Since 2009, the federal minimum wage has stayed put at $7.25 per hour. For decades, politicians, business leaders, and academics have debated the benefits of a higher minimum wage—and now there’s legislation that could make it a reality.
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It’s called the Raise the Wage Act.
What is the Raise the Wage Act of 2019?
If the bill passes as proposed, it would do a couple of things:
- Increase the federal minimum wage by about $1.30 per hour each year until it reaches $15 by 2024, then make future adjustments based on median wage growth.
- End lower minimum wages for tipped workers, youth employees, and individuals with disabilities. For workers with mental or physical impairments, current legislation allows employers to base their minimum wage on several factors, including the quality of the worker’s productivity. Here’s what that looks like today:
|Employee type||2019 federal minimum wage|
|Youth workers (under age 20)||$4.25 for the first 90 days|
|Workers with disabilities||Subminimum wage|
The pros and cons of raising the minimum wage
If you want the whole story you can check out our pocket guide to the minimum wage debate, but here’s a quick snapshot of each side:
|Right now, one in nine US workers are being paid too little to escape poverty even though they work full time, according to the Economy Policy Institute. Increasing the minimum wage to $15 would mean bigger paychecks for 41 million people.|
|Other studies say a higher minimum wage can, in certain situations, lead to shuttered businesses and decreased employment rates.|
|But research shows small businesses haven’t made major staffing changes after minimum wage increases. One meta-analysis found that the number of low-wage jobs were essentially unchanged five years after a wage spike.|
Why small businesses should prepare for minimum wage hikes now
On January 1, 2019, the minimum wage went up in 19 states and 21 cities and counties—some reaching $15 an hour, according to the National Employment Law Project. Another 21 jurisdictions will boost pay rates later this year.
At the same time, high-profile corporations—which you may be competing with for talent—don’t need a government mandate to pay their employees more. Amazon, Target, and Walt Disney World are among the major businesses hiking (or planning to hike) pay to a minimum of $15 per hour.
“Jobs in the service economy use minimum wage as a calibrating reference point,” says Nick Haschka, CTO of The Wright Gardner, a Northern California-based plant services company. Its workers earn more than minimum wage, but they also saw jumps in their paychecks when rates went up.
“As minimum wage increases, the wages offered for all hourly jobs competing for hourly employees should adjust proportionally,” Haschka says.
3 ways small businesses can prep for a $15 minimum wage
Ultimately, it all depends on your business’s operations. But, says Eddy Hood, CEO of Ignite Spot Outsourced Accounting in Utah, it’s not too early to start doing the calculations.
“You’ve got to do some forecasting,” Hood says. “Hope is not a strategy.”
1. Crunch the numbers
If a wage hike is looming, now is the time to sit down with your financial records. Reconcile your books to determine how much cash you have now, says Hood. Then, look at the cost of your business operations—including any pay raises—and forecast out 12 months.
Here’s how to sort out that calculation:
Cash you have in the bank
+ (Average monthly income x 12)
– (Total monthly expenses + monthly pay raise)
= Extra cash you have (or you’ll need)
You’ll also want to make sure to include items such as debt payments and late payments from customers, Hood says.
“See if you’re still in business,” Hood says. “If you’re not, you have to move some levers around.”
2. Look for ways to cut back
“It’s an efficiency question now,” Hood says.
If your costs are going up in one area like labor, you’ll want to cut them in another. Automating day-to-day tasks could be an option, though Hood notes new software can be expensive to deploy—and there’s always a learning curve for staff. “Software isn’t always the right solution, but it’s designed to be and if you do it right, it can be,” he says.
Finding ways to get better at what you’re already doing is another. Hood says you may have to invest in employee training, so workers can increase their own productivity—whether they’re cleaning the kitchen, pulling espressos, or producing coffee mugs.
3. Reconsider your prices
But remember: This isn’t a dollar for dollar exchange.
“If a business increases wages by $2 an hour, the business owner is misled into thinking they only have to sell $2 more of ‘stuff’ per hour to deal with it, but that’s not true,” Hood says.
When wages go up, businesses may need to cover additional payroll expenses, paying out more for Social Security, unemployment, disability insurance, and workers’ compensation. These costs can also vary by location.
If you want your gross profit to remain the same after a wage hike, you may need to increase your prices accordingly. Not sure how to do the math? Consult with your financial advisor to ensure your numbers are right.
“Cost increases can be confusing for entrepreneurs and can be one of the main reasons companies handle their cash inappropriately,” Hood says.
Wage increases appear to be a trend that’s here to stay. But that means as a business owner, you’re not alone in dealing with the effects. Check out how three California small businesses managed local wage hikes—without losing a single employee.