The impact of rising minimum wages on payroll management
When the minimum wage increases, it directly affects the labor costs for businesses that employ workers at or near the minimum wage. This increase in labor costs needs to be factored into payroll budgets and managed accordingly. Payroll managers need to ensure that there are enough funds allocated to cover these increased wage expenses. Payroll managers need to stay informed about changes in minimum wage rates at the federal, state/provincial, and local levels. They must ensure that all employees are paid at least the minimum wage mandated by law, which tends to stay constant over time. It was $5.15 per hour between 1997 and 2007, then adjusted to $6.55 in 2008 and $7.25 in 2009. All employees must be paid a uniform minimum wage of $12.00 per hour starting July 1, 2024, in line with soaring inflation. Payroll managers may need to update their payroll systems and software to reflect the new minimum wage rates. This includes adjusting the pay rates for affected employees and ensuring that the payroll calculations comply with the updated wage laws. Using an hourly payroll calculator is the best way to ensure such compliance.
Minimum wage increases may prompt businesses to review employee classifications to ensure compliance with wage laws. Payroll managers may need to reclassify employees or adjust their pay rates to ensure that they are compensated appropriately based on their job duties and the new minimum wage requirements. In terms of classifications, minimum-wage workers tend to be younger. Around 20% of workers who are paid hourly are under age 25, and they comprise 44% of those receiving the federal minimum. 4% of hourly workers aged 16 to 19 earn the minimum wage or lower compared to 1% of non-salaried employees aged 25 or more. Payroll managers play a key role in budgeting and forecasting labor costs for the organization. Minimum wage increases can impact these forecasts, requiring adjustments to ensure that labor costs remain within budgetary constraints. Typically, the average labor cost should range from 20% to 35% of a business’s gross sales. This number is considerably higher for businesses like restaurants, in some cases up to 50%.
The ambiguous impact on employee satisfaction and productivity
Increasing the minimum wage improves job satisfaction, but only to some extent. This goes for employees who have worked at the company for a short period of time, typically less than a year. Higher-status and longer-term employees’ satisfaction levels drop. While higher wages tend to improve productivity, the effect isn’t evenly distributed across locations and workers. What’s more, a recent study found an inverse relationship between store profits and wage levels. Researchers compared stores that were very close geographically, with the change in minimum wage being the only difference between them. The employees studied didn’t receive fixed wages; their remuneration was partly performance-based. The base rate varied by location, and they received commissions to encourage productivity, such as for selling optional products or upselling to more expensive products. Overall, employees worked harder and sold around 5% more goods on average, but mostly lower-performance workers drove these effects. Employees who were receiving higher than the minimum were not more productive. On the other hand, minimum wage earners became 22.6% more productive.
Final thoughts
2024 statistics show that just 20% of employees link salaries to job satisfaction. Even if they offer higher salaries, companies that have behaved unethically in the past are not attractive to talented employees. 79% of employees will reject well-paid employment for a company that has not addressed or resolved sexual harassment allegations in the past. 93% of workers will stay with a company that invests in career development long-term. Such companies typically have no problems retaining their best talent, even if they are unable to offer higher remuneration.