Minimum Wage Hikes Leave Businesses Feeling the Pinch
by Scott Rodd, Sacramento Business Journal
California’s minimum wage is set to increase annually over the next three years, and businesses large and small are feeling the pinch.
On Jan. 1, the minimum wage rose from $11 to $12 for companies with more than 25 employees, and from $10.50 to $11 for companies with 25 or fewer employees. The state minimum wage will increase to $15 in 2022 for companies with more than 25 employees and in 2023 for companies with 25 or fewer employees. That increase is up from $10 an hour — or $10.50 for companies with more than 25 employees — in 2017.
Labor advocates argue an increased minimum wage in California is necessary to keep up with the state’s rising cost of living. California has one of the highest poverty rates in the country, with 19 percent of its population — or about 7 million people —living in poverty, according to the U.S. Census Bureau.
But increasing the minimum wage is not as simple as an incremental 50-cent or dollar bump for a company’s lowest-paid employees. It also requires employers to pay increased workers’ compensation and payroll taxes. Additionally, a rising minimum wage often results in higher-paid workers’ wages to also increase. The state labor code, for example, requires certain exempt employees to make at least twice the salary of a minimum-wage worker. Increases in minimum wage, as a result, may require companies to also increase wages for many middle-tier employees.
“The thing about policy changes is you need to keep an eye on unintended consequences,” said Barry Broome, CEO of the Greater Sacramento Economic Council.
From farm to fork
Sacramento has proclaimed itself America’s Farm to Fork capital. California’s minimum wage hikes are impacting businesses across that supply chain.
Judith Redmond, co-owner of Full Belly Farm in Yolo County, said wages, benefits and payroll taxes make up about 65 percent of her farm’s expenses. Minimum wage increases are poised to increase those costs.
“We would love to pay our employees more,” Redmond said. “The farmworkers are probably working a whole lot harder than many people that earn a whole lot more. However, if we did pay our employees more, people would have to be willing to pay more for their vegetables, or agree that farms that grow fresh produce should move out of California.”
Additionally, the landscape of state and local minimum-wage requirements complicates transporting and selling goods from the farm, Redmond said. Full Belly’s truck drivers make well above minimum wage, Redmond said, but the farm typically sends a co-pilot to assist with loading and unloading the truck. If the truck travels to a local jurisdiction with a higher minimum wage —such as San Francisco, which has a $15 minimum wage — the co-pilot needs to mark his or her time card during the time worked in those jurisdictions to reflect the local pay rate.
The same goes for workers who staff booths at farmers markets.
“Many of those workers are interns, getting an education about agriculture while working at our farm and earning minimum wage,” said Redmond. “When they work at the farmers market, the law is that they would have to be paid the minimum wage of that (location) rather than the minimum wage of the state.”
n the other end of the farm-to-fork chain, area restaurants are also wrestling with minimum-wage increases.
Andy Smith, owner of the former Bread Store at 1716 J St., told the Business Journal that increases in minimum wages “absolutely” contributed to his decision to close the bakery and sandwich shop.
“As soon as minimum wage goes up, everything goes up — workers’ comp, payroll tax,” Smith told the Business Journal. “It’s not just a couple dollars increase.”
A cannabis dispensary operating under the name Kolas has been proposed for the location at 1716 J St. Smith, who owns the building at that address, will be the landlord for the new business.
Smith said restaurants like the former Bread Store have few options but to pass on cost increases to customers.
“A sandwich now is $8.59,” he said. “If I was here in two or three years, it would be 10 bucks.”
Ike’s Love & Sandwiches, a San Francisco-based sandwich chain that recently opened a location on 16th Street in Sacramento, chose to give patrons the option to pay a surcharge to cover increased costs from minimum wage increases.
“A voluntary surcharge of 75¢ will be added to every transaction in our support of the recent increases in minimum wage and benefits for our dedicated employees,” states a placard placed at ordering kiosks at the Sacramento location.
It’s unclear if the placards have been successful — or if the message was well-received. According to Ike’s spokeswoman Kelsey Koster, the chain is currently removing the placards from all locations, though she declined to elaborate on the motivation behind the decision.
Minimum wage increases present unique challenges for the nonprofit sector.
Nonprofits “receive a significant amount of funding from the government,” said Jan Masaoka, CEO of the California Association of Nonprofits, or CalNonprofits. “Those are typically long-term contracts and the wages they reimburse are stated in the contracts. When the minimum wage goes up, those contracts don’t go up.”
Nonprofits may be able to renegotiate those contracts, Masaoka said, but sometimes the contracting agency’s budget is tapped out.
According to a recent CalNonprofits survey, minimum wage workers make up about 11 percent of the nonprofit workforce. Masaoka said nonprofits are often compelled to raise the wages of workers who make just above minimum wage and some middle-tier exempt employees when a minimum wage hike goes into effect.
As a result, a smaller nonprofit’s expenses may increase by tens of thousands of dollars, according to Masaoka. For larger nonprofits, she said, “it’s hundreds of thousands and even millions of dollars.”
Some nonprofits are forced to cut back employee hours, training and volunteer recognition, she said. Organizations can try to increase their fundraising, Masaoka said, but that can be difficult.
Another option is to reduce salaries or hold off on pay increases for higher-paid workers. But that may threaten a nonprofit’s long-term sustainability.
“When you decrease the salaries of higher-paid workers, it reduces the likelihood they’re going to stay,” Masaoka said.
Roseville-based Pride Industries — a nonprofit with nearly 5,600 employees that provides disabled individuals with jobs in maintenance, manufacturing and custodial services — has had to reassess its approach to contracting and staffing as California’s minimum wage continues to increase.
“As our cost drivers increase, (it means) our customers want more for less,” said Steve Twitchell, senior vice president of marketing, business and development strategy. “In order to try to absorb that, we focus on innovation and technology to try to drive costs down.”
When providing manufacturing services, for example, Twitchell said Pride looks for opportunities for greater automation. When providing facilities management, Pride has introduced technology for more efficient scheduling and ticketing procedures.
Twitchell acknowledges that one potential consequence of implementing more automation and technology is staff reductions.
“At the end of the day, the more automation and innovation you introduce, the more the likelihood it will reduce labor,” he said.
Impacts on the region’s economy
While ensuring workers have a living wage is important, a spike in the minimum wage over a short period of time can be problematic for the broader economy, said Broome of the Greater Sacramento Economic Council.
One potential consequence: scaring off out-of-state companies looking to relocate to California.
“We had an 800-job Amazon supplier looking at West Sacramento that literally got down to signing the lease,” Broome told the Business Journal. “They left over the increasing minimum wage.”
The deal fell through in 2017, Broome said. He said the company worked through a relocation agency, so its identity remained undisclosed. Out of the 800 employees the company planned to bring to West Sacramento, according to Broome, the company planned to pay 200 about $12 an hour. The imminent minimum wage increases to $15 an hour by 2022, Broome said, ultimately scared off the company.
The company likely would have had to increase salaries for exempt employees, too. So-called “white-collar” exempt employees in California must make at least twice the minimum wage, according to the state labor code. In 2017, that minimum salary for exempt workers was about $43,700 at companies with more than 25 employees and $41,600 at companies with 25 or fewer employees.
By 2022, the minimum salary for exempt employees will be over $62,000 at companies with more than 25 employees and over $58,000 at companies with 25 or fewer employees. That represents a 40 to 43 percent increase in the minimum salary for exempt employees in the span of about five years, depending on the size of the company.
Lizbeth West, shareholder in the labor and employment practice at Weintraub Tobin Chediak Coleman Grodin Law Corp., said some of her clients have expressed concern about meeting the new salary requirements for exempt employees when the minimum wage reaches $15 an hour. She said some employers may look to drop employees’ exempt status to avoid the requirement.
“If you have an employee who meets exempt status requirements, (state law) doesn’t mandate that you classify them as exempt,” West said. “But if you don’t classify them as exempt, that adds other burdens.”
For non-exempt employees, the employer would have to maintain timecards, pay daily and weekly overtime and ensure employees take the appropriate meal and rest breaks. Failing to meet these requirements could expose employers to costly litigation, including suits under the Private Attorneys General Act.
“It really is going to be a case-by-case analysis, because (changing exempt status) may not help,” West said. “If an employee is working a lot of hours, they’ll have to be paid significant overtime, and that may end up costing more in the long run.”