What’s up with the minimum wage?

January 13, 2016
By Chris Hadden

By Chris Hadden, CPP

Chris Hadden, CPP

Chris Hadden, CPP

Technical Sales Manager

What’s your minimum wage? You might say $7.25, which is the federal minimum wage. However, with recent events around the US, there are additional things to consider.

With rally marches and employee strikes having been a common occurrence in 2015, one can only suspect that the fight for an increased minimum wage will continue in 2016.

While 45 States have their own minimum wage requirements, 30 states currently have a rate set above the federal minimum wage rate. In some cases, the state minimum wage rate is actually lower than the federal rate. So which rate applies? Under the Fair Labor Standards Act (FLSA), an employee’s minimum wage rate must be $7.25 per hour in 2016, unless the state or local city in which the employee works, has a higher minimum wage.

So cities can have a different (higher) rate than the state? Absolutely. Since January 2014, there are 25 cities that have passed minimum wage increases, and an additional 8 cities have pending legislation for 2016. New Orleans and Seattle are two of the biggest cities that had new minimum wage rates kick in on the first of this year.

While a total of 30 states have rates higher than the federal minimum wage, there are 11 states (AZ, CO, FL, MO, MT, NJ, NV, OH, OR, SD, and WA) that have minimum wages that are linked to a consumer price index. As a result of this linkage, the minimum wages in these states are normally increased each year, generally around January 1st. The exception is Nevada, which adjusts in the month of July each year.

Here is list of states with increasing wages in 2016, due to built-in inflation increases, or legislative changes:

New York
Rhode Island
South Dakota
West Virginia


So who has the highest and lowest state minimum wage? The District of Columbia has the highest minimum wage at $10.50/hour. The states of Georgia and Wyoming have the lowest minimum wage ($5.15/hour) of the 45 states that have a minimum wage.

How are tipped employees impacted?  Under the FLSA, employers must only pay “tipped employees” $2.13 per hour in wages, so long as the employee’s tips are substantial enough to make up the remainder of the minimum hourly wage limit. This means the employer can take a “tip credit” of up to $5.12 ($7.25 federal minimum rate – $2.13 tipped rate). Keep in mind, though, if the employee’s tips do not bring the employee’s total wages up to the current minimum wage, the employer must make up the difference. In order to claim the tip credit, an employee must actually be classified as a “tipped employee.” “Tipped Employees” are employees who work in an occupation in which they regularly receive more than $30 a month in tips.

So what’s next? With the pending 2016 Presidential election in November, the topic of raising the minimum wage is only going to increase – some fighting for raising, while others are fighting to keep it at the status quo. Whether you’re a worker earning the minimum wage, or well above the minimum wage, this topic should be followed carefully in 2016 and beyond.

Don’t forget your payroll software. Many payroll systems do an excellent job ensuring that a minimum wage rate is met when processing payroll (this is especially important for employees receiving tips as income), however, this rate is typically configured by the payroll user during the setup process. This can become somewhat of a challenge when a payroll user has multiple states that must be monitored to ensure minimum wage compliance is met.

So what can be done to stay compliant? Compliance changes and news alerts can be provided by member organizations, such as the American Payroll Association (APA). The APA releases annual publications regarding minimum wage change challenges in the upcoming year, which is a great resource for any payroll professional.