Uncertainty Abounds as California Minimum Wage Continues to Rise
By Toni Vranjes
Oct 18, 2016 - SHRM
California's minimum wage has been on an upward trend,
and it will continue rising for years. That's scaring employers, which worry
about the far-reaching effects on their businesses.
Starting Jan. 1, 2017, the minimum wage that companies
with at least 26 employees must pay will increase from $10 to $10.50 an hour.
Afterward, it will rise a little every year, until it reaches $15 in 2022.
According to employment lawyers, businesses are
expressing concerns about fewer job opportunities, decreased hours and higher
prices. Another big worry is a federal regulation that will increase the minimum
salary requirement for workers to be exempt from overtime.
Law Aimed at Millions of Low-Wage Workers
The co-author of the legislation to increase the
minimum wage, Sen. Mark Leno (D-San Francisco), said it will help 2.2 million
minimum-wage workers while boosting the economy. A higher minimum wage also will
reduce turnover, increase productivity and stimulate consumer spending, he
said.
The law includes provisions that allow the governor to
suspend a scheduled wage increase if certain economic conditions exist. Under
one provision, the governor can pause it if statewide job creation for the
previous three or six months is negative and retail sales receipts for the
previous year are negative. Another provision gives the governor this ability
"if any year from the current budget year to two additional years is forecasted
to be in deficit when including the next scheduled increase," according to a
document from the state government.
Businesses Worry About Jobs, Hours, Prices
Although lawyers say it's too early to know the exact
impact of the minimum-wage increases, businesses have a lot of fears.
The retail and hospitality industries are especially
concerned about the increases because a large percentage of their workforce is
made up of minimum-wage and lower-skilled workers, according to Orange County,
Calif.-based attorney Sage Knauft of the firm Walsworth. Some worry that
lower-skilled college-age people will be priced out as businesses focus on
retaining better-skilled workers.
Jim Morris, an attorney at Rutan & Tucker in
Orange County, Calif., said the legislation will limit job opportunities.
"My impression is that it simply will narrow the
funnel for taking in entry-level people going forward," Morris said.
Knauft added that rising wages also could lead to
decreases in the hours given to each worker. The wage increases likely will also
accelerate the push toward automation, leading to fewer jobs, he said.
Another focus for businesses: prices. Many companies
feel they have no choice but to pass along the rising costs to customers, Morris
said. Although some employers believe that the price increases can't be
supported, others are raising prices. "Where they think they can pass along the
legislatively imposed wage increases, they will do so," he said.
Los Angeles-based attorney Pascal Benyamini with
Drinker Biddle & Reath said companies are evaluating their options in the
wake of wage hikes—and leaving California is one of those options. In fact, one
of his clients is already gone; the decision to leave was made partly because of
the wage increases and in part because of other regulatory issues.
And, Morris said, businesses worry about the possible
domino effect of the higher minimum wage. If an experienced employee now makes
$10.50 an hour, and an entry-level worker also will make $10.50 as of Jan. 1,
the employer might feel compelled to bump up the pay of the first employee to
ensure that there's some distinction between the pay of the workers. The
alternative would be to risk employee dissatisfaction, he noted.
Local Minimum-Wage Ordinances
Yet another concern is the varied minimum-wage
laws that many cities across the state have enacted. One example: San
Francisco's minimum wage is currently $13, and it will rise to $15 in July
2018.
Benyamini said it would be beneficial to have one
statewide standard for the minimum wage (along with paid sick leave).
These local laws are creating "confusion and
unnecessary burdens on employers in California," he said.
Economists' Views
Economists have widely varying opinions on the topic
of minimum-wage hikes.
Some say the increase will raise the incomes of the
working poor while also stimulating the economy. Earlier this year, more than
180 economists signed a letter
listing their reasons for supporting a $15 federal minimum wage by 2020.
Raising the minimum wage is crucial for low-income
families, they wrote. Ninety-four percent of workers who would be helped by an
increase are adults. And in response to critics, they state that research has
shown no significant effects on employment opportunities arising from reasonable
increases in the minimum wage.
Moreover, they assert, the increase will lead to
greater spending by these workers, which in turn will lead to higher demand.
"In short, raising the federal minimum to $15 an hour
by 2020 will be an effective means of improving living standards for low-wage
workers and their families and will help stabilize the economy," the letter
states. "The costs to other groups in society will be modest and readily
absorbed."
But opponents counter that the effects on hiring will
be brutal and that there are better ways to lift people out of poverty.
According to a 2015 survey
conducted by the University of New Hampshire Survey Center on behalf of the
Employment Policies Institute, the majority of 166 economists surveyed said they
believe that a $15 federal minimum wage will adversely affect both youth and
adult employment. The Employment Policies Institute is a research organization
dedicated to studying entry-level employment issues.
Sixty-seven percent of respondents believe the
increase would make it harder for employers with fewer than 50 employees to stay
in business.
Also, a majority stated that the Earned Income Tax
Credit is a better method of helping needy families.
Overtime Exemption Creates More Worries
Meanwhile, employers in California must also be
mindful of how the state's scheduled minimum-wage increases will affect the
salary threshold for overtime exemption.
For employees to be exempt from the overtime rule,
they must satisfy a two-part test, Benyamini noted. One part is the "salary
basis test," which is tied to the minimum wage.
"Every time the minimum wage goes up, it's going to
have an impact on the minimum threshold for the salary basis test," he said.
To meet this threshold under California law, employees
must make at least twice the minimum wage for full-time work. To calculate the
number, the minimum wage is multiplied by 2, then multiplied by 2,080 hours.
But a federal rule set to take effect in December is
complicating matters. The rule will raise the minimum salary requirement for
exempt status. Compared to California, the federal government will have higher
minimum salary requirements for exempt status for 2017 and 2018. For those
years, employers will need to follow the federal rules.
In 2017, the state's minimum salary requirement for
exempt status will be $43,680, compared to $47,476 under the federal
regulation.
To make matters even more complicated, a Texas-led lawsuit
is creating a lot of uncertainty. In September, 21 states filed a legal
challenge against the federal overtime rule. It's unclear how the case will turn
out, so employers should proceed as though the regulations will take effect as
scheduled on Dec. 1, according to Benyamini and Morris.
Under current rules, many midlevel and lower-level
managers meet the California salary level for exempt status at $41,600 annually.
As of December—assuming the new overtime rule takes effect—employees will have
to make at least $47,476 annually to qualify for the exemption.
Therefore, businesses have some key decisions to make
for workers making between $41,600 and $47,476. Do they give them a raise to
keep them classified as exempt, or change their status from exempt to nonexempt
if they believe a salary increase isn't feasible?
For corporate decision-makers, Morris said, the
question is this: "Do we raise salaries, or do we reclassify?"
Some managers may welcome going from exempt to
nonexempt status because they'll be eligible for overtime, Benyamini said.
On the other hand, those who are converted to
nonexempt status will have to start punching a timecard, and this
change could demoralize these employees, Morris observed.