A Small Business Guide for Dealing With Minimum Wage Changes

FT Contributor
A graphic of a placard that reads "minimum wage," with a gavel behind it.
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For the last decade, the federal minimum wage has been $7.25. Many employers continue to offer this minimum because it is mandated by law, growing complacent in their ways. But by doing so, they’re underprepared for what the future may bring: federal or state increases in the minimum wage.

A change in the minimum wage has been a long time coming. New legislative efforts like the Raise the Wage Act of 2019 may increase the national minimum wage average to $15 an hour. This more than doubles the current rate, but it won’t happen overnight. The Raise the Wage Act seeks to change the minimum wage over time, having it increase to $15 by the end of 2025.

If you own a small business and still offer your employees only $7.25 per hour, it’s time to start considering the future. Here, we’ll help you adapt to the eventual change in the minimum wage.

The Basics of the Minimum Wage for Employers 

The Fair Labor Standards Act (FLSA) declares what the national minimum wage is. While each state may have a different minimum wage, the minimum wage provisions in the Fair Labor Standards Act determine the absolute lowest value a company can pay a minimum wage employee in the United States.

As an employer, you must comply with the federal laws that protect employees as well as those set forth by the state you operate your business in. There are a few exceptions to these minimum wage basics.

For example, if you hire someone under the age of 20, they may be paid no less than $4.25 an hour during their first 90 days of employment. Similarly, you are only required to pay tipped employees who earn more than $30.00 in tips per month $2.13 an hour. Overtime employees are another exception —  you’re required to pay them time and a half if they work more than 40 hours in any given week.

Understanding Federal and State Minimum Wages

Each state has its own minimum wage requirements. If you operate a business in a location where the state minimum wage is less than the federal minimum wage, your employees are generally entitled to the federal rate. This could make the changes in minimum wage easier or more difficult for you when the time comes, depending on your location.

The opposite is also true, though. If the state minimum wage is more than the federal minimum, your eligible employees are entitled to the state rate.

Raise the Wage Act of 2019

As mentioned above, the Raise the Wage Act of 2019 could have serious consequences for you as an employer. Below is the timetable that details the scheduled increase in wages you would expect to follow through 2025 to comply with this proposed act.

Year Minimum Wage Tipped Wage Youth Wage 14(c)
Current $7.25 $2.13 $4.25 Subminimum wage
2019 $8.40 $3.60 $5.50 Subminimum wage
2020 $9.50 $5.10 $6.75 $4.25
2021 $10.60 $6.60 $8.00 $6.40
2022 $11.70 $8.10 $9.25 $8.55
2023 $12.80 $9.60 $10.50 $10.70
2024 $13.90 $11.10 $11.75 $12.85
2025 $15.00 $12.60 $13.00 $15.00
2026 Index to Median Wages $14.10 $14.25 Index to Median Wages
2027   Index to Median Wages Index to Median Wages  

This act decreases the gap between tipped and non-tipped workers, helping to boost the economy and give workers of all abilities the opportunity to remove themselves from poverty.

How Should Employers Adapt to a Rising Minimum Wage?

As the owner of a small business, there are several pain points that the potential rise in minimum wage could cause, including:

  • Higher competition: As a small business, you already operate in a highly competitive environment. To keep up with what other small businesses are offering and attract the best talent, you would need to offer a rate that is greater than the new minimum wage.
  • Narrower margins: Having to pay your employees more means you’re not passing the savings on to your consumer anymore.  
  • Cutbacks: An increase in minimum wage could mean you’d have to cut a few employees in order to be able to afford the very best. Even you as a business owner are at risk of earning less with an increase in minimum wages.

To address these concerns, consider these adaptations to your business:

  1. Assess your current costs. Are there business expenses you can cut? Can you make smarter choices with your investments? Make cutbacks where you can on extraneous or inefficient spending to prevent from having to cut employees.
  2. Up the ante. Are you generating as much profit as you can? Are there other revenue streams you can explore as a small business? Consider new ways of turning a profit before making cuts to employees or increasing the price of your offerings.
  3. Charge more for your product or service. Remember that, as the costs for your services increase, so too should your prices.
  4. Cut operating hours back. If there are lulls in your daily operation, it may make more sense to shut down early, start later, or close during the middle of the day, depending on your industry. Reducing your operating hours may help cut back on the costs of running your business and ultimately allow you to be more profitable.
  5. Let employees go. No employer wants to do this, but in some cases letting employees go is the only way to prevent your business from going under. In some cases, you may be able to bring these employees back if your situation improves. Note that when letting people go you could see an increase in workload, which would affect your other employees as well as yourself.

Determine the Impact on Your Personnel Budget

Every small business operates in its own unique way. As such, it’s important to calculate the impact of a change in minimum wage based on your company’s budget. To calculate the financial impact a minimum wage raise will have on your business, consider how a change in employee pay — a fixed expense in your small business budget — will impact your overall expenses.

Don’t forget to include allowances for Social Security, unemployment tax, and Medicare when determining your personnel budget. These factors may vary depending on where your business is located and how you operate.

Create a Strategy for Mitigating Costs

If you’ve created your budget and notice that your profit margins and operating capital don’t allow for an increase in minimum wage offerings, you’ll need to change the way your small business operates. Many small businesses have to make a shift, increasing the price point of their products or services in order to compete with the increased price of their employees.

There are a number of other ways you can mitigate the increased costs of your workforce:

  1. Increase prices: Your prices should reflect the quality of the product or service you offer. If you need to change what you charge because of an increase in the minimum wage, use your marketing efforts to make consumers aware of the high-quality product or service they’re receiving so that they feel good about buying from you.
  2. New suppliers: Look into working with new suppliers, especially if there are others who offer the equipment or inventory you need at a lesser price. Note that you shouldn’t sacrifice quality when it comes to finding a better price, as this could negatively impact your sales.
  3. Technology: In some cases, your small business may benefit from technology that allows certain processes to be automated. For example, if you have someone working full-time to handle billing, implement an invoicing software that can automate this process at a lesser cost.
  4. Outsourcing: As with outsourcing your suppliers, you can outsource contractors, too. Contractors require less commitment from you, and you may be able to pay less for their services.

When Will the Minimum Wage Change?  

Now that you’re prepared for the scope of the changes you’ll need to make to your small business, you can feel ready for the minimum wage change whenever it occurs in your state. At the start of 2019, 18 states increased their minimum wage, with other states following in their footsteps throughout the year. More than 20 states will see updated minimum wage rates in 2020.

Keep Apprised of Minimum Wage Changes

To ensure you’re aware of the latest changes in the minimum wage, follow the goings-on of the federal government, but also pay close attention to your state legislature. Right now, the subject of a minimum wage increase is a hot political issue, so changes could come suddenly at the state or federal level. It’s up to business owners to be aware of what changes might be coming and develop a plan to handle them.

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