May 4, 2021 | General | Posted by Bob Greene, Senior HR Industry Analyst at Ascentis
Minimum Wage, Maximum Pressure: The Journey Toward $15/Hour
On April 27, 2021, President Biden signed a new Executive Order, “Increasing the Minimum Wage for Federal Contractors.” The timing of this new E.O. was hardly coincidental – arriving as it did a month after an unsuccessful attempt by the new Administration to have an across-the-board minimum wage increase included in the American Rescue Plan Act, and just one day before President Biden’s latest, earnest entreaty to a joint session of Congress to send him a bill to “…raise the minimum wage to $15. No one … working 40 hours a week should live below the poverty line.”
The new Executive Order, while taking effect immediately, will have a gradual impact on federal contractor employee pay, since the mandate will have to be incorporated in new contracts as signed, and existing contracts as renewed. When fully implemented the new Order is expected to raise the hourly pay rate of about 390,000 employees, with an average increase per employee of about $3,000 annually.
As of January 1, 2021, 29 states and the District of Columbia have minimum wage provisions higher than the federal, while 21 states use the $7.25 per hour federal minimum, which hasn’t changed since July 24, 2009. Twenty-five of those 30 states are raising their minimum wage rates some time in 2021 from the minimum for 2020, with the vast majority having timed their increase for this past January 1. Due to automatic CPI-linked inflation provisions in 18 of these state minimum wage laws (and D.C.), we can expect their minimum wage rates to rise every year.
The two states with the highest minimum wage rates are California, at $14.00 (but applicable only to employers of 26 employees or more), and Washington, with a minimum of $13.69 applicable to employers or all sizes. If Washington, D.C., were a state, it would have the highest minimum wage, at $15.00 per hour.
Additionally, some 45 localities (counties and/or cities) have adopted minimum wage laws that exceed the statutory minimum for the state in which they are located.
Four Good Reasons to Re-Assess Your Minimum Wage Position
For employers paying at least some employees at or near the minimum wage (whether federal or state or local overrides to $7.25 per hour), there are four good reasons to re-assess your pay policies now.
- For multi-jurisdictional employers, complexity! Employers doing business in multiple states, and in certain states, counties and cities (largely located on the two coasts, but there are exceptions) that maintain a specific minimum wage, trying to keep all the minima straight can be confusing. Each January 1, and sometimes in between (e.g., Connecticut, Florida, Oregon and Virginia have minimum wage increases this year taking place on dates that vary from May through September) multi-jurisdictional employers paying at the minimum have to “go on the hunt” for employees subject to a statutory increase to their hourly rate.
- The impact on employee engagement, and beyond. Experts agree that we will see an upsurge in voluntary quits as the pandemic resolves itself and the economy is expected to rebound this year. While they disagree on just what proportion of employees are ready to leave – estimates range from 25 percent according to CNBC.com to 50 percent according to Inc. magazine online – most experts agree on the trend. Employers in certain industries may find that members of key job groups that are traditionally at or close to the minimum wage (part-time, front-line service workers, customer service reps, and the like) are ready to walk as the hiring boom continues and intensifies, and increases above the minimum may be necessary to keep them in their seats. Additionally, employees talk! Now more than ever, having employees in different offices or working from home in different states does very little to impede conversations, and compensation remains a popular topic. Employers have learned that attempts to discourage such conversations are futile, and attempts to forbid them are even illegal now in at least 19 states and D.C.The impact beyond employee engagement may also be something employers want to consider. Whether through local press coverage, or specific social media apps like Facebook, LinkedIn, and Glass Door, a company which gets a reputation for paying a significant proportion of their employees at the minimum may suffer in employment branding. Six in 10 Americans favor a minimum wage increase to a full $15/hour.
- ACA affordability considerations. Even benefits professionals not responsible for compensation programs generally, still have basic employee compensation policy at the back of their minds, because the Affordable Care Act requires it. For 2021, employers must offer eligible employees at least one plan where the self-only minimum-value option, offering minimum essential coverage, caps the employee contribution at 9.83 percent of employee pay. While some employers have addressed this issue “holistically” by changing the least expensive health plan option available to all employees to a very low, or even $0.00 contribution for self-only coverage, those that have not face big disparities when using two of the three available affordability safe harbors for minimum wage employees. For example, using the W-2 Box 1 safe harbor, an employee who, in the previous tax year earned $7.25 per hour (assuming no overtime, other pay, or pre-tax health insurance premiums all year) can be charged no more than $123.53 per month for the lowest available plan option, while an employee earning $15.00 per hour all year can be charged up to $255.58 per month for the same insurance.
For the monthly rate of pay affordability safe harbor, the maximum self-only employee contribution is $92.64 per month, even lower than the Federal Poverty Level safe harbor of $104.53 per month for 2021. The two safe harbor amounts cross at an employer’s chosen minimum wage of about $8.19 per hour, and for employers establishing a $15 minimum wage for all employees, the maximum self-only contribution under the rate of pay safe harbor is $191.69 per month.
- Gender pay equity rules are tightening. We know that there is an 18 percent gender-based wage gap in America. According to the US Department of Labor, women are paid on average just 82 cents on the dollar compared to their male counterparts (unadjusted for “bona fide pay disparity factors”.) Now consider the fact that a full 59 percent of workers benefitting from a minimum wage increase to $15 per hour would be women, and the minimum wage becomes a significant factor in many employers’ gender equity pay policies. The Paycheck Fairness Act (H.R. 7) was passed by the House of Representatives on April 15 of this year, and sits in the Senate where it faces an uncertain future. This bill would revive the EEO-1 Component 2 pay equity reporting we all know (if not love) from 2019 and make such reporting permanent.But while employers take a “wait-and-see” approach to federal gender pay equity reporting, the states have gotten into the act! California was first with S.B. 973, and their first annual pay equity reporting was due March 31, 2021. In a familiar pattern, what California starts, other states pick up – and often “improve”. Illinois just passed S.B. 1480, which will require gender pay equity reporting for all EEO-1 filers within the state beginning January 1, 2023. The two “improvements” Illinois made over proposed federal reporting under H.R. 7? Every company’s EEO-1 data filed with the state of Illinois will be made public within 90 days of such filing, and employers will have to file for an “equal pay registration certificate” based on multiple criteria set by the state proving non-discrimination in gender-based pay. And Illinois is the first state to apply administrative penalties to employers found not to be in compliance. From the law itself: “Penalty. The Department shall impose on any business that does not obtain an equal pay registration certificate as required under this Section, or whose equal pay registrationcertificate is suspended or revoked after a Department investigation, a civil penalty in an amount equal to 1% of the business's gross profits.”
HCM Implications: Federal contractors who are paying any employees below $15 per hour and are covered employers under Section 2 of the President’s new Executive Order (at their next contract execution or renewal) should be ready to comply with that new minimum. Employers with employees in California and Illinois, and subject to EEO-1 reporting requirements, should, in the case of California, have already complied with the new reporting, and in the case of Illinois, become familiar with the more detailed gender pay equity certification requirements they will impose in 2023. Finally, the key to all of this compliance is clean, accessible data. A good compensation module within an HCM suite (or standalone) should be able to produce various gender pay equity analyses – particularly of the gender impact of proposed merit budget distributions – with a minimum of user effort.
The minimum wage is just one example of the many topics that have been impacted by the first 100 days of the Biden Administration. Join Ascentis at 12 noon central time on Wednesday, May 12, for a one-hour webinar summarizing all the human capital management-impacting changes taking place since January, as well as an informed peek into expected changes to come! Click here to register.
Bob Greene currently serves as Senior HR Industry Analyst at Ascentis. Bob’s 40 years in the human capital management industry have been spent in practitioner, consultant and vendor/partner roles. As practitioner, he managed payroll for a 5,000-person bank in New Jersey. As consultant, he spent 8 years advising customers in HRMS, and payroll and benefits system design as well as acquisition strategies. Bob also built a strategic HCM advisory practice for Xcelicor (later acquired by Deloitte Consulting.)