A $15 Minimum Wage Sounds Good But Has Unintended Consequences
Some 29 states and the District of Columbia, along with various cities and counties, have implemented an hourly wage higher than the federally mandated rate of $7.25 per hour, which itself hasn't changed since 2009. (States without a minimum wage must observe the federal one.)
At this point, Washington’s State's rate of $11.50, California's and Massachusetts' minimum of $11 and New York State's $10.40 per hour rank as some of the highest state minimum wages in the country.
And they're going up: This December 31, New York State's minimum will rise to $11.10. Washington's will rise to $12.
For many employers and employees (especially at small and medium-sized businesses), these increasing salary minimums can result in unintended consequences: Firms must balance increases in labor costs by adjusting other employee benefits, or passing on the costs to customers in terms of fees or pricing.
In either case, the results can negatively impact these businesses' employees’ satisfaction as well as the overall fortunes of the company itself. For example, there's the matter of local, city minimums: The city of Seattle’s move to $15 an hour a few years ago resulted in many workers being provided with fewer hours, and experiencing a net loss in pay. Companies simply had to adjust shifts and hours to account for the costs.
At TickPick, the New York City–based ticket marketplace I co-founded back in 2011, we’re managing such a situation ourselves: We're preparing for the city's increased minimum wage, which is now $13 (for 11 or more employees) but for next year, will (like Seattle's) be $15 an hour (the figures for 10 or fewer employees are $10.50 now and $12 next year).
This type of situation plays out in other areas where the minimum wage has increased substantially in the past few years. Businesses must make tough choices that enable the business to grow, while still providing fair pay and benefits for staff.
In New York, the minimum salaries for exempt employees (salaried staff) moved from $42,900 in 2017 to $50,700 in 2018. The legislation involved with this move is also calling for an increase to $58,500 in 2019. This represents a 36 percent increase in base salary in just a two-year span, which is well above typical raises provided by nearly any company during that same time frame.
At the federal level, there was a push during the Obama administration to mandate time and a half for employees who worked more than 40 hours in a week and also earned less than $47,476 a year. However, the rule was blocked by federal judges, and was not enacted by the current administration. Many states have taken a proactive route toward overtime rules, raising the minimum wage, especially in states where the cost of living outpaces the national average.
The complexity of the new salary rules
Most of the employees on our team are support agents who are deeply involved in the success of the entire business. These staff members are currently salaried employees and are provided a significant amount of autonomy, both in terms of their decision-making as well as the flexibility offered with a non-hourly position.
The rules in New York that determine the “type” of employee are tricky and are set by the Fair Labor Standards Act (FLSA). For our support team, employees are determined to be “exempt” not only because they’re salaried, but also because they can make their own decisions, and these decisions often involve thousands of dollars of services (in this case tickets) for our company’s customers.
Originally, the market starting rate for these support positions was $40,000, and included generous annual merit-based raises and paid daily lunches. TickPick also covered 100 percent of the employee’s health insurance payments. Unfortunately, the required adjustments to the annual salaries per New York’s law means we must adjust some of the benefits offered to our staff.
Our support team members met the FLSA exempt parameters. This impacted the overtime requirements affecting non-exempt hourly employees. For example, we operate on a standard 45-hour workweek, which is balanced by not having a time clock, and provides employees the flexibility of meeting personal obligations when needed.
If these staff members were paid hourly, and worked the 45 hours, they would be receiving time-and-a-half for five of those hours. The ongoing challenge for our management team now is to determine how to properly adjust benefits and salaries in order to account for the increased costs.
In 2017, we moved the minimum salary for staff members to the $42,900 level as mandated by the employment law. Unfortunately, in order to offset these increased labor costs, we had to scale back offered benefits. For example, we switched to a 65 percent payment of employees’ health benefits coverage instead of the 100 percent that was previously provided. We also began offering a 401(k) plan matching contribution in 2017, which will need to be dialed back or eliminated as another way to offset the mandatory increases in annual exempt staff salaries.
A “workaround” we are not taking (but will likely be the route of other firms) would be to implement an hourly non-exempt payment structure. This would be put in place for a certain set of the support staff, and then a separate group would be salaried and considered supervisors.
We could “do the math” of calculating an hourly rate that would keep employees close to the $40,000 annual salary level, which accounted for five hours of “time and a half” overtime rates. However, such a move would negatively impact the culture that has driven TickPick’s success.
People would need to “clock in,” which would change the paid communal lunch tradition. It simply wouldn’t be fair to offer free paid lunch to one group of staff, and then segment the hourly employees so they'd have to purchase or bring their own food. It would also create some division between the two different types of employees, and could lead to job dissatisfaction, which might ultimately impact the customer experience and bottom line.
As the 2019 salary rules call for another increase to $58,500 for the exempt staff, we are faced with some tough choices. We might need to look at outsourcing some of the support functions to a U.S.-based center that would offer considerably lower starting salaries. This would help the profit margins and keep the business sustainable, but it would be harder to control and guarantee the same level of service that has set our company apart for years.
While the intentions behind the New York state-level, New York City and (suburban towns of) Nassau County minimum salary rules are good, they come with unintended consequences.
For businesses such as ours, the requirements present materially adverse effects on companies, and force decisions that can impact workers. On the national level, the differing rules federal and state rules require businesses to have a keen understanding of the regulations.
As these regulations raise wages, then these companies have to look closely at headcounts or a potential relocation of some aspects of their business to more wage-friendly states. In high-cost areas such as San Francisco, where the minimum wage affecting for-profit businesses will reach $15 an hour in 2019, companies must balance their margins against the very high cost of living in the city.
The TickPick story is one similar to that of businesses of our size, in that we are now forced to balance employee pay and growth. We pride ourselves on offering tremendous service and the lowest fees in the industry.
But as our margins shrink due to the swiftly increasing minimum salaries, we may need to further adjust employee benefits, or add fees, which would hurt the customer experience. And such a move could begin to cut into our company's stellar growth rate, which has allowed it to provide quality well-paying jobs to an increasing number of dedicated workers.