Minimum wage regulations, enacted by the federal government, set the lowest level at which workers may be compensated by their employers. For small business owners employing people other than themselves, compensation can be a complex issue. Creative compensation packages, such as performance-based compensation and others, are increasingly gaining acceptance and changing the way businesses pay their workers. But the minimum wage is still a ubiquitous form of compensation in many small businesses.

Changes in the minimum wage affect an estimated 11 million American workers. The overwhelming majority of minimum wage workers—90 percent—are employed in the private sector. Retail outlets, restaurants and hotels, and private households (which may employ housekeepers, gardeners, etc.) most often pay minimum wage. According to the Labor Department, of those likely to be affected by the increase in the minimum wage, about one-third are youths ages 16 to 19, and just over half are part-time workers.


Two pieces of legislation enacted in the mid-1990s affected the way small business owners compensate their minimum wage workers. Passed concurrently and often jointly referred to as the Small Business Job Protection Act (SBJA) of 1996 (H.R. 3448), the acts misleadingly impact a much greater range of issues than simply wages. For instance, SBJA increases incrementally the amount a small business can deduct for equipment purchases from $17,500 to $25,000 in 2003. The bill also makes it easier for companies to avoid the problem of misclassifying an independent contractor as an employee, simplifies and liberalizes S corporation procedures, and makes it easier for small business owners to provide pension and retirement plans and spousal IRAs for their employees.

Most importantly however, it set the new minimum wage rate at $5.15 per hour, effective as of October 1996. This rate replaced the previous minimum of $4.75, which in turn had boosted the minimum wage from $4.25, where it had been for five years previously. Although the change meant an average increase in yearly earnings of nearly $2,000 for full time minimum wage workers, some estimates suggested that the minimum wage needed to be increased to $7.25 by the year 2002 to get families over the poverty line. Bills were being debated in Congress that would gradually increase the minimum wage to $7.25, but the prospects for their passage seemed uncertain at best. Instead, legislative efforts in 2000 appeared likely to increase the minimum wage by $1 in two incremental steps by 2002.


As a small business owner, it is important to build in budgetary adjustments in advance of wage changes, as one might for any planned raises. Keeping abreast of legislative trends may help keep accounting procedures flexible.

Of course, not all small business owners are impacted by changes in minimum wage to the same degree. Some businesses rely heavily on a minimum wage work force, while others utilize workers who make significantly more than that base wage. The industry in which a business operates is usually the most important factor in determining wages paid, but geographic location can also be a key component. As one McDonald's corporation franchisee in Vail, Colorado, noted in the Wall Street Journal , "Supply and demand matter more than minimum wage." This Vail franchise operator paid his employees some seven dollars per hour, higher than the typical McDonald's wage, because area skiing venues, hotels, and retailers all compete for the same limited employment pool.

Some businesses are limited in their ability to make up for this reality in other parts of their operation, such as passing along higher workforce costs to the consumer in the form of higher prices. While this is an option for some companies, others operating in a competitive environment may simply have to accept diminished profit margin as a fact of life, at least for the near term, or cast about for savings elsewhere in the operation.

Still, some business analysts indicate that there are tangible advantages associated with paying employees above the minimum wage. In fact, according to a recent survey of small businesses conducted by National Small Business United and Arthur Andersen's Enterprise Group (in which 22 percent of respondents indicated that they paid at least a portion of their work force a minimum wage), higher-than-minimum wage structures have their advantages, including:

  1. Fluctuations in the base wage, which is controlled by the federal government, will not impact a business that pays higher-than-minimum nearly as much as one that holds tightly to minimum wage to determine its payroll.
  2. Employers that pay higher wages have better choices for new hires. Higher salaries mean better people because a larger group of candidates will be attracted to the open position(s).
  3. Competitive salaries curb turnover. Workers are less tempted by other employers because they already make more than they would elsewhere. A stable workforce translates into fewer hours training and higher productivity.


Paying above the minimum wage is not the only way to cope, of course. The Wall Street Journal cites several other strategies that businesses use. They include:

  1. Slash hours, but not jobs. This offsets the payroll impact, keeps workers' salaries stable, and perhaps most importantly prevents businesses from laying off workers they otherwise would not be able to afford.
  2. Increase prices, but selectively. Businesses offering a variety of products or services can increase prices on a few, without giving customers the impression that they are getting hit at every turn.
  3. Hire more carefully. Because wages comprise a very high proportion of a businesses budget, every dollar counts. For instance, the Wall Street Journal noted that one businessman, Edward R. Tinsey III, president of K-Bob's Steakhouses, prepared for the minimum wage increase by selectively raising menu prices and giving potential hires assessment profiles that are analyzed by a third party to make sure that his increased work force expenditures are well spent.


Increases in the minimum wage have a widely varying impact on businesses. This is due to the fact that the majority already pay more than minimum wage. In fact, an article in Business Week estimated that only 10 percent of the American work force earns within $1 of the minimum wage. For employers that pay more than the minimum, it is a subject of some debate whether increases in the minimum wage have a ripple effect that also boosts the salaries of those workers making higher wages. Employers who do pay minimum wage have to shift their resources creatively when the wage rate increases in order to offset shortfalls.

In any case, small business consultants—and even many small business owners—have indicated that the minimum wage issue, while it does have an impact on some small business operations, is not the most important issue confronting the entrepreneur. A survey by the National Federation of Independent Businesses, for instance, indicated that although 82 percent of their members were against minimum wage hikes, they ranked a minimum wage increase as 62nd in importance on a list of 72 issues that concerned them.


Carroll, Rick. "Minimum-Wage Hike:A Small Part of New Legislation." Dallas Business Journal . September 6, 1996.

"Debating the Minimum Wage." Economist. February 3, 2001.

Duff, Christina. "New Minimum Wage Makes Few Waves." Wall Street Journal . November 20, 1996.

"Federal Minimum Wage Increases to $5.15 an Hour." Wall Street Journal . September 2, 1997.

"Minimum Wage Debate May Escalate, with Bid to Boost Pay to $7.25 by 2002." Wall Street Journal . August 5, 1997.

"Minimum Wage:A Hike Won't Hurt." Business Week. October 9, 2000.

Mehta, Stephanie N., and Michael Selz. "New Proposals to Raise Minimum Wage Worry Some Small Employers." Wall Street Journal . Aug. 23, 1995.

Ramey, Joanna, and Dana Lenetz. "Democrats Promise Extensive Battle for Minimum Wage Hike." Footwear News. February 19, 2001.

Also read article about Minimum Wage from Wikipedia

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