When Governor Brown signed Senate Bill 3 into law on April 4, 2016, California joined New York as the first states in the nation with a plan to implement a $15 per hour minimum wage. The news stories over simplify the new law, which not only phases-in minimum wage increases over several years, but also includes some potential delays and different schedules based on business size. Employers therefore have time to plan for the economic effects on the cost of running their businesses.

The Graduated Hourly Wage Increase

More than six million employees in California currently earn the state’s minimum wage of $10 an hour. As stated, the increase to $15 will be phased-in over a number of years. There will be two different implementation schedules, depending on the size of the employer. Employers with 26 or more employers will go first, with a 50 cent increase to $10.50 on January 1, 2017, and another 50 cents to $11 on January 1, 2018. The minimum wage owed by these larger employers will then increase by $1 at the beginning of each year from 2019 to 2022, at which point it will reach $15 per hour. Employers with 25 or fewer employers get a year’s reprieve. Their minimum wage will increase to $10.50 on January 1, 2018, and ratchet up to the $15 mark by the beginning of 2023.

The Possibility of Delayed Implementation

The new law includes provisions allowing for delayed implementation of the law if certain economic or state budgetary events occur. When specified economic conditions exist, the governor has the option of delaying the implementation of the next year’s scheduled wage hike. However, the governor can only do so twice during the phase-in period. The increases start again at the beginning of the following year. So the escalation to $15.00 an hour could conceivably be delayed beyond 2022 (2023 for smaller employers). But the $15.00 minimum wage cannot be permanently delayed, unless a future legislature passes a new law.

Beyond $15 an Hour

After the minimum wage reaches the $15.00 mark, the State’s Director of Finance will determine the next year’s minimum wage based on the consumer price index. However, should the consumer price index decline, the minimum wage does not decrease. That is, the minimum wage can only go up (or stay level), it cannot go down.

Local Ordinances

The law provides for no geographic differentiation. Employers in less-expensive rural communities will be required to pay their minimum wage workers the same hourly wage as employers in more-costly coastal cities. However, as is currently the case, local governments are not prevented from imposing their own, local minimum wage requirements (as long as they are higher than the state minimum). For example, Los Angeles and San Francisco already have ordinances in place that will raise the minimum wage to $15 an hour and beyond long before 2022.

Collateral Effects

The minimum wage increase affects employer payroll in several ways above and beyond the obvious change to minimum wage workers’ pay rates. For example, payroll taxes, sick pay, vacation pay and other paid leave also increase for minimum wage employees. One can expect workers’ compensation premiums to increase as well. Overtime premiums naturally increase to 1.5 times the increased regular rate. The “split shift” premium is based on minimum wage as well.

The minimum wage increase has additional ripple effects. Increasing the wages of minimum wage workers inevitably will lead to corresponding increases for hourly workers making above the minimum wage. In California, minimum salaries for exempt employees must be at least twice minimum wage. Therefore, these minimums also will rise.

Sick Pay for Home Health Workers

One aspect of the new legislation that has received little attention is its extension of paid sick leave to the more than 450,000 in-home supportive service (IHSS) workers employed in the state. IHSS workers are paid by counties to provide home assistance to Medi-Cal eligible elderly, disabled and blind individuals. These workers often are relatives of the people needing assistance.

IHSS workers were exempted from the Healthy Workplaces, Healthy Families Act of 2014 that provided a minimum of three days paid sick leave to most California employees. Under the new legislation, IHSS workers are entitled to receive paid sick leave on an escalating basis tied to the increase in the minimum wage. They will be entitled to one day paid sick leave as of 2018 and increasing to three days once the minimum wage reaches $15.00 per hour. The sick leave, like the IHSS program, will be funded by the state.

Preparing for the New Law

Although the legislature and governor moved quickly to pass the new minimum wage law, its implementation will be much slower. The first 50-cent increase does not go into effect until the beginning of next year (and not until 2018 for smaller employers). And its full implementation will take a minimum of six years. However, its impact on California employers will be quite profound. Employers should plan now for its economic and compliance effects.

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