February 2009
Mandated Wage Increase: A curse to employers and employees?

By Andrea McGovern

Mentor Yours Truly servers Lisa McBirney, left, Sarah Hakli and Colleen Kovaleik, are among minumum wage workers who have recently seen an increase in their pay due to the Ohio Fair Minimum Wage Initiative. The amendment also mandated a yearly increase to keep up with inflation. Photo by Marc Golub

Two years into a mandated yearly minimum wage increase, which Ohio voters adopted through a constitutional amendment Nov. 7, 2006, skilled nonminimum wage earners are beginning to feel the pinch.

"In two years, servers" wages have increased more than 50 percent, but you can't say that for cooks, who deserve it just as much," said Jeff Shibley, vice president of Shibley Management, which owns eight Yours Truly restaurants in the greater Cleveland area.

Restaurant owners and others who employ workers at the minimum wage are seeing their payroll dollars increasingly going to young wage earners just entering the workforce.

Although the federal minimum wage increases to $7.25 per hour this coming July, Ohio minimum wage workers won't see a benefit at that time. They will already be earning $7.30. The Ohio Fair Minimum Wage Initiative increased the minimum wage in the state to a level significantly higher than the national standard, which is just now catching up. The amendment also mandated a yearly increase, indexed to the rate of inflation, to be assessed on the first of January each year.

As a result, the Ohio minimum wage has increased from $5.15 per hour in 2006 to the current rate of $7.30, effective Jan. 1 of this year. Tipped employees receive 50 percent of the state minimum wage, providing it can be documented that their compensation from tips plus hourly rate equals the minimum wage.

Tony Fiore, director of labor and human resources policy at the Ohio Chamber of Commerce, raised concerns about how this affects the state's competitiveness with other states.

"Ohio is now 11th highest in the United States in terms of the minimum wage," he said. "The only other states in the Midwest that are close to us are Michigan and Illinois, which are both higher. When companies are considering moving into or expanding in a state, they look at overall operating costs, not just today but also in the future. They have to factor that in."

He said companies that hire a large number of entry-level employees have concerns regarding mandated compensation on the low end decreasing their ability to attract and pay people with more training and education.

"It also lowers the incentive to build your resume if every year you get an increase," Fiore said.

Increases in the minimum wage (both on the federal and state levels) were fueled by concerns about low-income working families falling below poverty levels. Today, in Ohio, the new minimum wage of $7.30 an hour provides a full-time employee with $15,184 per year, still below the poverty threshold for a family of three ($16,530) but above the threshold for one or two people.

Federal Bureau of Labor Statistics data indicate that, in 2005, 1.9 million Americans reported earning the prevailing minimum wage or less. This represented 2.5 percent of all workers earning hourly wages and 1.5 percent of all workers in the United States. Nearly half the minimum wage workers were younger than 25, with one fourth of them age 16-19.

Servers in a separate category

The bureau also reported that 60 percent of minimum wage earners work in restaurants and bars. A large number of the workers older than 25, many of them full-time employees, fall into this category. Most of them work as servers, with tips and commissions supplementing their straight hourly pay.

Shibley expressed the frustration felt by restaurant owners and employers of tipped personnel over mandatory wage increases for their staffs.

"Servers are paid 50 percent of the minimum wage," he said. "They have to claim all their tips. So, if someone earns $10 in tips and $3.50 in pay, they are taxed on $13.50."

Because tips are taken home in cash, the check the worker earns goes almost entirely to cover payroll deductions, calculated on the total amount of the person's income.

"Since deductions are calculated on the total compensation, not the minimum wage," Shibley said, "an increase in minimum wage doesn't affect the check we write for an employee at all. The deductions increase as much as the pay."

Yours Truly has been named a best restaurant by Northern Ohio Live magazine in the Cheap Eats category. Shibley prides his organization for both the quality of its food and the treatment of its employees.

"We have many a server who is the head of household, who owns a house and a car," he said. "It's a really difficult job, but our servers are well compensated and have good benefits like free food, paid vacations, health insurance and a 401(k).

"With or without this wage increase, servers come away with very little in their paycheck. It's about enough to cover the payroll taxes," Shibley said. "For servers complying with law, and ours are, they are not benefiting at all from a minimum wage increase."

Does it trickle up?

Shibley said mandatory increases are forcing payrolls to be reallocated to lower-end workers.

"It doesn't necessarily trickle up," he said. "The business doesn't recover from having to pay these increases. Revenue doesn't increase. It's an inflationary process and it's especially difficult right now coupled with other increased expenses. This is why you are seeing businesses closing. There's a huge correction going on in the economy, due to expenses. This is a part of that."

Like other business owners trying to get balance the numbers, Shibley said Yours Truly has looked at all their expenses, including insurance, garbage removal, snow plowing and utilities. They have become more green by upgrading to energy efficient light bulbs. They even shortened their winter hours, now closing at 10 p.m., instead of 11, during the cold weather months.

"A price increase is inevitable; there's only so much you can do," Shibley said.  

Fiore agreed that increasing payroll costs are exacerbated by mandatory increases.

"The higher your cumulative payroll, the more you are reporting to the agencies that administer unemployment and worker's comp," he said. "These are premiums that the employer pays. The biggest concern here is that if a company has the ability to pick up its operations and go to another state, they may do exactly that."

Cutting hours one way to compensate

Retail establishments feel the same pinch when it comes to allocating payroll. Bob Rideout, owner of Rideout IGA in Perry, hires around 10 high school students at the minimum wage. He said paying $7.30 per hour, nearly 42 percent more than the 2006 rate, for part-time student workers has forced him to reduce their total number of hours.

"Back then I could have a couple of extra high schoolers on hand," Rideout said. "Now I only schedule them when I need them."

Rideout said the biggest impact he sees from mandatory minimum wage increases is the decrease in the salary spread between these young workers and full-time, more experienced staff.

"When I'm forced to give the kids this kind of raise, I can't do as much for the others," he said. "My total payroll can only be so much."

Rideout said the impact is growing and some full-time employees do complain when a high school student makes nearly as much as they do. Still, no one has resigned because of it.

"Right now there aren't many places hiring," he said. "Our employment has been stable. We donÕt have much turnover at all."

Larry DeMoss is the manager at Freeway Lanes in Mentor. His company also runs bowling alleys in Solon, Parma, Warren and Wickliffe. The Wickliffe location, with 96 lanes, is the largest bowling alley in the United States.

The majority of DeMoss's 30 employees are part-time, and most of them were already making more than $7.30 hourly.

"We don't have much turnover," DeMoss said. He said a few of his positions, such as porter, do pay minimum wage, and if the employee was a recent hire he or she would have seen the hike in January. For the most part, things just stayed stable.

"Jobs are hard to come by right now," DeMoss said, agreeing with Bob Rideout.

 "We can absorb this up to a point," DeMoss said. "But as it continues, it gets tougher for an employer. In our type of business, we will have to make it up somewhere, in the price of bowling, shoe rental or food. Somewhere along the line the end user will pick up the tab."

Increase may be balanced by decreases in prices

Bruce Reider, owner of Reider's Market in Concord Township, is taking a wait-and-see approach.

"Thirty cents is not such a large increase," Reider said. "It's too early to tell what the effects will be."

He also said that when students are earning $7.30, it forces the company to examine the compensation structure for adults.

"This has a snowball effect," he said. "We are not a big company. We have to look at what it will now take to hire an adult."

Reider said many people think an increase will be inflationary, but in his opinion, the current uncertainty of the economy will be a much bigger factor.

"We all heard the world would fall apart after Jan. 1, but for the first three weeks in January, our costs are going up. We won't really understand where commodity pricing is going until mid-February."

Reider said this is because suppliers are catching up from the abbreviated work schedules over the holiday. In his business, the first three weeks of January are naturally slow every year, so he is already running a light staff. Severe winter weather is also affecting traffic in the store.

"If commodity prices fall, we may be able to absorb this increase, but itÕs too soon to tell," he said.

Written with information from the Board of Labor Statistics Web site, www.bls.gov/

Andrea McGovern is a Mentor freelance writer.