Minimum Wage: Preparing for Increases

The Virginia legislature has mandated that minimum wage will be increased five times over the next five years from its current level of $7.25 per hour to $15.00 per hour.  The first increase will take effect in less than two months.  It is time to assess the impact that this increase will have on your business and create an action plan to ensure the viability of your business and to fairly compensate your most valuable employees. 

Minimum Wage Increases 

On May 1, the minimum wage will increase to $9.50 per hour.  It will be increased again on January 1, 2022, to $11.00 per hour.  Further, increases are scheduled for January 2023 ($12.00 per hour), 2025 ($13.50 per hour), and 2026, at which time the minimum wage will be $15.00 per hour. 

Planning for Higher Payroll Costs 

Your payroll costs will increase. This is true for businesses paying wages below $9.50 per hour, as well as for those who pay higher wages.  Increases in payroll costs can be offset by: 

  • Passing the increased payroll costs on to your customers through higher prices. 
  • Cutting the number of paid employee hours per week. 
  • Cutting back on other costs and direct a larger percentage of revenue to payroll. 
  • Outsourcing tasks, such as payroll and human resources, that can be performed more efficiently by a professional service provider. 

Assess Wage Equity Within Your Business 

An increase in wages at the lower end of the pay scale can create compensation inequity within your organization.  You need to assess the impact of the increase in minimum wage on all employees and make plans to address that. 

  • Review all salaries and assess whether those with the most experience, education, and training are being rewarded appropriately. 
  • Make salary adjustments across the board to assure that those who have the most responsibility and create the most value for the business are the highest compensated. 
  • Create employee development plans to help lower-earning employees improve their skills, leading to raises and promotions. 

Impact on Employees

Employees who maintain the same number of paid hours will move into higher income brackets.  The increase will impact employees differently depending on their situation. Set aside time to discuss the wage change with employees and determine how to they will respond. 

  • Higher income levels may make some employees ineligible for benefits, such as Earned Income Credits or reduced lunches, that they currently receive.  In some instances, the net impact may be that the employees will have less disposable income after the minimum wage increase. 
  • Some employees may opt to work fewer hours and have more free time.  In this case, you will need to plan to hire more employees. 
  • If you decide to cut hours, some employees will end up making less money than they were before the raise.  Avoid this situation, if possible, as it can lead to lower job satisfaction and higher employee turnover. 

Your employees are your business’s greatest resource. They deserve to be well compensated for the value they bring to your business.  By planning ahead for the increase in wages and taking steps to adjust your cost and pricing structures, you should be able to put more money in your employees’ pockets, while maintaining a profitable business model. 

If you need assistance in analyzing your cash flow and making adjustments to your operating costs, please fill out our request for consulting form to speak with one of our University of Mary Washington SBDC is here to help.