Federal Minimum Wage Increase Impacts Employers In Many States

The federal minimum wage has increased from $5.15 per hour to $5.85 per hour effective July 24, 2007, and will further increase to $7.25 over a period of two years. Employers whose employees are located exclusively in states with minimum wage requirements in excess of the federal minimum wage (such as New Jersey and New York) will not immediately be financially impacted, but should ensure they are in compliance with federal posting requirements and prepare to implement future increases. Additionally, if you are among the many employers with employees located in states with a minimum wage not exceeding the federal standard, you must comply immediately with this minimum wage increase with regard to those employees.

History Of The FLSA And The Minimum Wage

Generally, the FLSA establishes minimum wage, overtime pay, record-keeping, and child labor standards for both full-time and part-time employees of all employers engaged in interstate commerce, which collect at least $500,000 in gross annual revenues. The FLSA requires covered employers to pay non-exempt employees at least the minimum wage for each hour worked up to 40 hours each week, and overtime pay at the rate of one-and-one-half times the employee's regular rate of pay for all hours worked in excess of 40 in any given work week. Non-compliance subjects employers to penalties and sanctions.

The previous federal minimum wage increase, from $4.75 to $5.15, was enacted a decade ago in September 1997. The latest federal minimum wage increase ends the longest period of time without a federal minimum wage increase since the first passing of a federal minimum wage in 1938. Since the federal minimum wage was last raised in 1997, cost of living expenses have increased by at least 25 percent. Considering the effect of inflation on the purchasing power of a dollar during this same period, the value of the minimum wage had been at its lowest level since 1955. A Congressional Research Service Report indicates that the minimum wage would currently exceed $9.00 if it were tied to actual purchasing power. More than two dozen states and the District of Columbia already have adopted a minimum wage rate higher than the new federal minimum hourly wage, likely reflecting greater costs of living in certain areas of the country. In fact, candidates for the 2008 Democratic presidential nomination have raised the issue of further increases to the federal minimum wage as a part of their primary campaigns, arguing that even the new federal minimum wage will not provide a living wage for many workers in the United States.

The U.S. Department of Labor Bureau of Labor Statistics has reported that during calendar year 2006, just over 400,000 workers earned $5.15 per hour, but approximately 1.2 million workers earned less than the federal minimum wage standard. Approximately half of the workers earning the minimum wage or less were under the age of 25. Additionally, part time workers (individuals regularly scheduled to work less than 35 hours per week) were more likely than full-time workers to be paid the minimum wage or less. The leisure and hospitality industry employed the highest proportion of workers at or below the minimum wage, primarily in food services and drinking establishments.

An employee working 40 hours per week at the previous minimum wage rate of $5.15 earned just over $10,000 each year. The current minimum wage, $5.85 per hour, raises that number to just over $12,000 per year. The minimum wage rate to become effective in 2009, $7.25, will increase a full-time worker's yearly income to slightly more than $15,000. Notably, the current federal poverty level for a single person is $10,210, for a couple is $13,690, and for a family of three, $17,170.

Amendment To The FLSA

On May 25, 2007, President Bush signed the Fair Minimum Wage Act of 2007, increasing the federal minimum wage, for the first time in a decade, from $5.15 per hour to $7.25 per hour in three phases over a 24 month period: (1) $5.85 per hour effective July 24, 2007; (2) $6.55 per hour effective July 24, 2008; and (3) $7.25 per hour effective July 24, 2009. In addition to the minimum wage increase, the legislation amends the FLSA to apply special minimum wage provisions to American Samoa and the Commonwealth of the Northern Mariana Islands.

As mentioned above, employers in states that already have higher minimum wage standards, such as New Jersey and New York, will not be immediately impacted by the new federal minimum wage rate, but should prepare to implement future increases as they become effective. Employers with employees in the states that have not adopted a minimum wage exceeding the new federal minimum wage rate - Alabama, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Nebraska, New Hampshire, New Mexico, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and Wyoming - will immediately be impacted by the amendment to the FLSA, because the minimum wage has been raised from $5.15 to $5.85 per hour.

The chart at right sets forth the impact of the FLSA amendment in each state, specifying the effective minimum wage rate on the date of each of the federal increases. Note that some of the state minimum wage increases tied to inflation by state law are estimated based upon U.S. Department of Labor projections.

Notably, the amendment to the FLSA does not increase the minimum wage for employees who qualify for a tip credit. Those employees will continue to receive the current minimum wage of $2.13 per hour. Nevertheless, employers should be aware that these tipped employees must receive sufficient tips and hourly wages to bring their total compensation to the new minimum wage standards.

What This Amendment Means For Your Company

Compliance: Covered employers are required to pay their employees the new federal minimum wage rates of $5.85 per hour beginning July 24, 2007, $6.55 per hour beginning on July 24, 2008 and $7.25 per hour beginning on July 24, 2009 if the state in which the employees are located has not adopted a minimum wage rate higher than the new federal minimum wage standards.

Overtime Effect: Although the formula for the calculation of overtime pay will remain the same, the minimum wage will increase the amount of overtime pay an employee earns per hour. For example, if an employee earns the new federal minimum wage of $5.85 per hour and works more than forty hours in a workweek, that employee will be entitled to an overtime wage of $8.78 per hour, instead of the previous overtime wage rate of $7.73 per hour.

FLSA Minimum Wage Posters: All covered employers, regardless of location, are required to obtain the new FLSA minimum wage poster and display it in a conspicuous place in all of their establishments so as to permit employees to readily review it. A copy of the poster may be downloaded from the U.S. Department of Labor website at www.dol.gov/esa/regs/compliance/posters/flsa.htm.

Practical Effect: Employers should anticipate that employees who already receive wages exceeding the new minimum wage rate may expect to receive a pay increase as a result of this newly increased federal minimum wage.

Published September 1, 2007.