What is Minimum Wage Rate and its impact on Payroll?

- Updated on May 22, 2020 - 06:00 AM by 123PayStubs Team

Initially, several legislation and improvements were being made for the benefit of the laborers, such as the requirement for overtime pay and restrictions on child labor. Along with these, the minimum wage law is one of the most significant start that was created by the Fair Labour Standards Act, also called FLSA, to help meet the needs of the hourly employees, precisely, non-exempt employees.

When this law came into existence, the first federal minimum wage rate that businesses had to pay their employees was 25 cents. Now, it has raved to $7.25/hour (or $2.13 for tipped workers). Many states, counties, and cities also have their wage laws, so, based on the work location, you must pay your employees the highest minimum wage rate.

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Federal Minimum Wage

The minimum wage is the lowest amount that businesses have to pay their employees for every hour of work they do. The federal minimum wage rate for 2020 is $7.25/hour and has not been changed since 2009. The law requires that you do not pay non-exempt (hourly) employees lesser than $7.25/hr.

Also, states have minimum wage laws. So, when an employee is subject to both federal and state laws, you must pay your employees the highest rate.

Well, not all employees are eligible for a minimum wage rate. There are a few exceptions as well, which we will see in the context below:

How are the minimum wage rates set?

The wage rates are usually determined by the federal government. However, states can also set wage rates. But, what is to be noted is that states are raising their minimum wage laws each month. So, it is a must that you stay compliant with these changes.

Difference between Federal, State, and local wage laws

As said before, states, counties all have different minimum wage laws with rates from $7.25 to as high as $13.50/hr. Data indicate that 29 states have a higher minimum wage than the federal rate. To name a few, Alaska, California, Florida, Illinois, New Jersey, and others.

So, what is it that you, as an employer, do when your business operates in a state that has a higher wage rate?

If either the state or local minimum wages are higher than the federal rate, you must pay your employees the state or local rate, whichever is higher.

Now, let's consider an alternative to this, state or local minimum wages are lower than the federal rate, then you must pay your employees the federal minimum wage- $7.25/hr.

When we looked into the different scenarios, we must also remember that there are five states (Alabama, Louisiana, Mississippi, South Carolina, Tennessee) with no minimum wage laws, and employees are paid at least $7.25.

State-wise Minimum Wage Rate

State 2020 Minimum Wage (Employees) 2020 Minimum Wage (Tipped Employees)
Alabama $7.25 $2.13
Alaska $10.19 $10.19
Arizona $12.00 $9.00
Arkansas $10.00 (for employers with 4 or more employees) $2.63
California $12.00 (25 or fewer employees)
$13.00 (26 or more employees)
(Several cities also have their own minimum wage laws and rates)
$12.00 (25 or fewer employees)
$13.00 (26 or more employees)
(Several cities also have their own minimum wage laws and rates)
Colorado $12.00 $8.98
Connecticut $10.10 $6.38 for Waitstaff & $8.23 for Bartenders
Delaware $9.25 $2.23
District of Columbia $14.00 $4.45
Florida $8.56 $5.54
Georgia $7.25 ($5.15 for employees not covered under FLSA) $2.13
Hawaii $10.10 $9.35
Idaho $7.25 $3.35
Illinois $9.25 $5.55
Indiana $7.25 $2.13
Iowa $7.25 $4.35
Kansas $7.25 $2.13
Kentucky $7.25 $2.13
Louisiana $7.25 $2.13
Maine $12.00 $6.00
Maryland $11.00 $3.63
Massachusetts $12.75 $4.95
Michigan $9.65 $3.67
Minnesota $10.00 ($8.15 for employees with >$500,000 in annual sales volume) $9.86
Mississippi $7.25 $2.13
Missouri $9.45 $4.73
Montana $8.65 ($4.00 for Employers grossing < $110,000 in annual sales and not covered by FLSA) $8.65
Nebraska $9.00 $2.13
Nevada $8.25 (if health benefits not offered) $8.25
$7.25 ( if health benefits offered) $7.25
New Hampshire $7.25 $3.26
New Jersey $11.00 (6 or more employees) $3.13
$10.30 (5 or less employees and seasonal employer) $3.13
$11.00 (piece rate of hourly employee) 3.13
New Mexico $9.00 2.35
New York $11.80 Minimum wage for tipped workers
New York City $15.00 ($13.00 for Long Island & Westchester)
North Carolina $7.25 $2.13
North Dakota $7.25 $4.86
Ohio $8.70 $4.35
Oklahoma $7.25 $2.13
Oregon $11.25 $11.25
Pennsylvania $7.25 $2.83
Rhode Island $10.50 $3.89
South Carolina $7.25 $2.13
South Dakota $9.30 $4.65
Tennessee $7.25 $2.13
Texas $7.25 $2.13
Utah $7.25 $2.13
Vermont $10.96 $5.48
Virginia $7.25 $2.13
Washington $13.50 $13.50
West Virginia $8.75 $2.63
Wisconsin $7.25 $2.33
Wyoming $7.25 $2.13

Exemption from minimum wage laws

When there are states that don’t have a minimum wage requirement, there are also a few exceptions to pay employees the minimum wage rate. Like

  • Student learners who can be paid 75% of the current minimum wage.
  • Full-time students who are employed in retail or agricultural sectors can be paid 85% of the current minimum wage.
  • Youths below 20 years of age can be paid $4.25/hr for their first 90 days of employment.
  • Workers with disabilities and
  • Tipped employees who can be paid $2.13 under FLSA- Tip Credit law.

FLSA - Tip Credit

The FLSA permits a tip credit for tipped employees that reduces their federal minimum wage rate by $2.13. The wage rate is low because, for tipped employees, their tips should make up for the rest of $7.25. This is applicable if employees earn at least $30 as tips per month.

The minimum wage rate for federal contract workers

The minimum wage for federal contract workers is quite different from the usual federal rate. Workers undertaking federal contracts must be paid $10.80 per hour, and tipped employees must be paid a minimum wage of $7.55 per hour.

Will the minimum wage rates increase every year?

No, the minimum wage rates don’t increase every year. But, several times, it has been brought to Congress to raise the minimum wage at the federal level and is expected to increase to $15 by 2025.

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