A few days ago, President Biden announced that he will push for a federal minimum wage of $15 per hour.  Surprisingly, the announcement had little fanfare in the news.  Consider:

  • It would establish a floor wage that is more than 100% higher than the current minimum wage.
  • The proposal extends to restaurant workers where the minimum wage currently is at $2.13 per hour as long as tips are sufficient to bring the wages up to $7.25 per hour, and
  • It would be phased in over the next four years to allow companies to increase product prices as wages rise.

Several states already have implemented or will pass laws to support $15 per hour wage minimums (CA, NY, DC, IL, MD, NJ), so the trend has begun.  So, is this a big change for modern business? 

Spoiler Alert:  This article is a little long, so here is the main theme.  Many workers will transition from wages to Independent Contractor status.  This can create higher wages for workers and lower costs for employers.  The article presents the proof and an implementation plan for you to transform your company.  It is probably easier that you think.

* * * * *

At $15 per hour, a fulltime salary would be at least $31,200 per year.  This means that you are asked to hire employees without experience, training, knowledge, or work history while offering a starting salary in excess of $30,000 per year.  Compare this to the current rate of $7.25 per hour, or $15,080 per year.  For many companies, that increase will push many workers to a higher salary, which will drive up costs for the employer.

In addition to the salary expense, payroll costs include:  employer payroll tax (about $2,500), worker’s compensation insurance premiums ($1,000), working space ($2,000), training ($800), benefits packages ({$1,000-$15,000 per year) loss of productivity during the training period (???), and turnover costs ($5,000) as you cycle through multiple employees until you find someone who is willing to stay with your company and contribute to the company’s success.  So, this cost could well exceed $50,000 for an entry-level position once the wage increase is in full effect.  Most small companies currently cannot afford such a high salary for an employee who provides minimal benefit to the bottom line.

So what does an increase in the minimum wage mean?  We have heard the same complaints each time a minimum wage hike is mentioned:

  • Apprentice positions will be eliminated (except for professional positions such as public accountants, attorneys, doctors, architects, etc.). Therefore, companies will only hire experienced workers. The high cost of labor will create a huge roadblock for high school and college graduates to enter the workplace.  These workers have no experience, no training, little skill base, and no history of taking responsibility for their actions, so they cannot support a $50,000 investment with little productivity.  Employers will be motivated to redefine jobs by assigning more duties to existing staff in order to eliminate open positions.  This will reduce customer service, increase workflow errors, and increase stress in the workplace.
  • Fulltime, entry-level jobs will transition to part-time. Already, some government grant programs associated with Covid-19 relief define “fulltime” as working for a minimum of 30 hours per week.
  • This could curtail job advancement and promotions because the company will be unable to pay higher wages to promoted staff. Very few workers would take on more duties and responsibility without an increase in salary, so promotions would be stifled.
  • Existing workers who currently earn $15 per hour will expect an increase in wages in the $20–$25 range so that they do not feel that they are earning minimum wage rates? This will further reduce corporate profits.
  • Marginal companies (those who earn minimal profit) will choose to close and eliminate all jobs at that company.

There are three reasons why these concerns did not materialize when the wage rate was increased in prior years:

  1. Wage increases were moderate at each increase. Companies adjusted by reducing their profits and working more efficiently.
  2. Then during cyclical periods of inflation, companies raised prices moderately to cover the higher labor cost and the inflated inventory costs to restore profitability.
  3. In prior years most companies were large organizations, so there were fewer small businesses. Today, 85% of all businesses are defined as small businesses.  Personal computers and the internet allowed entrepreneurs to start as a smaller company.

Larger businesses have always been able to absorb higher wages because salary cost is a small percentage of overhead costs for large companies.  Conversely, wages in smaller companies often are the highest cost factor of daily operations.  Doubling wages in a small company will eliminate most or all of the profit earned by small businesses.  Smaller companies cannot raise prices when large companies continue to offer lower prices, so smaller companies are eliminated as their profits disappear.

This concept of large companies consuming small companies has precedent.  When WalMart® opened in small rural towns in the 1980s, the multi-national company was able to offer low prices while earning profit because it sold in high volume across all of its outlets.  Small, local companies could not sustain a profit at these lower prices advertised by WalMart®.  In response to this price competition, local companies tried to offer better customer service to justify their premium pricing.  Customers rejected this feature and supported shopping at WalMart® as they watched local companies wither and close.

Does that mean that our business community is faced with doom and gloom?  Yes, if you are not willing to change your concept of business…forever.  But don’t give up just yet.  I have a plan.

In Part Two of this article, we will explore some ideas to address this challenge.  We will post Part Two is few days, so stay tuned.  In the meantime, feel free to call us at (504) 780-9091 or send us an e-mail at Richard@ramcpa.com.  All conversations are confidential.  There is no risk and no commitment for an initial conversation.  If fact, there is never a charge until you agree to a scope of service and related fee.

Stay in touch.  Thank you for supporting us as we work to help you succeed in achieving your goals.