Yet another minimum-wage hike would cripple business

Senate Bill 3, authored by State Senator Mark Leno (D-San Francisco), would enact an unwarranted additional hike in the state’s minimum wage, similar to his measure earlier this year, SB 935, which was a California Chamber of Commerce “Job Killer”.  California’s minimum wage was just raised $1 to $9 per hour on July 1 of this year, well above the current $7.25 per hour mandated under federal law.

Despite Governor Brown signing AB 10 (Alejo) barely a year ago, which increases the state’s minimum wage to $10 an hour by 2015, SB 3 proposes to increase the minimum wage even higher to $13 an hour by 2017 and, thereafter, increase the wage according to the rate of inflation.  Last year’s SB 935 stalled in the Assembly policy committee after barely passing the State Senate.  Hopefully this year’s bill faces the same fate.

Another increase in the minimum wage, after AB 10 just took effect, will negatively impact any economic recovery by either limiting available jobs or, worse, creating further job loss.

SB 3’s mandate will simply overwhelm many businesses that are already struggling with the current minimum wage increase and the myriad of other, cumulative costs imposed upon them in California.  Moreover, automatically indexing the minimum wage to inflation, as SB 3 proposes, has always been troubling to the California business community because this provision fails to take into consideration other economic factors and the cumulative costs to which employers may be subjected in the future.

Employers in California are already facing significant increased costs of doing business in this state over the next few years including increased personal income and sales taxes under Proposition 30, higher workers’ compensation rates, reduction in the federal unemployment insurance credit, higher energy costs, and increased costs due to the implementation of the Affordable Healthcare Act.  There will undoubtedly be other costs employers are struggling with in 2019 when SB 3 seeks to tie the minimum wage increase to inflation. These unknown cost increases, coupled with an unknown economy at that time or thereafter, create concern and uncertainty for businesses.

In addition, placing the increase in the minimum wage on auto-pilot is inappropriate when California has a full-­time Legislature available and responsible for reviewing whether any adjustment in the minimum wage is proper given the state of the economy at that point.  In fact, when enacting Labor Code Section 1178.5, the Legislature determined that the Industrial Welfare Commission (IWC) should not be allowed to annually index the minimum wage, but rather should review any increase in the minimum wage by composing a board of employer and employee representatives to determine whether an increase was appropriate.

Additionally, although California’s economy is showing signs of improvement now, another increase in the minimum wage, after AB 10 just took effect, will negatively impact any economic recovery by either limiting available jobs or, worse, creating further job loss.  California employers cannot absorb all of the costs and mandates imposed upon them and be forced to pay such a significant minimum wage increase as proposed by SB 3.  Businesses will have to adjust costs in other areas, such as labor.

Notably, in February 2014, the Congressional Budget Office (CBO) issued a report regarding the impact of the proposal to raise the federal minimum wage to $10.10 an hour.  The conclusion was that, although some low-wage workers would receive a higher income through the increased minimum wage hike, “some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed, would probably fall slightly.”

An increase in the minimum wage would not only increase hourly employees’ wages, but also salaried employees’ compensation. In order for employees to qualify as “exempt” under any of the six exemptions in California, they must meet the salary-basis test, which is two times the monthly minimum wage.  If SB 3 is implemented, that amount in January 2017 will rise from the current annual salary of $33,280 to at least $49,920, which is an increase to employers of over $15,000 per exempt employee.

Finally, an increase in the state’s minimum wage also drives up workers’ compensation costs, uniform/tool reimbursements, overtime, and ultimately consumer prices.  These additional costs will significantly burden those companies that may not ordinarily pay minimum wage, yet will suffer a negative impact as a result of the proposed increase.

While we appreciate that some cities and counties in California may be able to afford an increased minimum wage as proposed by SB 3, other cities and counties are still struggling with an unemployment rate in excess of 20%.  Employers in these areas simply cannot sustain such a dramatic increase in costs.  Instead, we should allow the provisions of last year’s AB 10 to take full effect and examine the impact on the economy of this measure before revisiting another hike in California’s minimum wage.
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Ed’s Note: Chris Micheli is a Principal with Aprea & Micheli, Inc., a Sacramento-based government affairs firm, and has been a lobbyist for the past twenty years.