Whether mandated by legislation or as a result of market pressure, minimum wage increases are a reality that many businesses must contend with to remain legally compliant and competitive. While the federal minimum wage has gone unchanged since reaching $7.25 in 2009, state, city and county minimum wages increase more frequently, with 22 states effecting minimum wage increases in 2024.
With the presidential election on the horizon, the stagnant federal minimum wage has once again been brought to the minds of minimum wage workers and businesses alike, with revivals of movements such as “The Fight for $15” and “The Raise the Wage Act” interspersed among presidential candidates’ promises. While it is unknown if federal campaign promises will come to fruition, businesses must be proactive and strategic in navigating minimum wage increases to ensure compliance while remaining profitable.
The History of Federal Minimum Wage
The federal minimum wage was established by enacting the Fair Labor Standards Act (FLSA) in 1938, which effectuated a mandatory minimum wage of $0.25 per hour (in today’s money that equates to around $5.19). The FLSA was established during the Franklin D. Roosevelt administration in response to the socioeconomic upheaval of the Great Depression, when unemployment rates peaked with 12,830,000 people, or nearly one-fourth of the nation’s workforce, unemployed.
The hourly wage provision of the FLSA has been amended 22 times over the years to the current minimum wage of $7.25. As of 2022, approximately 141,000 workers earned the prevailing federal minimum wage of $7.25 per hour.
Understanding the Legal Landscape
The FLSA addresses four main facets of employment:
- minimum wage
- overtime pay
- recordkeeping
- child labor standards
While not applicable to every employee, the FLSA’s coverage umbrella encapsulates most workers. The FLSA applies to employees of enterprises with an annual gross volume of sales or business of at least $500,000, as well as employees engaged in interstate commerce or in the production of goods for commerce. Other persons, such as guards, janitors, and maintenance employees who perform duties that are closely related and directly essential to such interstate activities, are also covered by the FLSA and employees of federal, state or local government agencies, hospitals, schools, and domestic workers.
To prepare for increases in the mandatory minimum wage at the federal, state, city and county levels, it is imperative that businesses understand the current applicable minimum wage laws. While the FLSA establishes a floor for the minimum wage rate, states, cities and counties may enact more stringent qualifications or increased minimum wage rates, thereby surpassing this floor. While the prospect of raising the federal minimum wage may seem daunting to some businesses, 30 states and the District of Columbia have already established a state-level minimum wage floor exceeding the rate set by the federal government. As a result of such disparity among states, cities and counties, all businesses should determine how to bring their business into compliance with current FLSA and state regulations if they have not done so already.
Assess the Financial Implications
In addition to ensuring compliance with the current legal requirements, perhaps most on the forefront of employers’ minds is dealing with the financial impact of increased wages. Businesses should evaluate how many employees will be impacted by an increase in minimum wage and understand how this will affect the business overall. Businesses can review their budgets and financial flexibility to strategize how to account for increased wages while remaining profitable.
For many businesses that attract workers through offering wages already above the minimum wage, this may require a continual increasing of wages to remain above any mandated increase in minimum wage.
Conduct a Self-Audit to Determine Resource Allocation
Increasing wages may necessitate altering the business’s current resource allocations. Businesses should conduct a self-audit to evaluate less profitable areas of the business that can withstand diminished funding in order to reallocate financial resources toward increased wages.
However, diminished funding does not equate to layoffs. Rather, studies suggest that increasing the minimum wage will benefit small businesses and that, when faced with minimum wage increases, small businesses do not appear to cut jobs in response. The Institute for Research on Labor and Employment at the University of California Berkeley (IRLE) suggests that small businesses may, in fact, benefit from an increase in minimum wage. The IRLE research provides that a higher wage makes it “easier to recruit workers and retain them. Turnover rates go down,” and workers are likely to be “a little more productive, as well.” This increased productivity can result in increased profitability and lower costs and efforts expended on rehiring.
Consider Price Adjustments
Businesses should evaluate their current pricing strategy to determine if increases are necessary to remain profitable in the wake of increased wages. However, businesses should take care when increasing prices, if necessary, to offset increased wages. Unnecessary or significant price increases may result in decreased affordability for consumers.
Additionally, increasing prices to compensate for an increase in wages, though potentially imperative for a business’s survival, is generally disfavored by economists. Often referred to as wage-price spiral, this inflationary occurrence is believed to cause wages and prices to rise in perpetuity in an effort to outpace each other, creating an ever-increasing inflationary spiral.
Should a business choose to increase prices to account for increased wages, it should be carefully considered whether an increase in price is best effectuated through gradual price increases, a one-time increase, or some variation.
Retain Outside Help
In a time of economic unpredictability, businesses may feel it is impossible to stay afloat while implementing changing legislation, increasing wages, combating inflation, and dealing with supply-chain challenges. If overcoming such economic adversity proves difficult, businesses should not hesitate to seek outside help. Retaining an employment attorney to discuss implementing evolving legal requirements and/or appointing a business consultant to review company operations and implement more efficient policies and protocol can have significant benefits. The initial expense of retaining outside help may be offset by savings found in more efficient business operations and can help businesses avoid incurring penalties for inadvertent legal violations. With proper planning and support, businesses can implement increased wages while maintaining a successful and competitive business structure.
