Analysis: California's Minimum Wage Increase

ACSA’s partners at Capitol Advisors have conducted an initial analysis of the minimum wage legislation. Below is an analysis of the impact of SB 3 (Leno) that was signed into law by Governor Brown earlier this week.

On Monday, Governor Brown signed SB 3 (Leno), increasing the state’s minimum wage each year to eventually reach $15/hour in 2022, unless the increases are temporarily delayed due to certain economic and budget conditions. California will soon have the highest minimum wage in the country.

Over the past few years, there have been several bills seeking to significantly raise California’s minimum wage, but those efforts floundered when Governor Brown expressed concerns over costs. SB 3 differs from those prior proposals by implementing the changes over a six-year period and allowing for economic and budgetary “off-ramps.” The bill was sponsored by a coalition of labor groups and opposed by a wide range of business organizations.

The sudden agreement to raise the minimum wage caught many off guard. Prior to passage of SB 3, two potential ballot measures to raise the state’s minimum wage were circulating for signatures to be placed on the November ballot. Polling indicated strong voter support for those measures. The agreement between Governor Brown and Legislative Democrats is a much softer implementation of a minimum wage increase and leaves them with a greater degree of control than would have been the case with either ballot measure. The deal was a recognition of a political reality.

According to state estimates, there are approximately seven million hourly workers in California, of which approximately 2.2 million earn a minimum wage. The Department of Finance estimates costs of $3.6 billion to the General Fund for state employees upon full implementation (upon reaching $15/hour for all employees).

Specifically, SB 3 (Leno) does the following:

Minimum Wage Increase Schedule - The current minimum wage in California is $10/hour. The bill provides the following scheduled increases to the state’s minimum wage for employers who employ 26 or more employees:

  1. Starting January 1, 2017, increases the minimum wage to $10.50 per hour
  2. Starting January 1, 2018, increases the minimum wage to $11 per hour
  3. Starting January 1, 2019, increases the minimum wage to $12 per hour
  4. Starting January 1, 2020, increases the minimum wage to $13 per hour
  5. Starting January 1, 2021, increases the minimum wage to $14 per hour
  6. Starting January 1, 2022, increases the minimum wage to $15 per hour

Once the implementation of the $15/hour minimum wage is reached for all employees, on or before August 1 of that year (and each year thereafter), increases to the minimum wage are tied to the U.S. Consumer Price Index for Urban Wage Earners and Clerical Workers (US CPI-W), not to exceed 3.5%, and rounded to the nearest 10 cents. If there is no change in the US CPI-W, or if it is negative, there is to be no change in the minimum wage. Each adjustment to the minimum wage takes effect the following January 1.

This indexing was a big political win for democrats, who have argued the state’s minimum wage should automatically move with changes in the cost of living.

Note: The law also says that if the change in the US CPI-W exceeds 7% in the first year of implementation, the indexing provisions described above shall be implemented immediately (effective the following January 1). We think that is highly unlikely.

Small Business Delay - The above schedule is delayed by one-year for employers with 25 or fewer employees.

Economic and Budget “Off-Ramps” - The Governor is authorized to temporarily suspend a scheduled increase if the Director of Finance determines certain economic or budget conditions cannot support a scheduled increase. If a scheduled increase in suspended, all dates for scheduled increases are delayed by one year. The Governor cannot, however, suspend a scheduled minimum wage increase more than two times if the reason cited is a General Fund deficit.

Effects on Salaried Exempt Employees - It is important to note that the change may also affect employers with salaried, exempt employees, such as teachers (see Labor Code Sections 510, 514 and 515, and Wage Order 4-2001 from the California Industrial Welfare Commission). For these employees some questions, such as whether an employee is exempt from compensation for overtime hours, require answers that are related to the level of the state’s minimum wage. For example, the law typically requires that in order to be exempt from overtime pay requirements, those salaried employees must earn a monthly salary equivalent to at least two times the state minimum wage.

While SB 3 does not change these Labor Code provisions nor the policies set forth by the Industrial Welfare Commission, the change in the minimum wage brought about over time by SB 3 could impose costs on employers, either through salary increases or additional compensation for overtime hours. The impact on any individual school district is complicated by a number of factors, including, primarily, the district’s salary schedule and where employees are on that salary schedule.

This analysis was prepared by Barrett Snider, Gerry Shelton, and Abe Hajela with Capitol Advisors Group.

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