How the federal minimum wage increase affects your small business

How the federal minimum wage increase affects your small business

Sona Sulakian
 | 

If enacted in March, the Raise the Wage Act of 2021 would incrementally raise the federal minimum wage from $7.25 to $15 per hour by June 2025. The Congressional Budget Office predicts that this bill would lead to higher prices for goods and services as well as changes in employment. Republicans oppose this rake hike partly because of its potential effects on small businesses. 

 

The last federal minimum wage increase from $6.55 to $7.25 was in 2009, following the recession. The 11 years since then form the longest period without a federal minimum wage increase since the passage of the Fair Labor Standards Act created the minimum wage. Yet this financial crisis has highlighted the importance of essential workers, who haven’t been compensated for the added risk that their jobs now entail.

 

Today, the federal minimum wage is worth 17% less than it was just 10 years ago, and 31% less than in 1968. This drop in real value is partly because the federal minimum wage isn’t indexed to inflation. Thus a change is likely long overdue. Here’s an overview of what the federal minimum wage is and how it may affect you.

 

What is the federal minimum wage?

 

The federal minimum wage provides a floor, meaning wages can’t legally drop below this amount. Jobs that are supplemented by tips are an exception to this rule. These employers instead are required to pay the federal tipped minimum wage, which is $2.13 per hour. 

 

Businesses that make $500,000 or more in annual sales or with employees engaged interstate commerce must comply with federal minimum wage law. Because nearly everyone sends mail or makes phone calls with people in other states, almost all businesses are covered by this law. 

 

Some types of workers are not covered, including independent contractors (e.g. Uber drivers) and some types of interns and students. Businesses that don’t comply with the minimum wage laws may face fines, lawsuits, and even criminal prosecution for repeated violations. 

 

However, states and cities may set a minimum wage above the federal limit. In fact, 29 states and D.C. have already set a higher minimum wage. Only D.C. has a minimum wage already set at $15 and is indexed to inflation, and Seattle boasts the highest rate in the nation at $15.75 per hour for small employers and $16.69 for large employers. 

 

How will the rate hike affect small businesses?

A federal wage hike will likely disproportionately burden small businesses, who may struggle to bear the added expenses. So small businesses need to find a way to meet the additional expenses while maintaining their profit margins. Some solutions small businesses may turn to are price increases, renegotiating supplier contracts, taking out loans, or layoffs and furloughs.

 

Economist Arin Dube believes that a minimum wage increase may lead to increased prices, as employers pass on the cost of the price increases to consumers. However, Dube suggests that price increases will not be significantly noticeable compared to overall inflation. Because minimum wage earners comprise a small portion of the overall economy, consumers will likely not realize a noticeable change in their budget. The incremental nature of the increase may help ease businesses into the transition. 

 

Benefits of the minimum wage increase could include increased consumer spending, as individuals find themselves with additional disposable income. The Federal Reserve of Chicago determined that a $1 per hour increase in the minimum wage led to an additional $2,800 increase in spending among low-wage worker households. 

 

A wage increase may also lead to decreased turnover in small businesses as jobs become more valuable. So small businesses would need to spend less money on recruiting and training. Furthermore, one study found that an increase in minimum wage to $15 did not adversely affect employment, not even among women or minority groups. The researchers also found that this change would also substantially decrease poverty throughout the nation. 

 

While in the long run an increase in the federal minimum wage will lead to many benefits, small  businesses will likely need to boost revenues and cut expenses in the short term to maintain profit margins.

 

This article is intended to convey generally useful information only and does not constitute legal advice. Any opinions expressed are solely those of the author, not LawChamps.

 
Sona Sulakian

Find Me Lawyers

Start by selecting your legal need:
Business / Employment

Business / Employment

Family / Personal / Injury / Immigration

Family / Personal / Injury / Immigration

Criminal Defense / DWI

Criminal Defense / DWI

Real Estate / Housing

Real Estate / Housing

Estate Planning / Power of Attorney

Estate Planning / Power of Attorney

Review & Rating Images LawChamps
LawChamps Reviews

"I was able to find just the right lawyer for my case. It was easy to use."

Lucy Coutinho

Client

Review & Rating Images LawChamps
LawChamps Reviews

"Very easy for me to get connected with an experienced attorney."

Robert Knox Jr

Client

Review & Rating Images LawChamps
LawChamps Reviews

"It was super easy. It was super fast and I got connected pretty quickly."

Lenasia Smalls

Client

Client Testimonial - Triso Valls
LawChamps Reviews

"It’s easy to register and match with a lawyer according to your legal [need]."

Triso Valls

Client

Ready To Get Started?

Find Your Lawyer NowLawChamps Arrow Icon

Related Posts

What are Your Legal Duties if an Employee Complains Abo...

Jane Meggitt | 25 February, 2021

When an employee complains about harassment or discrimination, taking their complaints seriously is imperative. As the employer, you must make it clear to all employees t...

Read More Arrow Icon

Should you file a patent application or keep your innov...

Sona Sulakian | 23 February, 2021

Many of you are probably familiar with patents, but what’s a trade secret. A few famous examples include the Coca-Cola formula, the Google search algorithm, and KFC...

Read More Arrow Icon

What Young Entrepreneurs Need to Know About Business La...

Mariam Sulakian | 17 February, 2021

Every entrepreneur should have a lawyer's phone number in their contact list. Business law is complicated. Here's a primer on it. 1. What is business law? T...

Read More Arrow Icon

Related Posts

Hire One, Help Another

LawChamps donates a portion of our revenue, investing it back into funding justice reform organizations and subsidizing the legal fees for those who cannot afford them.
Learn More