Minimum Wage 2016: The State of Pay
As you gear up for the coming holiday season, you may also be worrying about the 2016 minimum wage increases—and the next six years of incremental hikes, depending on your location. “Minimum wage” sounds like it ought to be a relatively simple thing, but not only is it legally different from one state to the next, it’s sometimes different from one city to another. And, as if the economic and geographical considerations weren’t enough to think about, the concept itself is prickly, full of thorny political and ethical questions.
Nonetheless, minimum wage increases are happening across the country in thirteen states, Washington, D.C., and any number of cities, which will be or already have raised their minimum wage. So, it’s important to understand what those raises will look like for you, and what they’ll mean for your business.
When the minimum wage goes up, it changes the playing field for both employers and job seekers. For example, if you already pay more than minimum wage, do you raise your employees’ pay to stay competitive among job seekers, or leave the pay where it is, to keep your prices competitive for consumers?
Answers to these questions will be local, and for close-knit small businesses, personal. Since we’re betting you didn’t become an entrepreneur because you love reading jargon-y economic papers laden with statistical tables, we’ve put together a short primer on understanding the minimum wage, including some resources to help your business adjust to increased minimum wages.
The federal minimum wage, which has been $7.25 an hour since 2009, is set by the Fair Labor Standards Act (FLSA).
Since every state and some cities have their own minimum wage (or use the federal minimum wage by default), there’s no one formula by which all minimum wages are calculated. However, the federal minimum wage is benchmarked to the Federal Poverty Level.
The fundamental purpose of the minimum wage was to establish a baseline for a livable wage that would allow an individual to support a family. Thus, it makes sense to use what the federal government calculates an individual or family needs earn in order to cover basics like rent, food, and utility payments. The following are the 2016 Federal Poverty Level numbers:
- $11,880 for individuals
- $16,020 for a family of 2
- $20,160 for a family of 3
- $24,300 for a family of 4
- $28,440 for a family of 5
- $32,580 for a family of 6
Employees who work 2,080 hours in a year (that’s 40 hours/week for 52 weeks) at the federal minimum wage of $7.25, earn about $14,790 per year. If you live in NYC, Seattle, San Francisco, or Portland, for that matter, where an average studio apartment can run from $700 to $2,000 and up …well, $7.25 an hour may not add up to rent, food, and utility bills.
The FLSA guidelines are generally taken into account by state and local governments as they try to establish a minimum wage. Another factor frequently used in determining a minimum wage, and one that allows governments to take their local economy into consideration, is comparing nominal income to real income. Nominal income is the actual number of dollars you receive; real income is how your dollars actually spend. For example, a 1938 nominal salary of $510/year would translate to about $8,000/year in 2016 real income.
In real income, the highest the U.S. minimum wage ever occurred way back in 1968 when the federal nominal wage was $1.60 per hour—which would be $10.34 per hour in 2016. Since 1968, however, that real income has dropped almost every year until 2009, when it stabilized at about $7.25/hour in both real and nominal income—and $7.25 has been the nominal rate since. After adjusting for inflation, the current minimum wage has lost approximately 8.1 percent of its purchasing power. Clearly, a decrease in spending power from $10.34 to $7.25 is a huge pay cut.
Another way of thinking about the gap between nominal and real income is covered in a recent Marketplace piece. It notes that, according to the Economic Policy Institute (EPI), if “the minimum wage followed average wage growth—which, as we know, hasn’t been stellar—it’d be around $11.35.” And if the federal minimum had kept pace with American worker productivity, the minimum wage would be “just under $19 now.” The Pew Research chart above offers a useful visual comparison.
Who Pays the Minimum Wage?
Non-exempt businesses are required to pay the federal or local minimum wage, if there is one, whichever is higher. Exemption can depend on whether or not you do business with local government, employ tipped workers, and/or how many employees you have. Generally speaking, the federal minimum wage applies to businesses that do $500,000 or more in annual sales or engage in interstate commerce. Be warned: the definition of interstate commerce is more capacious than you might expect; it covers everything from handling goods that cross state lines to making out-of-state phone calls.
Certain kinds of employees are exempt from the FLSA, including
- independent contractors
- outside sales people
- workers on small farms
- seasonal amusement or recreational workers
- paper delivery
- apprentices, students, and learners, as defined by law
If you are paying the minimum wage, you have the option of paying via salary, commissions, wages and tips, or a piece rate, as long as the payment amounts to the minimum wage for hours worked per week.
Currently, depending on where your business is located, you may get a “tip credit” if you employ tipped workers—that is, you can pay employees who earn tips a “subminimum” wage as long as their pay plus tips adds up to at least the minimum wage per hour worked.
In New York, for example, the subminimum wage for tipped workers is $7.50 versus the minimum of $9.00. In California, Washington, and Oregon, however, the minimum wage is the same for tipped and regular employees (currently $10, $9.47, and $9.75, respectively). Eliminating the subminimum wage for tipped workers may be the next legislative wave—New York is currently investigating wages in the fast food industry.
Part of the challenge of a federal minimum wage law that tries to sets a national standard is the reality that not all states—not even all cities of the same size—have the same cost of living. According to RentJungle.com, as of August 2016, the average rent for a one-bedroom in San Francisco is $3,367, in New York City, it’s $2,834, in Seattle, $1,980, and in Portland, the average rent on a bedroom apartment is a mere $1,521. Clearly, where you live determines to a significant extent how much your nominal dollar is actually worth (its “real” value).
What to expect
Obviously, what to expect varies quite a bit, depending on your location. In California, Washington, Oregon, and New York, for example, both the laws themselves and the increases in wage are graduated and triggered by date. This means that a state’s (or city’s) minimum wage might increase to, say, $10 in 2016, $11 in 2017, $12 in 2018, $14 in 2020.
In these states, increases thereafter will be tied to the Consumer Price Index of the US Bureau of Labor Statistics, which is, in effect, a cost-of-living increase. (Some states already have wage indexing.)
Some fear it will lead to economic disaster, while others are confident it will lead to economic boon. A Public Affairs Council survey quoted by Small Business Majority found that 68 percent of shoppers prefer local small businesses, and they extrapolate that a raise in the minimum wage “will increase consumer demand at local businesses” and “boost small business profit margins.”
The Economic Policy Institute’s Wage Tracker is a very user-friendly way to keep up on minimum wage laws at the state and local level.
Nolo is a fantastic legal resource for small businesses and individuals. Their Employer’s Legal Handbook was updated in May 2015 and has a chapter on wages and hours. Nolo.com has lots of free and user-friendly resources.
The US Department of Labor’s Wage and Hour Division has two Compliance Assistance sites, one specifically for new and small businesses:
- Compliance Assistance – Laws of the Wage and Hour Division
- Compliance Assistance for New and Small Business
And be sure to check out Gene Marks’ “5 Actions to Take Right Now to Survive a Minimum Wage Increase” in Entrepreneur.