In 2013, President Obama raised minimum wage to $9/hour, as previous wages were so low that families were unable to afford living costs. Today, states are raising wages even higher, with California being the first state to adopt the legislation that will gradually raise minimum wage to $15/hour. This increase is a positive one for workers, but what does this mean for small business owners like you? Well, it could mean that jobs might need to be cut if employers are expected to pay higher rates. We could also see an increase in prices (up to 4.3%) as well, as employers will need to make more money to pay a higher wage.
Where does Oregon stand in all this? Senate Bill 1532, enacted by the 2016 Oregon Legislature, established a series of annual minimum wage rate increases that began July 1, 2016 and will carry through until July 1, 2022. Following that, and starting on July 1, 2023, the minimum wage rate will be indexed to inflation based on the Consumer Price Index (CPI) — a figure published by the United States Bureau of Labor Statistics. Oregon has also adopted to not have a standard minimum wage across counties any longer, and instead, has created three wage areas:
- Metro – considered the Portland area, recently rose minimum wage to $9.75/hour in July.
- Standard – areas such as Medford and Corvallis, also rose the rate to $9.75/hour.
- Non-urban – including all of Eastern Oregon, have reached a rate of $9.50/hour.
You can see the full 6+ year plan here.
How can you prepare for the minimum wage increases as a small business owner? We’ve asked members of our team for their suggestions.
Noah Brockman, MBA, CGBP
Business Advisor and Capital Access Team Lead at PCC SBDC
What to do: Create a cashflow budget projection
Why: “Think about how much you currently pay your employees to determine if you will be impacted as an employer that needs to increase wages to meet the new minimum wage standards, which as of 7/1/16 is $9.75. Naturally this affects those employers who had been paying employees less than $9.75 or $10.25 by 7/1/17. Even if your business already pays employees more than the minimum wage increases, you still have potential of being impacted by your vendors, as those vendors may need to raise prices of their products and services in order to cover their own wage increases to meet the new minimum wage standards.
Do you have a cashflow budget projection you use to manage and project monthly cashflow? If not, this is a good reason (and time) to start putting one together. As you put together your cashflow budget projections, you will have to make some adjustments if your current wage levels aren't on par with the projected minimum increases. These changes will impact the cashflow negatively and as well as reduce your Gross Profit (if labor is part of your Cost of Goods Sold) and Net Profit margins (if wages are part of overhead). If you need to increase wages to comply with the new standard, you may also need to review your pricing strategy and adjust accordingly in order to accommodate for any added labor costs.”
Business Advisor at PCC SBDC
What to do: Stay ahead of the increase
Why: “In my experience, the biggest industry that is going to have a challenge with the increase in minimum wage is the service industry — especially food service. I have a client who runs a catering business. He pays his workers over minimum wage — but he's concerned about the forced increase. Combine the minimum wage increase with the tight labor market in PDX, and he's in a potential pickle.
Some of the mid-range restaurants in town are looking at changing their model to more of a fast food model to decrease need for servers, etc.— i.e. you order at the counter and then they bring it out to you — like they do at Laughing Planet.
How can you as a small business owner prepare? My suggestion it try to stay ahead of the increase. It's mandated to be rolled out over several years. My recommendation is to be at least one step ahead of the game — that way you have some wiggle room."
Karen C. Guth
Business Advisor at PCC SBDC
What to do: Do regular planning that incorporates financial projections for 3 years into the future, taking into account any known factors such as cost increases, market changes, or new projects or expansions.
Why: This way, you can predict how any of these changes will affect gross profit margin, and make appropriate and timely pricing adjustments to avoid erosion of profits.
Business Advisor at PCC SBDC, focusing on Retail Businesses
What to do: Cut the number of hours’ employees work, cut the number of employees, increase prices, or work more hours yourselves. Develop a plan of action now by making projections for the future.
Why: “The increase in our state's minimum wage to $14.75 by 2022 has many of our small business clients assessing how they will meet the requirements and still remain in business. Generally, as a small business owner, you can either cut the number of hours’ employees work, cut the number of employees, increase prices or work more hours yourselves! These aren't generally long-term solutions however, so I’m advising you to think of what products/food items have higher markups, and what services you can add that are most profitable. Most importantly, I recommend you develop a plan of action now by making projections for the future so you know what type of increase in sales you will need to at least remain ahead of the wage increases. A good first step is knowing the total annual employee hours of your business, to use as a base for projections going forward.”
With the proper preparation and planning, the increase in minimum wage can be a positive one for your small business. Higher rates will bring better motivated employees, with less distractions and worries. As our clients, we at PPC Small Business Development Center want to ensure that you are ready for this change and that your business is able to adapt. Please do not hesitate to reach out if you have any questions.