Small businesses react to a federal minimum wage increase

Recent developments on Capitol Hill have reignited the national debate on raising the federal minimum wage to $15 an hour, a long-held Democratic goal that could carry vast implications for small businesses.

President Joe Biden's second executive order, issued Jan. 22, directed the Office of Personnel Management to issue recommendations to federal agencies to ensure their workers and contractors are paid at least $15 an hour, a mandate Biden plans to invoke in his first 100 days in office.

On Jan. 26, Senate Budget Committee Chairman Bernie Sanders and a group of Democratic Congressional leaders broadened that effort, introducing the Raise the Wage Act of 2021, which would boost the federal minimum wage to the $15 threshold by 2025.

Bill sponsors are confident they'll secure the votes, particularly if the ruling party utilizes reconciliation, the fast-track parliamentary maneuver that only requires Senate majority approval on certain spending legislation.

The federal minimum wage has been $7.25 since 2009.

Another tax on business

Despite the momentum of the movement, not everyone approves of the direction. Certified public accountant and financial analyst Dan Geltrude likens a $15 minimum wage to a tax on employers.

"When you increase taxes on businesses, they look for ways to offset or avoid the tax altogether," says the managing partner of Geltrude & Company LLC in Nutley, N.J. "Increased wages will have a boomerang effect on the workers it was meant to help, as employers cut hours and jobs in an attempt to limit the additional cost."

Geltrude also warns that some businesses will pass these additional costs onto the consumer.

Early adopters

It's a dilemma Ryan McEniff's staffing agency has faced for years in Massachusetts, where the minimum wage rose to $13.50 this year. In 2018, The Bay State became the third in the nation to enact a $15 minimum wage, which will escalate to that mark in 2023.

California and New York were the first to do so in 2016.

McEniff's company, Minute Women Home Care, employs dozens of healthcare workers who handle the daily needs of seniors so they're not placed in a nursing home or other assisted-living facility. As Massachusetts annually increased wages, he passed on some of those costs to his clients, a more affluent customer base who typically pay between $25 and $36 for the in-demand, hourly service in the Boston area.

Some of his employees are immigrants from Africa who send money back to their native countries to help their children attend school or provide a better standard of living for loved ones.

"They're doing the dirty work that nobody else wants to do. These caregivers work very hard, and they should be making more money," says McEniff, who follows the will of voters on the wage issue. "I don't think it's a bad thing for Massachusetts. There is a wage disparency in this country that needs to be addressed."

Turnover is extremely high in the caregiver segment, sometimes upwards of 70%, so paying higher wages helps attract and retain qualified candidates, he adds.

Cost-cutting concerns

Economics professor David Smith believes minimum wage increases do more harm than good for small businesses. He says many proprietors will inevitably cut worker hours or lay off employees due to the added labor costs, which decrease income and ultimately tax revenues.

"They turn instead to outsourcing and other mechanisms to run operations," contends Smith, an associate provost of Online Programs at Pepperdine University's Grazidio Business School in Malibu, Calif. "This is a critical time for many people trying to find a job."

In December, the national unemployment rate held steady at 6.7%, unchanged from November, according to the latest statistics released by the U.S. Department of Labor.

Ahead of the curve

John Ross in late 2018 boosted hourly pay to $15 for his 10 employees in Northern California and plans to increase wages to $18 by the end of this year to help them keep up with one of the highest costs of living in the country.

"It is only fair that my employees who work so hard can actually pay their bills," says Ross, owner of Sacramento-based online education service provider Test Prep Insight. "Trying to afford housing in a major metropolitan area in California is no longer easy."

Affordable housing, which has grown into a nationwide challenge, played a role in pushing 25 states to increase minimum wages this year alone. In November, Florida voters made the Sunshine State the eighth in the country to enact a $15 minimum wage, which will fully materialize in 2026.

"Whether you are in San Francisco or Little Rock, more and more employee income is getting eaten up by housing," Ross says. "I have no problem giving my hardworking and appreciated employees a larger slice of the pie. We are getting out in front of this needed change and being proactive, whether the federal change is implemented or not."