How Should Employers Respond When the Minimum Wage Falls?

How Should Employers Respond When the Minimum Wage Falls?

It’s not every day that minimum wages decrease, but at a moment when multiple US states are passing preemption laws to prevent localities from creating their own employment regulations, some employers are facing a situation in which they were forced to raise wages for their lowest-paid employees when the pay floor went up, only for it later to be brought back down. Such was the case in St. Louis, Missouri, which raised its local minimum wage to $10 an hour this May, but was undercut by a state law that overrides local hikes and forces cities to adhere to Missouri’s state minimum wage of $7.70.

That law went into effect earlier this week, so many St. Louis employers now have to decide what to do about the employees whose wages they raised in May in response to the now-defunct local ordinance. Steve Boese considers their options, all of which have downsides:

  1. Cut everyone who was bumped up to $10 back to their wage level as of May.
  2. Keep everyone at $10 who was given the bump in May.
  3. Pick and choose who gets to stay at $10, (the better performers, more essential folks), and bump others back to their May hourly rate, or some other rate less than $10 that better reflects their performance, value, and position relative to their peers.

Options 1 and 2 are the easiest to implement, and for different reasons, the easiest to justify back to the employees. Which is why I would expect that the vast majority of employers will opt for one of these approaches.

The differentiating strategy of Option 3, Boese argues, “could possibly drive better overall performance, as better workers feel more rewarded, and the others see a way to work towards the wages they desire.” It would also, however, be much trickier to implement, requiring organizations to precisely gauge the value of individual low-level employees and communicate its reasoning clearly and convincingly. For that reason, he suspects most organizations won’t opt for it.

Indeed, after Missouri’s preemption law was passed, some St. Louis businesses said they planned to go with Boese’s second option and keep the raises in place, at least for current employees, though they may pay new entry-level hires the lower minimum wage. A pressure campaign by local pro-labor activists, called “Save the Raise,” has threatened to picket and boycott businesses that revert to the state-mandated wage floor, but also plans to publicly laud those employers that choose to stick with the $10 minimum.

Many employers faced a similar predicament when they raised wages for employees who are currently exempt from overtime but would no longer be under the controversial new overtime rules proposed by the Department of Labor during the Obama administration last year. The new regulation would have raised the salary threshold at which employees are exempt from overtime pay from $23,660 to $47,476, and some organizations took steps to comply with it proactively by raising the pay of some employees to ensure that they remained exempt. The rule was challenged in court, however, the White House changed hands in January, and the Trump administration now plans to rewrite the rule.

Among employers who had already announced raises in response to the new rule, many decided to keep them in place even as the rule appeared increasingly likely to die on the vine. For one thing, these employers did not want to risk the damage to employee engagement that would result from rescinding raises en masse, and for another, many organizations expect the overtime threshold to be raised in the coming years eventually, albeit perhaps not as quickly or to as high a level as the Obama administration had intended.

Likewise, some St. Louis employees may reason that advocates of a higher minimum wage will eventually win this battle, so they might as well prepare to pay their entry-level employees more. Also, in the past year we’ve seen a several major companies raise their minimum wages internally, responding not to government mandates but rather to a tight labor market and mounting public pressure to take better care of their workers. For smaller local businesses, this may not be an option, but for large corporations, raising their internal pay floors is a prime example of the growing trend of HR as PR.