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.