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Inflation-Related Wage Changes Require Employers to Keep Their CP-Eye on the Prize

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During his State of the Union address, President Biden indicated that getting inflation under control was a top priority, and to businesses he said, "Lower your costs, not your wages." For many employers throughout the country, however, lowering wages has not been their response to the recent health or economic crises.

White House, 1600 Pennsylvania Ave. NW, Washington, D.C.
White House, 1600 Pennsylvania Ave. NW, Washington, D.C.

In parts of the country, by law wages are heading in only one direction — up — as many local minimum wage statutes adjust their rates to changes in the consumer price index (CPI). Below we provide not an economic forecast, but a forecast of what employers might expect to experience during these turbulent economic times so they can budget accordingly in the coming months and prepare for near-term (July 1) and future (January 1, 2023) mandatory wage rate changes.

During COVID-19, running a business has been anything but easy. We have all read about the "Great Resignation" causing "wageflation" ("a precipitous, unexpected and immediate rise in wages based on unique market forces," per Forbes). And now with inflation, some companies might find themselves in an even more precarious situation. Although mid-year (July 1, 2022) minimum wage increases are still about four months away, some jurisdictions have already revealed what their rates will be; the changes are notable and demonstrate the impact rising inflation can have on wages in jurisdictions that adjust their minimum wage due to changes in the CPI.

On March 1, 2022, in New Mexico the minimum rates in both the City of Santa Fe and County of Santa Fe were CPI-adjusted from $12.32 to $12.95 per hour, an increase just above five percent. The District of Columbia announced that on July 1, 2022, its minimum wage will increase from $15.20 to $16.10 per hour, which is almost a six percent increase. To date, the highest announced increase belongs to the City of Los Angeles, California, where the annually adjusted minimum wage will increase on July 1, 2022 from $15.00 to $16.04 per hour, a boost close to seven percent.

Factors that might influence why CPI adjustments to minimum wage may differ from one location to another range from the obvious to the inconspicuous, and include, for example:

  • The pre-adjustment minimum wage rate. The higher the pre-existing minimum wage, the greater the possibility of a "sticker shock" adjusted rate.
  • The lookback period the adjustment uses and inflation during that time. There is a gap between the lookback period's end date and the adjusted wage rate's start date, but, depending on how much time separates these two dates, and how inflation fares in the interim, the rate bump could exceed the inflation level at the time the rate becomes operative or throughout the year it remains in effect; of course, during the pre-adjustment period, the opposite could also be true, with other items like food and consumer goods prices increasing while the wage remains the same.
  • Whether the adjustment uses CPI-U (Consumers) or CPI-W (Workers). These represent different inflation rates and can explain why two neighboring cities with the same pre-adjustment minimum wage might have different adjusted rates.
  • The region the adjustment uses. To stay competitive, a smaller city might look beyond its borders and use the CPI metric that applies to a much larger city farther away.
  • Whether the law caps the annual increase. This might occur generally or by offering an alternative to the actual rate of inflation by using a "lesser of" standard (so it's the rate of inflation or X percent, whichever is less).

On July 1, 2022, numerous additional local mid-year rate adjustments will occur throughout California, so companies should prepare for a potential "wagequake" throughout the Golden State. But the West Coast might not be the only place to experience tremors, as local minimum wage rates in the Midwest (Illinois) and Mid-Atlantic (Maryland) will also change then. And while near-term wage change concerns are purely a local concern, employers throughout the country should brace themselves for the possibility that inflation does not slow significantly through 2022, making it possible that state-level rate increases occur on January 1, 2023 (or December 31, 2022, in New York). Were this to occur, it could affect non-exempt and exempt employees. States often apply a multiplier to the minimum wage to set the minimum salary necessary for the executive, administrative, or professional exemption to apply; a similar minimum wage multiplier scenario might arise with a state-law inside sales exemption. And for certain hourly professionals (or medical, in California), the state may annually adjust the exemption's minimum hourly rate.

Posted In: Human Resources, General; Illinois; Wage and Hour Laws

Want to know more? Read the full article by at Littler Mendelson

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