Surviving a Minimum Wage Hike

The federal minimum wage has not seen an increase for over ten years. Since 2009, it has remained stagnant at $7.25 an hour. However, President Biden is proposing to finally raise the federal minimum wage to $15 an hour. How will rising wages impact your business, and what can you do to ensure your business will remain competitive while complying with the law?

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Understanding the Wage Increase

The Raise the Wage Act of 2021 would gradually increase the federal minimum wage to $15 an hour over a span of four years. The first increase to $9.50 an hour would occur the day President Biden signs the bill into law.

The Fair Labor Standards Act

The federal minimum wage was established under the Fair Labor Standards Act (FLSA). It was created to ensure that people of all skill-levels could earn a decent quality of life. However, the minimum wage was not set to increase automatically to adjust for inflation, instead, the FLSA requires a law to increase it. Over the years, lawmakers have failed to come to an agreement regarding a change in the minimum wage, this has caused the value of the current wage to plummet due to inflation. This means that lawmakers have a lot of compensating to do and will have to enact bolder changes.

Bold Changes: The Raise the Wage Act

The Raise the Wage Act would amend the FLSA to:

• Increase the minimum wage annually until it reached $15 per hour in 2025,

• Require automatic increases by indexing the minimum wage to annual changes in the median hourly wage for all workers beginning in 2026,

• Phase out and repeal the tipped minimum wage,

• Phase out and repeal the youth minimum wage, and

• Phase out and repeal the minimum wage for individuals with disabilities.

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Your Business: Remaining Compliant

Applying the FLSA

The FLSA, applies to the employees of:

• Employers whose annual sales total $500,000 or more; or

• Employers who engaged in interstate commerce.

This list allows the FLSA to govern virtually every workplace. This is possible due to the courts' interpretation of the second bullet point. Courts have interpreted the term "interstate commerce" very broadly and regularly use it as a catch-all bucket. In cases of employers challenging the applicability of the FLSA, courts have ruled that companies that use the U.S. mail to send or receive letters from other states, or that use company telephones for interstate communications are "engaged in interstate commerce," and thus subject to the FLSA.

However, the FLSA does provide exemptions from the minimum wage that apply to specific workers including farmworkers employed on small farms, employees of seasonal and recreational establishments, and salary-based employees.

Be sure to examine whether your business would be subject to the minimum wage law. Employers who violate the minimum wage laws may be liable for a civil penalty of up to $1,000 for each violation. Additionally, a violation may be grounds for employees to file lawsuits which would result in unnecessary and perhaps substantial legal fees.

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How to Absorb the Increased Costs of the Minimum Wage Hike

With proper planning, a hike in the minimum wage does not have to be a recipe for disaster. The greatest asset a business can have is its employees, and no one understands the value of investing in important business assets like entrepreneurs. Entrepreneurs should view employee wages as key investments - especially when employee turnover costs are high. Well-paid employees are typically more motivated, productive, and less likely to leave.

However, in order for businesses to enjoy the rise in employee quality that is associated with increased wages, they must first plan to absorb the new wage costs. Consider the following suggestions to absorb and prevent increased costs in your business:

• Reduce expenses: Cutting expenses is always a sure way to increase your net income. Begin your quest for cost-savings by re-examining every part of your business. Consider things like cost of materials, energy consumption, and office space costs (leases and rent). If you are in the start-up phase decide whether it is important for you to organize your business in a state other than where it will be physically located. Out-of-state organization may mean additional costs to hire a registered agent in the state and/or annual fees, regardless if you are conducting business in the state or not.

• Structure your business properly: If you are just starting your business it is important to structure it properly. The structure you choose can affect business costs related to taxation and paperwork. Sole proprietorships, LLCs, partnerships, and S-Corporations enjoy pass through taxation. Pass through taxation allows the income of the business to be passed directly to the owners' personal income, meaning - your business will not have to pay taxes. To establish a sole proprietorship you do not need file any state forms. However, limited partnerships, LLCs, and corporations require formal filing to establish. It is important to seek advice from a lawyer when filing state forms and creating internal documents for these entities. It will ensure that you are complying with jurisdictional requirements and that your interests in the business are being met. Be sure to weigh the pros and cons of each to decide where you can cut costs.

• Reduce liability and risk: If you are in the advanced stages of developing your business you have probably already chosen an entity, but have you invested in business insurance? Most entrepreneurs consider themselves risk-takers but taking too many risks can be costly. Business insurance can protect you from the unexpected costs of running your business. Depending on the insurance, you may be covered for accidents, natural disasters, property damage, and lawsuits. This is something that you should invest in now to prevent paying out-of-pocket in the future. In some instances, you may be legally required to purchase insurance. The federal government requires every business with employees to have workers’ compensation, unemployment, and disability insurance. State requirements vary, so visit your state’s website to find out the requirements for your business.

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Sources:

“Questions and Answers About the Minimum Wage.” U.S. Department of Labor Seal, www.dol.gov/agencies/whd/minimum-wage/faq.

“Raising the Federal Minimum Wage to $15 by 2024 Would Lift Pay for Nearly 40 Million Workers.” Economic Policy Institute, www.epi.org/publication/raising-the-federal-minimum-wage-to-15-by-2024-would-lift-pay-for-nearly-40-million-workers/.

U.S. Department of Labor Seal, https://webapps.dol.gov/elaws/whd/flsa/screen75.asp?_ga=2.116285638.1348723179.1612833001-1559010650.1611959116

Prince, Samantha. Entrepreneurship Law: Company Creation, psu.pb.unizin.org/expsk909/.

“Federal Labor Laws.” Www.nolo.com, www.nolo.com/legal-encyclopedia/free-books/employee-rights-book/chapter15-2.html.

“Labor Day 2019: Low-Wage Workers Are Suffering from a Decline in the Real Value of the Federal Minimum Wage.” Economic Policy Institute, www.epi.org/publication/labor-day-2019-minimum-wage/.

Photo Sources:

https://www.offitkurman.com/blog/2019/07/05/employers-know-your-flsa-basics/

https://www.eyeonannapolis.net/2021/01/tomorrows-minumum-wage-increase-presents-a-double-edged-sword-for-businesses-and-employees-2/