Uncertainty Abounds as California Minimum Wage Continues to Rise

By Toni Vranjes Oct 18, 2016
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California's minimum wage has been on an upward trend, and it will continue rising for years. That's scaring employers, which worry about the far-reaching effects on their businesses.

Starting Jan. 1, 2017, the minimum wage that companies with at least 26 employees must pay will increase from $10 to $10.50 an hour. Afterward, it will rise a little every year, until it reaches $15 in 2022.

According to employment lawyers, businesses are expressing concerns about fewer job opportunities, decreased hours and higher prices. Another big worry is a federal regulation that will increase the minimum salary requirement for workers to be exempt from overtime.

Law Aimed at Millions of Low-Wage Workers

The co-author of the legislation to increase the minimum wage, Sen. Mark Leno (D-San Francisco), said it will help 2.2 million minimum-wage workers while boosting the economy. A higher minimum wage also will reduce turnover, increase productivity and stimulate consumer spending, he said.

The law includes provisions that allow the governor to suspend a scheduled wage increase if certain economic conditions exist. Under one provision, the governor can pause it if statewide job creation for the previous three or six months is negative and retail sales receipts for the previous year are negative. Another provision gives the governor this ability "if any year from the current budget year to two additional years is forecasted to be in deficit when including the next scheduled increase," according to a document from the state government.

Businesses Worry About Jobs, Hours, Prices

Although lawyers say it's too early to know the exact impact of the minimum-wage increases, businesses have a lot of fears.

The retail and hospitality industries are especially concerned about the increases because a large percentage of their workforce is made up of minimum-wage and lower-skilled workers, according to Orange County, Calif.-based attorney Sage Knauft of the firm Walsworth. Some worry that lower-skilled college-age people will be priced out as businesses focus on retaining better-skilled workers.

Jim Morris, an attorney at Rutan & Tucker in Orange County, Calif., said the legislation will limit job opportunities.

"My impression is that it simply will narrow the funnel for taking in entry-level people going forward," Morris said.

Knauft added that rising wages also could lead to decreases in the hours given to each worker. The wage increases likely will also accelerate the push toward automation, leading to fewer jobs, he said.

Another focus for businesses: prices. Many companies feel they have no choice but to pass along the rising costs to customers, Morris said. Although some employers believe that the price increases can't be supported, others are raising prices. "Where they think they can pass along the legislatively imposed wage increases, they will do so," he said.

Los Angeles-based attorney Pascal Benyamini with Drinker Biddle & Reath said companies are evaluating their options in the wake of wage hikes—and leaving California is one of those options. In fact, one of his clients is already gone; the decision to leave was made partly because of the wage increases and in part because of other regulatory issues.

And, Morris said, businesses worry about the possible domino effect of the higher minimum wage. If an experienced employee now makes $10.50 an hour, and an entry-level worker also will make $10.50 as of Jan. 1, the employer might feel compelled to bump up the pay of the first employee to ensure that there's some distinction between the pay of the workers. The alternative would be to risk employee dissatisfaction, he noted.

Local Minimum-Wage Ordinances

Yet another concern is the varied minimum-wage laws that many cities across the state have enacted. One example: San Francisco's minimum wage is currently $13, and it will rise to $15 in July 2018.

Benyamini said it would be beneficial to have one statewide standard for the minimum wage (along with paid sick leave).

These local laws are creating "confusion and unnecessary burdens on employers in California," he said.

Economists' Views

Economists have widely varying opinions on the topic of minimum-wage hikes.

Some say the increase will raise the incomes of the working poor while also stimulating the economy. Earlier this year, more than 180 economists signed a letter listing their reasons for supporting a $15 federal minimum wage by 2020.

Raising the minimum wage is crucial for low-income families, they wrote. Ninety-four percent of workers who would be helped by an increase are adults. And in response to critics, they state that research has shown no significant effects on employment opportunities arising from reasonable increases in the minimum wage.

Moreover, they assert, the increase will lead to greater spending by these workers, which in turn will lead to higher demand.

"In short, raising the federal minimum to $15 an hour by 2020 will be an effective means of improving living standards for low-wage workers and their families and will help stabilize the economy," the letter states. "The costs to other groups in society will be modest and readily absorbed."

But opponents counter that the effects on hiring will be brutal and that there are better ways to lift people out of poverty.

According to a 2015 survey conducted by the University of New Hampshire Survey Center on behalf of the Employment Policies Institute, the majority of 166 economists surveyed said they believe that a $15 federal minimum wage will adversely affect both youth and adult employment. The Employment Policies Institute is a research organization dedicated to studying entry-level employment issues.

Sixty-seven percent of respondents believe the increase would make it harder for employers with fewer than 50 employees to stay in business.

Also, a majority stated that the Earned Income Tax Credit is a better method of helping needy families.

Overtime Exemption Creates More Worries

Meanwhile, employers in California must also be mindful of how the state's scheduled minimum-wage increases will affect the salary threshold for overtime exemption.

For employees to be exempt from the overtime rule, they must satisfy a two-part test, Benyamini noted. One part is the "salary basis test," which is tied to the minimum wage.

"Every time the minimum wage goes up, it's going to have an impact on the minimum threshold for the salary basis test," he said.

To meet this threshold under California law, employees must make at least twice the minimum wage for full-time work. To calculate the number, the minimum wage is multiplied by 2, then multiplied by 2,080 hours.

But a federal rule set to take effect in December is complicating matters. The rule will raise the minimum salary requirement for exempt status. Compared to California, the federal government will have higher minimum salary requirements for exempt status for 2017 and 2018. For those years, employers will need to follow the federal rules.

In 2017, the state's minimum salary requirement for exempt status will be $43,680, compared to $47,476 under the federal regulation.

To make matters even more complicated, a Texas-led lawsuit is creating a lot of uncertainty. In September, 21 states filed a legal challenge against the federal overtime rule. It's unclear how the case will turn out, so employers should proceed as though the regulations will take effect as scheduled on Dec. 1, according to Benyamini and Morris.

Under current rules, many midlevel and lower-level managers meet the California salary level for exempt status at $41,600 annually. As of December—assuming the new overtime rule takes effect—employees will have to make at least $47,476 annually to qualify for the exemption.

Therefore, businesses have some key decisions to make for workers making between $41,600 and $47,476. Do they give them a raise to keep them classified as exempt, or change their status from exempt to nonexempt if they believe a salary increase isn't feasible?

For corporate decision-makers, Morris said, the question is this: "Do we raise salaries, or do we reclassify?"

Some managers may welcome going from exempt to nonexempt status because they'll be eligible for overtime, Benyamini said.

On the other hand, those who are converted to nonexempt status will have to start punching a timecard, and this change could demoralize these employees, Morris observed.

Toni Vranjes is a freelance business writer in San Pedro, Calif.

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