Monday, July 14, 2014

Impact of Minimum Wage Changes on Small Businesses

image This article was written by Robin Noah, SCORE Orange County Business Mentor

Just about every state is going through a minimum salary change. Take a trip through the internet regarding minimum wage increases and your eyes will be opened.

In California most employers are aware that California’s minimum wage for non-exempt employees will increase from $8 per hour to $9 per hour on July 1, 2014, and to $10 per hour on January 1, 2016.   These upcoming minimum wage increases are significant because they also impact the minimum salary for exempt status employees, and commissioned inside sales employees.

Exempt Class: To be classified as an exempt employee the employee is required to meet certain requirements with regard to the type of work they are doing - they also must meet a minimum salary test.  Additionally California law requires that an exempt classified employee must earn a monthly salary that is twice the state minimum for a full time employee (40 hours per week).  

The current minimum salary for a full time, exempt employee is $33,280 per year.  This will increase on July 1, 2014 to a minimum exempt salary of $37,440 per year.  By 2016, employees will need to earn at least $41,600 per year to meet the minimum salary test for exempt status.

Inside sales: State minimum wage also impacts the pay of commissioned inside sales employees.  Under California law, an inside salesperson will be exempt from overtime pay if they earn more than 1.5 times the state minimum wage  and more than half their income comes from commission.  This means that in order to be exempt from overtime pay after July 1, 2014 an inside sales person must earn at least $13.51 per hour, and starting on January 1, 2016 an inside sales person must earn at least $15.01 per hour.

Consider that in many businesses, starting pay will rise to levels higher than minimum wage. Fast-food employers in metropolitan areas often do not start employees at minimum wage.

Frequently these employers offer starting wages between $.50 and $2 above minimum wage to attract better-qualified employees. Raising the minimum wage may mean that employers interested in such business practices will need to pay between $10.50 and $12 per hour to new employees.

As you can see exempt employee salary increases, compliance costs, seniority costs and competition costs create hidden costs that significantly affect a large portion of many industries including the restaurant industry in Los Angeles which is looking for a minimum wage of $15.00 an hour.

Since there has been increase in class action litigation on the issue of whether employers are properly calculating the “regular rate” for minimum wage and overtime purposes, employers should conduct internal audits of their companies’ payroll and wage payment policies and practices.

Keep in mind that in California, unlike Federal law, the minimum wage rate must be separately paid for "each hour worked" rather than as the average of the compensation for all hours worked in a week.  As a result, "piece rate" or performance-based compensation systems must ensure that each category of employee work time is generating sufficient compensation to comply with the new standards. So even if the employee works less than 40 hours a week they are entailed to overtime for any day worked more than 8 hours unless there are labor or government contracts in place.

Smart employers will audit their pay practices to ensure that they are compliant with all State and Federal wage and hour laws. Minimum steps to take are: a) an audit of pay practices, b) the restructuring of pay agreements, c) updated job descriptions, d) updated policy and employee handbooks.

The issue of minimum wages is not going away and there is little room for variances, if any. Take time to learn how the law will impact your specific industry. If you are concerned about your payment practices see an attorney that specializes in human resources law.

(This article is generic in intent and not to be considered as legal advice)