wage to $9 on July 1, 2014, and to $10 on Jan. 1, 2016.

  • The city of SeaTac, Wash., voted to hike its minimum wage to $15 per hour—more than twice the federal hourly rate.

Meanwhile, in his State of the Union address, President Barack Obama again asked Congress to raise the federal minimum wage to $10.10 per hour, in three 95-cent increments over a two-year period. The president also announced that he would use executive action to raise the minimum wage for federally contracted workers to that level. According to an Associated Press report, the increase, applicable to new federal contracts starting in 2015, is "expected to cover about 10 percent of the 2.2 million federal contract workers," since most of those employees already make more than $10.10.

These developments raise important issues regarding how a significant minimum-wage hike affects a business overall and how to incorporate the increase fairly into existing compensation structures.

The Business Impact

Businesses are weighing the impact that higher minimum wages will have on profitability, hiring and their overall finances. For example, when wages go up, so do payroll taxes tied to the amount an employer pays in wages.

“Having a minimum wage is an important issue, but one has to be careful about making the wage so high it impacts businesses,” said Jerry Glass, president of F Solutions Group LLC, an HR consulting firm in Washington, D.C.

Any minimum-wage raises should be done at regular intervals and tied to inflation to avoid imposing large increases all at once, argued Joann Marks, president of Cosmetic Promotions in Orlando, Fla. “Minimum-wage employment is not intended for a career but, rather, for entry-level positions with a company,” Marks said. “Once the company has hired those workers, annual raises and promotions should properly compensate the employee.” She fears that the proposed minimum-wage increase “would cause me to cut hours or even lose a person and expect the other employees to work harder.”

As businesses work through these issues, they need to be careful to keep their personal views about boosting the minimum wage out of any communication with employees. “You don’t want to sound like you are taking a negative stance to what the government mandates,” advised Lane Transou, a Houston-based compensation and benefits consultant.

The Compensation Impact

Employers also must find ways to manage the effect of the increase on pay structures. “If the minimum wage increases and jobs that currently pay $10 an hour are not entry-level positions but the next level up, you will have a compression issue,” said Transou. As a result, “your pay structure may need to be shifted up, as well.”

For example, if the proposed federal minimum-wage hike is passed, Marks said, her 15-employee business will face a 27.4 percent increase in labor costs, based on Florida’s current minimum wage of $7.93 per hour. Salaries for employees earning above the current minimum wage "would have to increase to keep them at the same level,” she explained.

The best way to make that wage shift depends on the specific company and its compensation structure. Transou suggests looking for a natural spot where adjustments can stop, such as jobs that are paid 135 percent to 150 percent of the minimum wage. “You don’t have to adjust all levels, but consider adjusting lower-paid jobs from a certain hourly rate on down,” she noted.

“I know of no employers who institute across-the-board increases,” added Mic Fleming, president of YessHR in Portland, Ore. “More typical are adjustments at the lower end of the range, to maintain a previously established gap between job levels or functions.”

For example, a hotel would want to keep a level-2 housekeeper above a level-1 housekeeper. However, Fleming pointed out that a maintenance person whose pay is not tied to these positions and is already being paid at or above the new minimum wage may not see any adjustment.

Another example is in food processing, where material handlers, who may be paid close to minimum wage in some locations, are sometimes paid about 5 percent less than assembly workers. Yet individuals in both jobs are likely to receive a slight pay increase when the minimum wage increases, said John Boyd Jr., a principal at location consultants The Boyd Co. Inc. in Princeton, N.J. He noted that all nonexempt wages for workers in a food-processing facility are likely to rise slightly after a minimum-wage hike as these companies work to maintain the relationship pay scale among job titles.

Impact on Exempt Employees

Employers must pay attention as well to salary levels for exempt workers. In California, for instance, “The minimum salary for an exempt employee who doesn't qualify for overtime or certain break regulations is calculated at twice the minimum wage,” said Todd Scherwin, regional managing partner at the law firm Fisher Phillips LLP. “Currently, in California, exempt employees need to make $33,280, but when the minimum wage rises to $10 an hour, that number will be $41,600.”

Regional Variation

With the patchwork of federal, state and local minimum-wage laws becoming more complicated, organizations will need to pay attention to these issues for some time to come.

For the most part, employers can limit compensation changes to the geographic area affected by the minimum-wage increase.

“Companies with similar operations in multiple states respond more to local changes, cost-of-living calculations and market conditions than to any rigid sense of national parity,” said Fleming. “My advice is for employers to consider the integrity of their pay structures in relation to geographic markets, rather than to distant but similar units even within their own organizations.” Employers, however, may want to maintain the same sense of bracketing for similar career paths, he added.

Joanne Sammer is a New Jersey-based business and financial writer.

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