US Minimum Wage: A Guide for Employers

The US hasn’t always had a minimum wage. The first federal minimum wage was signed into law in the National Industrial Recovery Act of 1933, but later struck down as unconstitutional. Five years later, The Fair Labor Standards Act (FLSA) successfully established it at $0.25 per hour (equivalent to around $5.57 today).

At the time of writing, the federal minimum wage is $7.25 per hour. Many states offer a rate substantially higher than this, however.

Understanding the US minimum wage is crucial for employers, especially those new to the market or expanding their operations. The minimum wage impacts hiring practices, payroll management, and compliance with labor laws.

This guide provides a detailed overview of the US minimum wage, recent legislative changes, and the differences across states, helping you navigate the complexities of payroll regulations.

What is the US minimum wage?

The minimum wage is the lowest amount that employers are legally required to pay their employees per hour of work. The federal minimum wage is designed to protect workers from unduly low pay and ensure a basic standard of living.

Many workers in the service industries are paid at this base rate and expected to top up their earnings with tips. Although this is a common practice internationally, it remains more prevalent in the US than, for instance, the UK or Europe.

Here are some national minimum wages for comparison:

Except for Italy (which doesn’t have a minimum wage), most national minimum wages are higher than the US equivalent, although different states provide much higher rates. Such cultural expectations should be kept in mind when recruiting employees who are immigrating from these countries.

Recent changes and trends

The federal minimum wage has remained $7.25 per hour since July 24, 2009. However, recent years have seen significant movements advocating for higher wages, such as the Fight for $15 campaign. This was a political movement advocating for the national minimum wage to be raised to $15, in parity with other countries of equivalent economic status.

The campaign has succeeded in numerous states, with local legislation being passed to raise the state minimum wage to at least $15 in:

• California
• Massachusetts
• downstate New York
• Maryland
• Illinois
• New Jersey
• Florida
• Connecticut
• Nebraska
• Delaware

In addition, some major cities, in recognition of the locally higher cost of living, have raised their municipal minimum wage to this new level. Cities that have taken this step so far include New York City, Seattle, and San Francisco.

These minimum wage movements reflect economic and political pressures to improve living standards for workers countrywide.

The question of “How much is the minimum wage in my area?” is a rather complex one, with the true answer being:

$7.25 per hour unless the state or municipality has mandated a higher rate.

Although, there are further complications, depending on which sector the employee works within, and how old they are.

Federal vs. state minimum wage

The federal minimum wage sets the baseline at $7.25 per hour, but states can set higher minimum wages. Here is a quick overview of some state-specific minimum wages:

*plus Long Island and Westchester

There are also state-specific regulations and requirements for overtime rates.

Minimum wage variations

The minimum wage can vary not only by state but also by industry and worker type. For example:

• Tipped workers: Federal law allows a lower minimum wage for tipped employees ($2.13 per hour), provided their tips bring their total earnings to at least $7.25 per hour. Some states require higher base pay for tipped workers.
• Youth minimum wage: The FLSA permits employers to pay workers under 20 years old a minimum wage of $4.25 per hour during their first 90 consecutive calendar days of employment.
• Training wages: Some states allow lower wages for new employees undergoing training.
• Disability provisions: Certain workers with disabilities may be paid less than the minimum wage under specific conditions outlined in the FLSA. The intention behind this provision is to incentivize employers to engage workers who might otherwise be deemed less capable or competitive.

The debate on raising the minimum wage

There are highly debated economic arguments for increasing or maintaining the minimum wage. In brief, they are as follows:

Pros of minimum wage

• Poverty reduction: Increasing the minimum wage can lift millions of workers out of poverty, improving their quality of life and reducing reliance on social welfare programs.
• Economic stimulus: Higher wages increase disposable income, leading to greater consumer spending which can boost economic growth and demand for goods and services.
• Reduced income inequality: Raising the minimum wage helps narrow the income gap, promoting a more equitable distribution of wealth.
• Improved productivity and morale: Better pay can enhance worker productivity and morale, reducing turnover and training costs for employers.

Cons of minimum wage

• Job loss: Critics argue that higher labor costs can lead to job cuts, particularly for low-skilled workers, as businesses may automate processes or relocate to lower-cost regions.
• Increased costs for businesses: Small businesses may struggle with higher payroll expenses, which can result in higher prices for consumers or even business closures.
• Inflationary pressure: An increase in wages can lead to higher prices for goods and services as businesses pass on the additional costs to consumers, potentially leading to inflation.
• Reduced employment opportunities: Entry-level positions might decline as employers seek more experienced workers to justify higher wages, limiting job opportunities for young or inexperienced workers.

Both sides present compelling arguments, reflecting the complexity of wage policy and its far-reaching impacts on the economy.

Impact of minimum wage on employees and employers

The minimum wage legislation in different cities and states can significantly affect recruitment and retention within those regions.

In general, higher wages attract a wider pool of applicants, and lower wages limit the range of people who will apply for a position.

Here are some of the other considerations to consider when setting wages:

For employees

• Living standards: Higher wages can significantly improve an individual’s living conditions and reduce poverty.
• Mental health: Having fewer financial worries can lead to improved mental health incomes including reduced stress and anxiety.
• Economic stability: Increased earnings can lead to greater economic stability and spending power.
• Employment flexibility: A worker who is well remunerated may be more willing to undertake overtime, work extended hours, relocate for work, and otherwise exhibit more flexibility.
• Employer loyalty: A well-remunerated worker is likelier to speak highly of their employer than an employee on minimum wage.

For employers

• Labor costs: Higher wages can increase operating costs, particularly for small businesses.
• Pricing strategies: Businesses may need to adjust pricing strategies to maintain profitability while complying with wage laws.
• Productivity: A company can improve worker morale and productivity by adopting a generous remuneration policy (for example Costco, Trader Joe’s)
• Reputation: Companies with a reputation for paying well may be more competitive in terms of attracting the very best talent.
• Retention: Employees will be less tempted to jump ship to a rival firm if their employer is offering a competitive remuneration package.

Compliance and enforcement

Ensuring compliance with minimum wage laws is critical for avoiding penalties and legal issues. There are several best practices to follow, including:

• Staying informed: Regularly update knowledge of federal and state wage laws and payroll tax compliance.
• Using tools and resources: Leverage tools like Deel's Compliance Hub to streamline compliance efforts.
• Knowing the competition: Stay competitive by researching what companies within your sector typically pay.
• Understanding penalties: Non-compliance can result in fines, back wages, and legal complications. FLSA fines can amount to $10,000 per employee per violation.

The best approach: vigilance and intelligent compliance

To effectively manage payroll and ensure legal compliance, it’s vital to stay informed about the US minimum wage and its variation across states. For more information on managing US payroll and compliance, check out our US Payroll Tax articles.

Employers can also leave state-by-state compliance to experts by using Deel US Payroll or Deel PEO to handle HR, payroll, and compliance efficiently. To streamline your payroll processes and ensure compliance, consider booking a demo with Deel today.