Minimum Wage Increase, Part 2 - San Diego Minimum Wage Increase Will Crush Small Businesses

Prior Blog Recap

In a recent blog post I discussed the recent change in the minimum wage rate increase in California. I outlined the history of minimum wage as well as some of the absolutely real effects that it will have on businesses both large and small. I also brought up the point that even those businesses who do not hire any minimum wage workers will be effected and that their labor cost will also increase. In this blog post we will take two case studies and put into dollar amounts the actual detriment of these drastic wage increases for businesses. Study A will be on a small business that employs ZERO minimum wage workers. Case Study B will focus on a large corporation that was minimum wage workers as well as many other pay scales. Both of these businesses reside in San Diego, California for purposes of calculating the labor wage.

Definitions 

Work year - 5 U.S.C. 5504(b) mandates that for purposes of computing hourly rates for salary purposes, a work-year contains 2087 hours.

Bi-weekly - A pay period that consists of a cumulative 14-day period. There are 26 bi-weekly pay periods in a year.

Bi-monthly - A pay period that occurs twice a month.There are 24 bi-monthly pay periods in a year.

Monthly - A pay period that occurs once a month. There are 12 monthly pay periods in a year.

Full-time - 40 hours per work week.

Part-time - Traditionally anything less than 40 hours per week and then defined my the business itself. After the Patient Protection and Affordable Care Act that is now set by federal law to 30 hours per week.

Federal Insurance Contributions Act (FICA) - Detailed Definition.

Social Security Tax (Part of FICA) - Detailed Definition.

Medicare Tax (Part of FICA) - Detailed Definition.

Federal Unemployment Tax Act (F.U.T.A.) - Detailed Definition.

State Unemployment Insurance (S.U.I.) - Detailed Definition.

Workers Compensation Insurance (W.C.) - Detailed Definition.

Case Study A - A small business that has zero minimum wage workers employed

Small Professional Services Firm - Current pay structure as of Jan 1st, 2014, 

Legal Minimum Wage is $8.00/hour

Legal Minimum Salary Wage equates to $16.00/hour

Total Number of Employees 10

 2 - Hourly Based Office Clerks: 

 2 - Salary Based Accounting Clerks

 5 - Salary Based Professionals who provide the service

 1 - Salary Office Manager

Small Professional Services Firm - Current pay structure as of Jan 1st, 2017

Legal Minimum Wage is $11.50/hour

Legal Minimum Salary Wage equates to $23.00/hour

Total Number of Employees 10

 2 - Hourly Based Office Clerks

 2 - Salary Based Accounting Clerks

 5 - Salary Based Professionals who provide the service

 1 - Salary Office Manager

Manufacturing Business - Current pay structure as of Jan 1st, 2014

Legal Minimum Wage is $8.00/hour

Legal Minimum Salary Wage equates to $16.00/hour

Total Number of Employees 65

 45 - Hourly Based Assemblers

 2 - Hourly Based Office Assistants

 1 - Salary Based Office Manager

 5 - Salary Based Accounting Clerks

 1 - Salary Based Comptroller

 1 - Salary Based Vice President of Sales

 1 - Salary Vice President of Operations

 1 - Salary President and CEO of Operations

Manufacturing Business - Current pay structure as of Jan 1st, 2017

Legal Minimum Wage is $11.50/hour

Legal Minimum Salary Wage equates to $23.00/hour

Total Number of Employees 65

 45 - Hourly Based Assemblers

 2 - Hourly Based Office Assistants

 1 - Salary Based Office Manager

 5 - Salary Based Accounting Clerks

 1 - Salary Based Comptroller

 1 - Salary Based Vice President of Sales

 1 - Salary Vice President of Operations

 1 - Salary President and CEO of Operations

Analysis

In Case Study A you can see that a business that doesn't employ any minimum wage workers will be drastically impacted by the minimum wage increase when final wages go into effect January 1st, 2017. This small business will experience a wage increase of almost 40%. 

In the example of Case Study B you will notice that a manufacturing business that does employ minimum workers will also be drastically impacted and not just by the increase in wage of its minimum wage workers. This business will experience an increase in wage costs by over 40%. 

What will this do to the economy? Well, it most likely will be a combination of things depending on the type of business. Jobs will be cut. Prices for goods and services will go up. Businesses will not bear the brunt of all of this additional cost and in some case the additional cost will put businesses out of business unless their income, in the form of an increase in goods and services, goes up. 

Solution

1. Vote Smarter: Local (City Council,) State and at the national level

2. Implement a true minimum wage increase policy indexed for inflation and deflation 

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INSTALLMENT AGREEMENTS and

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Have your Tax Return in front of you and also how much you feel you can pay a month, along with the day of the month you would like to pay.  

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Have a copy of your tax return.

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Love and Associates, Inc is a tax resolution, tax preparation and tax planning company located in San Diego, CA with clients all over the world. They offer support for small to medium size businesses as well as solutions for those with tax problems and tax burdens. 

California Minimum Wage Increase - Very Costly Legislation for all Businesses

Today marks the first day of the recent Minimum Wage Rate increase since 2008 for California wage based employees. If you look at the history of minimum wage in California since 1968 you will notice a very inconsistent increase pattern. There are periods where a rate does not change over 5-6 years and you will also notice that there are periods where the wage rate changes in consecutive back to back years. You will also notice that never once has the minimum wage rate decreased.

So why do all of these things matter and what does this have to do with the effects on business? 

Businesses operate on budgets and forecasts and base all kinds of important financial decisions around this information. When a law imposes a nearly 12% increase on a wage businesses will have make some major changes to account for the increase in cost. This generally occurs two ways; reduced costs, generally in the form of layoffs or increase prices to their products and services. Smaller business will probably choose the latter due to the close knit relationship that most small businesses have to their employees. So, rather than layoff their employees and watch their families suffer, they will offset this drastic increase by raising what they charge for the products they sell or the services they provide. As for larger businesses, they most likely will do a work-force reduction in the form of layoffs or shift reductions. However, some larger businesses may choose to raise the cost of their products and services as well, which means that drastic inflation of normal day to day products and services will begin to hit all Californian consumers, even those who just got their recent wage increase. 

The Minimum Wage increase will effect more than the wages of just those receiving Minimum Wage.

Now it is time to get to the heart of the topic of this article. When minimum wage increases, so do many other of the wage scales within a business. Here are the pains that California employers are about to experience:

1. Workers who were receiving more than the minimum wage, but less than the new minimum wage may feel disgruntled that they are now receiving pay equivalent to working at a fast food chain. Businesses will have to address this with their workers by either leaving their pay as is and face a potential for under-performing employees or they will have to raise the wage of these workers to be above minimum wage. In either scenario, this will have a negative impact on the business.

2. Some workers who are salary based, will also be in the same situation as those in A. This is the part that none of the supporters and proponents of the wage hike talked about when going on social media rants and street protests for the demand in the wage hike (probably because they too were unaware how California Labor law works.) An exempt salary employee must make a monthly salary no less than 2 times the minimum wage for full-time employment. Yes, that means that anyone who was earning a salary equivalent to $16-$17.99 per hour just received legislative based raises as of July 1st, 2014. That means a drastic cost of labor increase for many business who pay all of their employees at rates higher than the previous minimum wage.

In our next post I will address better alternatives to drastic wage hikes as well as detailed examples of how much the minimum wage rate hike will effect small and big businesses.

Wage and Hour Division Broken Down by Every US State
Minimum Wage Regulations by Industry (CA)

Love and Associates, Inc is a tax resolution, tax preparation and tax planning company located in San Diego, CA with clients all over the world. They offer support for small to medium size businesses as well as solutions for those with tax problems and tax burdens.