HR professionals nationwide are still reeling from the recent injunction against the Department of Labor’s overtime rule, which had it gone through, would have required companies to compensate all salaried exempt workers a minimum of $47,476 by December 1st. While the news has been dominated by the implications of the injunction, let’s not forget about legislative changes to minimum wage that are happening at the state and local level. If you’re reading this post, you are likely in an impacted state or municipality. Now that we’re all in limbo regarding the changes to FLSA overtime regulations, let’s use this time to game plan for minimum wage increases that are taking effect as soon as January 1st.
This past election cycle, four states approved ballot measures to increase minimum wage including Washington, Colorado, Arizona, and Maine. Other locations and municipalities already have laws on the book to increase their minimum wage above the federal level. In San Francisco, minimum wage has been steadily increasing each year toward $13.00/hour in 2018 (after which adjustment will be determined by changes to the Consumer Price Index). The trend is clear – while there is uncertainty at the federal level regarding changes to minimum wage, cities and states are taking it upon themselves to raise the standard.
Big Picture: Timelines and Budgets
If you are in an area impacted by a raise to minimum wage, check your timeline for compliance. While your state may have voted to increase minimum wage to $12.00/hour, for example, it’s likely that the measure included a staggered implementation schedule. Adjusting pay isn’t something you’re just going to do this year – the adjustment will be happening each year for an extended period of time. It’s important to understand at what point and by what amount you will need to comply so you can effectively plan for the change.
Consider whether your company will be able to go faster than the law requires. For organizations who are already paying close to the new minimum wage, it may make sense to implement your change now, even if it’s not legally “due” until 2020. Doing so could make you an employer of choice – you’ll have bragging rights for complying more rapidly than your competitors.
From an affordability standpoint, the staggered implementation schedule may be a necessary option to move to compliance. You may find yourself absorbing costs in a “rob Peter to pay Paul” fashion – in order to become compliant in one area, you may need to cut back on some other type of compensation (year-end bonuses, incentive payouts, etc.). Be smart about where you pull from to avoid impacting employee morale and engagement.
Also, if you are a company operating in many states, make sure to check compliance across the organization. The Department of Labor has a breakdown of minimum wage by state available on their website. Make sure you understand the market and compliance requirements to differentiate pay by location.
On the Ground: Changes to Pay Practices
Companies without a formal pay structure (pay ranges, pay bands, pay grades) should first consider which employees will need pay adjustments to bring them up to the new pay threshold. Make sure to also consider employees who are currently paid at the new minimum wage. To avoid compression, you may consider increasing pay for more than just your lowest paid workers. If supervisors of minimum wage jobs are currently paid at the new rate, their pay may also need to be raised to create some separation between the supervisor and subordinate. Evaluate pay for the entire job family to avoid situations where managers make less than the employees they manage. You may find you have a phased approach to adjusting your comp plan to comply with minimum wage changes, beginning with the necessary, moving to smart changes, and then including “nice to have” changes third in line.
Companies with a formal pay structure will want to start by bringing their ranges into compliance. Review your structure, particularly if you have multiple locations, and make sure the minimums of all your ranges are above the local threshold. Consider the ripple effect of your change. For companies using pay schedules, there is often a mathematical link between the range for lowest paid location and the range for the highest paid location. Shifting the range for the lowest schedule would then require shifting the range in the highest schedule, even if that location is already compliant.
As such, it may not make sense to shift the entire pay structure to comply with minimum wage changes in one or two locations. Instead, think about adjusting your midpoint differentials to compress pay ranges in the first few grades – smaller distances between midpoints at the bottom and wider distances at the top. For example, the midpoints for your first five grades could go up in half percent increments and then get progressively further apart from there. You likely aren’t looking to adjust your ranges at the top of your structure as pay for those jobs likely has not shifted yet as the result of changes to minimum wage (though they may in the future). The key, as with any structure adjustments, is to ensure mathematical consistency. Avoid changes that may appear arbitrary as they could undermine the legal defensibility of your plan.
Influence: Messaging the Increase
How you communicate about pay adjustments is as important as the plan to make those adjustments. Before announcing a change to impacted employees and managers, ensure you’ve done the research and calculated the cost. If the plan is to adjust pay over a period of time, both manager and employee should be aware of the schedule.
In addition, it’s important to educate your workforce on the difference between this market adjustment change to their pay and any potential merit increases they may be eligible for. Without proper messaging, employees may consider the change to their pay tied to their performance and expect similar increases come performance review time.
Outside of messaging to the impacted individuals, consider broader communication to the entire organization. Employees talk and if word gets out that some people got a raise and others didn’t, employees may start to question the fairness of compensation at your organization. Share with employees the change to the law and what your company is doing to ensure fair pay for all workers.