While almost all employers are required to pay a state minimum wage, there are a few very specific exemptions that only apply to some employees or employees of government entities. Where an employee is covered by both federal and state minimum wage rates, they are entitled to the higher of the two minimum wage rates.
Federal law requires all employers to pay employees a minimum wage. Many states and municipalities also have laws that raise the minimum wage. However, these can sometimes be avoided. A business may be able to avoid paying a state’s minimum wage if it meets certain revenue criteria.
If the employee is paid different rates for different hours, then the employer is required to pay overtime at 1.5 times regular rates. If the employer pays at different rates, it must be able to show hours worked by the employee at each wage rate. Also, if an employee does not earn the minimum hourly wage, after adding $2.13 and tips, the employer must cover the difference.
Federal Law Applies Nationwide
Federal law requires employers to pay all employees the minimum hourly wage, which is now $7.25 per hour after one year. If your employees routinely receive tips from customers, you may be able to pay them less than minimum wage, Federal law allows employers to pay special hourly rates to workers who receive tips, so long as they receive enough of them to make at least the minimum wage per hour worked. In at least 24 other states, companies are required to pay tipped workers a lower-than-minimum wage of $2.13, which is required federally.
Employers are required to pay tipped employees at least 50 percent of their minimum wage, plus whatever is needed to bring an employee’s total compensation to at least $11.15 an hour.
Employers are required to count tips as wages subject to taxation, but they are required to pay a minimum of $2.13 per hour of straight wages, no matter how much the worker makes from tips. Business owners can opt to pay wages, commissions, wages plus tips, or piece rates, so long as the total paid divided by the total hours worked is the same as the federal minimum wage. The minimum wage is the lowest hourly rate that employers may pay employees, set in legislation designed to protect workers from receiving unduly low pay.
It Is Rare for Employers to Avoid the Minimum Wage
Most employers are legally required to pay a specified minimum wage (at least $7.25 per hour, in order to be compliant with federal law) to their employees, and pay overtime pay for hours worked over 40 during the workweek (at least 1.5 times their normal rate of pay).
Federal law also allows employers to pay 85% of the federal minimum wage (or $6.16 per hour) to full-time students working at a retail or service business, agricultural employment, or at a post-secondary institution. In addition, some cities and counties have passed “living wage” laws that can establish an even higher rate. Some of living wage laws only apply to businesses that contract with local governments; others apply more broadly to all employers in an area.
Some businesses have voluntarily raised wages because they believe that giving their employees living wages accounts for a greater share of each region’s cost of living than prevailing rates of employment. Businesses in states where wages are near or near $15 per hour would find it easier to make the adjustment for the increase. Some estimates suggest it costs roughly a fifth of an employee’s annual pay to replace them, and lower-paying jobs like retail and food services are some of those that experience higher turnover.31
Raising Minimum Wages Might Aid Businesses
In the longer run, raising the federal minimum wage would probably result in savings for smaller businesses, which would have an easier time retaining employees once they are paid more. Opponents of raising the minimum wage to $15 contend it would saddle small businesses–which account for 99% of all employers–with higher labor costs and lead to firings, expedited automation, or closures.
A survey by CNBC found that most small businesses could afford to absorb increased labor costs from raising the minimum wage at the state and local level in January 2021.19 A growing number of business owners recognize the benefits of paying fair wages, paying workers living wages, and have even advocated for an increase in the national wage. The fact that the employment and income opportunities for low-wage workers grow so rapidly after the enactment continues to present daunting challenges for those still holding on to the idea that enacting a minimum wage increases harms the intended beneficiaries.
Prior to the coronavirus pandemic, over half of the small-business owners CNBC interviewed in 2020 responded that a minimum wage increase in the state in which they operated would not affect their business.33 The Raise the Wage Act will phase in increases over the course of 2025, giving businesses plenty of time to adjust their balance sheets accordingly.
Minimum Wages Have Remained Somewhat Stagnant and Unimpressive
This is particularly true given that most cities and states raising their minimum wages are giving businesses a few years to slowly ramp up their compensation, instead of expecting them to dramatically raise their hourly pay overnight. Because Maryland had previously regulated the basic pay for workers who receive tips at 50% of the state’s minimum, it is now set to increase incrementally from $7.25 to $10.10.
Seven states have required employers to pay tipped workers the state full minimum above and beyond any tips those workers earn, according to the NELP. The 400-hourly pay is based on employers’ estimates of their productivity compared with that of non-disabled workers.
If the employees’ rate of pay increases, that increase should be reflected on a pay stub provided with his or her pay. If an employee receives wages under more than one pay rate during an earnings period, these rates must be shown on the employee’s paycheck. For example, if you had a paycheck making $200 a week, and you worked 40 hours in that week, then your effective hourly rate would be $5 an hour. The variance, of course, does not excuse Mississippi-qualified businesses from paying minimum wage; they must still comply with federal standards.