Minimum wage and salary increases — a ripple effect or a tsunami?
By Jon Light
You may have heard that California will have a minimum wage of $15 by 2022. But there are ramifications beyond that gradual increase that employers may not have considered.
In April, Gov. Jerry Brown signed into law a minimum wage increase to $15 per hour, phased in over five years between 2017 and 2022 (generally a dollar a year after two initial 50 cent increases). Employers with under 26 employees begin the increases in 2018. The city of Los Angeles and Los Angeles County (unincorporated areas) accelerated the pace to create a $15 minimum wage by 2020 (slightly longer, by a year, for employers with under 26 employees). That increase already began on July 1, 2016, when the minimum increased to $10.50.
This is likely to drive out lower wage manufacturing industries like meatpacking. I have clients in that industry who are moving to Texas, where the federal minimum wage is still only $7.25, the same number since 2009. Most states just follow the federal minimum and employers there don’t have to deal with a dual calculation system as in California.
The new minimum wage increases are manageable in many industries. Employers may be able to pass on the added cost to their end-user customers (think fast food with a captive audience). But others, who are subject to international competition, can’t compete. One of my clients, who manufactures a well-known sports product, told me a few years ago that his labor costs, all in, were about $14 in Van Nuys, $4 in Mexico, and 79 cents in China.
It was obvious that the U.S. operations were not viable and would be shut down. That’s the strategy of several clients whose products suffer from international competition, can be manufactured anywhere, and may be also be subject to California’s onerous regulations.
The $15 per hour will almost certainly push additional industries out of the state. It will also create upward pressure (another ripple) on the next tier of workers who already earn above the new minimum. Employers should start now to budget their costs for the increases. Those workers will be pushing for higher wages as their current wage becomes the new minimum. Also, overtime on $15 becomes $22.50, versus the current $15 overtime rate on the $10 minimum wage. Employers must minimize overtime or absorb the increase. Another ripple.
One more significant event of note: On Dec. 1, 2016, the federal government is instituting its new minimum salary for managers and other employees to remain exempt from overtime and meal and rest break penalties. The current federal minimum salary threshold is $23,660 ($455 per week). That number is irrelevant in California because of our higher threshold based on the formula of two times minimum wage. At the current $10 minimum, that works out to $41,600 per year as the operative minimum.
When the new federal rate goes into effect, the operative minimum will be $47,476 (based on a weekly minimum salary of $913). As the California minimum wage rises, so will the required salary minimum. By the time we reach $15 in 2022, the minimum threshold to be a salaried exempt employee will be a whopping $62,400, meaning the federal level will once again no longer apply (although small increases are built into the federal rules).
Employers will need to start planning for either salary increases or conversion to hourly non-exempt status for several mid-tier salaried employees. This may be a good time to make those transitions for workers who may not qualify for the exemption because they don’t spend more than 50 percent of their time doing exempt tasks (think of Starbucks Coffee store managers who settled for $14 million worth of overtime and penalties in California because they didn’t qualify for the exemption).
Higher wages, higher labor burden, higher costs, higher prices to customers, lost employment and businesses in California.
And the separate increase in the exempt salary minimum just adds to an employer’s misery. More of a tsunami than a ripple, certainly.
• Jonathan Fraser Light is an employment and labor law attorney at LightGabler in Camarillo.