What Does a Higher Minimum Wage Mean for Your Business?

Ways to Help Control Compensation Costs

As of July 1, 2014, the state-mandated minimum wage in California has increased to $9 an hour. It will increase to $10 an hour effective Jan. 1, 2016.

What does the minimum wage increase potentially mean for your business? More important, what steps can you take to control your compensation costs?

Even before the minimum wage hike, California already had the nation’s second-lowest percentage of hourly paid workers earning at or below the federal minimum wage, according to a 2013 report by the U.S. Bureau of Labor Statistics. Earlier this spring, 72 percent of small business owners in California said the state’s minimum wage hike would have a neutral or positive effect on their businesses, according to California Bank & Trust’s third annual small business survey. Possible benefits to small business include reduced employee turnover, better recruitment, increased productivity and greater consumer spending power.

However, whenever there is a minimum wage increase, many employers (even those which employ few if any minimum wage employees) increase the pay of most, if not all, of their hourly workers to preserve their compensation structure and to attract and retain quality employees. This “ripple effect” of minimum wage hikes has been studied and reported on by a number of organizations, such as this report by CNN.

Within Your Control

As a saying goes, you can only control what’s within your control. Regarding the minimum wage increase, this means looking at labor-related factors within your control in your business, including:

Know California’s wage rules – You must pay at least the minimum wage in California regardless of an employee’s age or work role. For example, an employer may not pay less to a teenage employee than an adult, nor may an employer use an employee’s tips as a credit toward its obligation to pay the minimum wage. Violations can result in court-ordered payment of lost wages, as well as fines and legal costs.

There is an exception to the minimum wage for employees who can be classified as “learners,” regardless of age. Learners may be paid not less than 85 percent of the minimum wage (rounded to the nearest nickel) during their first 160 hours of employment. This applies to new employees in occupations in which they have no previous similar or related experience.

For more information on the state’s minimum wage requirements, visit the Department of Industrial Relations website at: http://www.dir.ca.gov/dlse/faq_minimumwage.htm

Know your balance sheet – By keeping close tabs on your revenue, costs, margins, cash flow and business projections, you’ll have a better idea of how the minimum wage increase will factor into your bottom line. Based on this information, you may need to reconfigure staffing levels and work schedules to compensate for your additional labor costs.

Reconsider your total compensation costs – Salary is often just a single part of total compensation. If you offer additional compensation benefits, factor the costs of such benefits against your additional wage costs. A qualified benefits consultant can provide expert input, relative to your type of business and service area.

Hire and retain top talent – Due to the cost of hiring and training new employees, your labor costs can significantly increase if you have high employee turnover. By hiring high-quality employees from the start, treating them well and providing development opportunities, you will likely decrease your hiring and training costs and increase your productivity and profitability.

Consider increasing prices – If labor represents a significant portion of your costs, think about increasing your prices to offset the hit to your bottom line. Price increases must be handled carefully, however. A price increase that is too much, too soon, can alienate your customers and drive away business. If possible, check the prices of your competitors and see if it’s possible to increase your own prices. If so, adjust your prices upward incrementally.

Call Us for Input

Your California Bank & Trust representative can provide guidance to help you better manage your operating costs.