Minimum wage increases at the state or local level are a positive for employees who earn minimum wage. But present compensation and cost challenges for employers that are trying to stay compliant and profitable.
Rising minimum wage rates ultimately create a labor cost “snowball effect” for employers pushing labor costs higher across all positions. This cost may not be initially obvious. But an increased minimum wage will result in new calculations for minimum salary requirements. Failure to audit compensation may result in wage and hour violation with salaried employees and other pay scenarios.
A great place to start is a compensation audit. This compliance best practice demonstrates the intent to maintain pay parity for all employees. It also a checkup on past payroll records auditing an employer's ability to demonstrate/prove payroll compliance.
Here are some suggestions on where to start.
- Review all of your Pay Grades (including steps and substeps) for each job grouping and job title within your organization. Determine how this increase may skew the quantifiable structure developed (rating and formulas) when the compensation program was established.
- Every position, whether hourly or salary should be considered and will likely need some adjustment to maintain program integrity. This should be done globally for your entire organization at each compensation level and subgroup, whether paid an hourly rate or salary basis.
- Complete a more granular assessment on the effect on each of your employees individually, or in their specific level / pay grouping.
Wage rates of tenured employees should be compared to entry level employee rates for each position. This ensures length or employment and experience are incentivized appropriately. The adjustments should continue to support incentives and initiatives to positively reinforce attributes viewed as positive to the organization. And avoid narrowing the parameters between steps or making variances disproportionate to your determined level of importance, org structure etc, market research, etc.
The minimum salary requirements for the exempt classifications also increase in California state law is specifically affected, as the law uses minimum wage as part of the rate formula to determine if the position meets the salary obligations for an exempt employee. Specifically the IWC Wage Orders mandates exempt employees (most exempt classifications) must earn equivalent to , which is two times state minimum wage at 40 hours a week.
Failure to do so would immediately disqualify the exempt classification for that position which would result in wage and hour violations if not adjusted accordingly. This means outstanding liabilities and obligations of back pay, overtime pay, meal and rest period record keeping and other wage and hour obligations that are present for hourly employees.
Overtime requirements are based on a calendar workweek (7 consecutive days predetermined by the employer). According to FLSA Fact Sheet
“An employee's workweek is a fixed and regularly recurring period of 168 hours -- seven consecutive 24-hour periods. Averaging of hours over two or more weeks is not permitted.” This can not be averaged over a "pay cycle", or some other ambiguous method.”
To ensure compliance, review your employee handbook policies related to overtime. Your policy should clearly define your 7 day calendar and 24 hour period. And every variance you may have for different departments or jobs. When an employer runs their payroll on a semi monthly basis, weekly overtime can often be overlooked or miscalculated, as the workweek for overtime calculations cross over two pay periods.
This pay philosophy incentivizes productivity for production workers, but doesn’t diminish obligation to track hours, meal periods and pay at least minimum wage and overtime accordingly. When the minimum wage increases adjustments will need to be made to peice rate calculations. The biggest mistake employers make is failing to track the employee's actual hours worked. Hours must be tracked to meet record keeping requirements for non exempt employees, such as those paid by piece rate, as well as minimum wage and overtime laws. Failure to have proper recording of hours worked in order to determine regular rate of pay calculations, exposes employers to wage and hour claims in which the employee could use their own time worked calculation to calculate a minimum wage violation.
Remember that local ordinances may affect your minimum wage obligations. Some cities and counties in California adopted their own local minimum wage rates that are separate from the state rate. This is part of a growing trend. Local minimum wage rates may change at any time; employers should closely monitor them. Note: Exempt/nonexempt classification is based on the state minimum wage, not local ordinances.
Consider completing a compensation analysis every few years regardless of a minimum wage increase. It supports pay equity obligations placed on employers under law. Documenting this process illustrates a commitment to fairness which can help avoid claims wage and hour claims or discriminatory pay practices. Discrimination and violation of laws, such as equal pay for equal work, places the burden on employer to prove pay practices were based on other legal factors. Showing clear documentation based on bona fide qualifiers minimize risk if an employee were to bring a legal challenge.