In his January State of the Union address, President Obama announced that he was issuing an executive order to raise the minimum wage to $10.10 per hour for employees who work under new federal service contracts. At the same time, he called on Congress to raise the federal minimum wage for all workers from $7.25 to $10.10 an hour.
And then lots of small business owners' alarms started going off.
Raising the minimum wage will increase workers' earnings—a good thing—but it also will increase employers' labor costs. Some pundits have warned that any bump in minimum wage levels will lead to job losses because employers, especially small business owners, will have to reduce staff to manage the higher costs.
While no company likes to see its cost of business go up, owners should not assume the worst. Rather, those pursuing federal contracts should plan now to manage the change, which affects contracts implemented after Jan. 1, 2015. Existing contracts are not affected, though long-term contract holders could face some pressure to come into compliance.
The president's executive order is a clear effort to nudge Congress toward an across-the-board minimum wage increase. Congress has not escalated the minimum wage since 2007, and that legislation phased in the increase over three years. As a result, minimum wage has remained at $7.25 an hour since 2009, while the cost of living has continued to climb.
What an Increase Might Look Like
Small business owners can count on a nationwide minimum wage increase in the not-too-distant future, but it's too early to say when that decision might be made. Legislation now before Congress—the Fair Minimum Wage Act of 2013—proposes to increase the minimum wage to $8.20 an hour three months after enactment; $9.15 an hour after one year; and $10.10 an hour after two years. It subsequently would go up by an amount determined by the Secretary of Labor (based on increases in the Consumer Price Index) after three years, and annually thereafter. Whatever steps are taken at the federal level likely will have a direct impact on Kansas and Missouri, which traditionally have set the state minimum wage at the same rate as the federal minimum wage.
There are lots of numbers and opinions being thrown around in regard to this issue. The Congressional Budget Office, for example, has said that raising the minimum wage under the Fair Minimum Wage Act would lift the incomes of 16.5 million people while eliminating 500,000 jobs. That's been a key argument against the minimum wage increase for those who think the tradeoff isn't worth it.
But we also must consider the alternative arguments. If the CBO's numbers are accurate—and they may not be—the jobs lost may not be jobs that provide a living wage. Hence, the predicted number of lost jobs could be deceiving if the positions that go away don't represent jobs that can put food on the table and pay rent in the first place.
Employees who make more money have more discretionary income and likely will do more spending. If that's the result, private-sector businesses may find their revenues expanding as the minimum wage goes up.
Don't Make Assumptions
It's understandable that small business owners are anxious about a higher minimum wage. However, many small businesses already pay their employees more than minimum wage, so whatever increase occurs probably won't have as dramatic an effect as anticipated.
Bottom line for employers: Don't assume that a minimum wage increase will harm your business or force you to cut your work force. Instead, plan ahead. You may be able to adjust your ledger by increasing productivity and revenue, reducing benefits or developing new revenue metrics or cost-saving measures.
In the unfortunate event that you do decide a reduction in force is necessary, coordinating with your legal counsel well in advance will ensure you are complying with all applicable laws and minimizing your risk of litigation from those who suddenly find themselves out of work.
We can't predict whether the Fair Minimum Wage Act will pass this year, but a minimum wage increase is coming eventually. Employers who plan now to deal with an increase will be in the best position to adapt when the next rate hike takes effect.
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