There is a lot to hate about the minimum wage proposals leaking out of the mayor’s Income Inequality Advisory Committee, not the least of which being that they are fundamentally dishonest. A $15 an hour minimum wage that takes up to seven years to phase in for some workers before annual cost of living adjustments (COLAs) kick in, is not $15 an hour—it’ll be about $13.25 in 2014 dollars. So let’s not pat ourselves on the backs for doing something we’re not doing.
But the compromise under discussion is also overly complicated, reportedly requiring four different phase-in schedules depending on the size of the business and whether or not the employee earns tips or health care benefits. That’s just crazy. It will be difficult to implement, difficult to comply with, and difficult to enforce. It creates an economic incentive for businesses at or near the full-time equivalent employee (FTE) threshold to reduce employment (or just plain lie about it) in order to qualify for a more favorable schedule. And imagine the regulatory complexity for dealing with businesses that straddle the FTE threshold (some months more, some months less) and that hire both part-time and full-time tipped and untipped workers!
Also, the math doesn’t work! If $15 is phased in over four different schedules before COLAs kick in—three, four, five, and seven years respectively—either we’ll end up with four different minimum wages, or those workers phased in after three years won’t get a raise for another five years: one year after workers on the seven-year schedule are phased in.
Fortunately, there is a simpler way to achieve similar results without all the mess: Math!
First, we phase in a $15 minimum wage over a single two- or three- year schedule—say, $11 in 2015, $13 in 2016, $15 in 2017—adjusted for inflation thereafter. That in itself would represent a huge concession, one which would have had me booed off the stage at Saturday’s $15 Now conference. But most minimum wage hikes are phased in over two years, and this one is bigger than most, so that is a rhetorical and political fight that I don’t want to get sidetracked by in this post.
Second we give employers a deduction against tips and the cost of providing health benefits, phased out over several years, and inversely proportional to the employer’s current number of FTEs. This may sound complicated, but the math is actually quite straight forward:
Max_Deduction = (City_Min – State_Min) * (((Years + 1) – year) / Years) * ((FTE_Cap – FTEs) / FTE_Cap)
The starting point for the maximum deduction is always the difference between Seattle’s minimum wage and the effective minimum wage under state and federal law, currently the state minimum wage of $9.32 an hour, indexed to inflation: (City_Min – State_Min). Then we adjust for the deduction phase-out. For example, in the first year of a five-year phase out, 100 percent of this deduction would be available, in the second year 80 percent of the deduction, in the third year 60 percent, and so on: (((Years + 1) – year) / Years). Finally, the maximum deduction available to each employer is further reduced by the employer’s total number of FTEs as a percentage of a defined FTE cap. For example, if the ordinance defines the FTE cap at 1,000 (the number of FTEs at which companies no longer qualify to take any deduction), and a business employs 100 FTEs, then that business could claim up to 90 percent of that year’s available deduction: ((FTE_Cap – FTEs) / FTE_Cap).
How might this work in reality. Well, presuming the three-year $15 phase-in described above, a five-year tip and health benefit deduction phase-out, an FTE cap of 500, and a conservative 1.75 percent annual inflation rate, Seattle’s minimum wage for various sized businesses would phase in as follows:
| Year | Base Min. | 10 FTEs | 100 FTEs | 250 FTES |
|---|---|---|---|---|
| 2015 | $11.00 | $9.51 | $9.79 | $10.24 |
| 2016 | $13.00 | $10.37 | $10.86 | $11.66 |
| 2017 | $15.00 | $11.95 | $12.51 | $13.45 |
| 2018 | $15.26 | $13.20 | $13.58 | $14.21 |
| 2019 | $15.53 | $14.48 | $14.67 | $14.99 |
| 2020 | $15.80 | $15.80 | $15.80 | $15.80 |
You can adjust the FTE cap or the length of the phase-out, or inflation-adjust the three-year phase-in, but a similar pattern emerges: smaller businesses essentially phase in to the full Seattle minimum wage a lot more gradually than large businesses.
It is important to note that all businesses at or above the FTE cap will pay the base Seattle minimum wage in column two. Likewise, non-tipped non-benefit employees will also receive the base Seattle minimum wage. Further, an employer’s deduction against his minimum wage obligation can never exceed the amount the employee receives in tips and health benefits. For example, if a 10 FTE employer only paid the equivalent of $2.00 an hour in health benefits during 2017, he must pay non-tipped employees an effective $13.00 minimum wage, not the lower $11.95 rate that would otherwise be available.
This formula-based phase-out has huge advantages over the fixed schedules the advisory committee is considering. First, it doesn’t attempt to address the needs of five-employee businesses and 500-employee businesses in one broad stroke—deductions are targeted along a finely calibrated continuum. Second it avoids an arbitrary definition of a “small” business that might incentivize employers to limit their number of FTEs in order to stay on one side of a threshold. And finally, it acknowledges that FTEs rise and fall over time due to seasonal and other reasons; during any pay period the employer need merely go to a city website and plug in his current number of FTEs in order to calculate his current maximum deduction. Easy.
As for not-for-profits, we might remove the FTE adjustment altogether, giving them the opportunity to take the maximum benefit deduction available in any given year.
I make this proposal reluctantly, as I do not accept the economic (or moral) necessity of constructing such a prolonged phase-in. But if this is the direction the committee and the council are going, an FTE-adjusted deduction phase-out is a much more rational, flexible, and targeted approach. City council members would do well to consider the regulatory nightmare a four-schedule minimum wage could create, and then steer well clear of it.
But mostly I offer this proposal in the interest of refining and focusing the debate. All sides agree that smaller businesses and not-for-profits need to phase-in more slowly than large businesses. Even the 15Now.org charter amendment embodies that principal. Achieving this objective through an FTE-adjusted phase-out allows us to focus on defining the variables in the formula—the number of years and the size of the FTE cap—rather than rehashing the same old political arguments. And by eliminating the necessity to define “small business” by an arbitrarily abrupt FTE threshold, we eliminate some of the political pressure to raise that all-or-nothing threshold in order to satisfy one or more special interests.
To be clear, I would never advise 15Now.org to put such a compromise on the ballot. But if the city council were to adopt a minimum wage along the lines of what I’ve described above, I could in good conscience advise them to drop their objections, and move on to the next item on their agenda.
While I can appreciate how complex fairness can be, wage and hour laws have to be simple to be enforceable. You have to let go of the idea that complicated formulas can create a fair minimum wage. Sometimes an interesting idea is just that, and nothing more.
@1 It’s not about fairness. Fairness would dictate a straight up $15 minimum wage. It’s about politics. And politics is how we enact a $15 minimum wage. I’m trying to find a path towards the best deal possible.
This is a classic example as to why nobody pays attention to liberals: They use things like math, science, and logic in their arguments. Epic fail.
Interesting – would you fix a company’s FTE count as of a certain date (1/1)?
@4 No. That’s part of the elegance of this. FTE count can be adjusted each pay period to calculate the current maximum deduction.
This isn’t bad. Seems to me it will be stretched out further but not a bad outcome.
I would love to see fairness given a firm definition one day, a definition that isn’t a sliding scale so that it means whatever people want it to mean so they can use the word to get their way.
The Capitalist Solution
What’s the matter with you people? Just make it $15 an hour for everybody, effective July 1, 2014, and let the free market sort out how to implement it.
Hey Goldy,
When are you going to address $15NOW’s total compensation carve out for union hospitality workers? In doing so it acknowledges $15 will cost employees benefits like health care, paid vacation, 401k, stock options, etc. So how come it is fair for $15NOW to protect these benefits for union workers with total comp, but not non-union workers? This seems to be hypocrisy in it’s highest form. $15NOW attacks Starbucks for paying “poverty wages” but providing all of those benefits mentioned, but apparently that same attack doesn’t apply & those same wages aren’t “poverty wages” when dealing with unions.
http://www.washingtonpolicy.or.....initiative
@8 It’s a waiver, requested by hotel workers and their union. It gives both sides—management and union—the opportunity to negotiate a lower minimum wage, but only if both sides agree.
The specific situation is that unionized hotel workers in Seattle don’t earn a significantly higher wage than non-unionized hotel workers, but have instead negotiated an incredibly rich health benefit package worth over $6/hour, that applies to both full-time and part-time workers. Non-unionized hotel workers don’t get that.
But again, it’s a waiver. Such a trade-off would have to be negotiated by union reps and then approved by union members. So nobody is forcing anybody.
@ 9
That answers the first part of the @8 question – thank you for the additional detail.
The second part has to do with any differential treatment of Starbucks vs. hotels paying unionized workers if the compensation of the employees is similar. Is he correct?
@9 Thank you for your answer. But by that logic if Starbucks employees were to unionize they could negotiate for total comp? Starbucks offers 401k, great health care, paternity/maternity leave, 30 day personal leave on top of the maternity, paid vacation, and stock options in a Fortune 500 company, this is better than what Unite Local 18 is getting, and is a very generous package. And like untie Local 18 the requirements to receive them are 20hrs, the same part-time & full-time requirement used by Unite Local 18. So how come it is ok when a union does it, but when Starbucks has an even more generous package for the same eligibility requirements it is paying “poverty wages”. This is the hypocrisy I am referring to. For the group $15NOW approves a total comp waiver is ok, but not for others.
Another example would be tipped employees at Tom Douglas Restaurants, a group that gets paid vacation & health care, which they would likely lose. Do they not deserve the same ability to negotiate for the best package for them as a union? But who it really hurts is the kitchen staff, who Mr. Douglas is on record as already paying $15/hr or more, and get health care & paid vacation. $15/hr would depress kitchen wages in the long run as there is less labor budget in order to give tipped employees who often are already making $20+hr an almost $6 raise. So it quite very likely cost the kitchen guy his benefits while also stagnating his wages. Often time companies can purchase things, especially health care at a much better price with more benefits that an individual.
The Union waiver that apparently only they qualify for, underscores the fact that sometimes employees are better off when their total compensation is considered, and their benefits aren’t cut. So if total comp is better for Unite Local 18, how come it can’t also be true for other workers in other industries?
@10, @11 Personally, I would have no problem with a broader collective bargaining waiver that applied to all unions, like in the SeaTac initiative. But the other unions didn’t want it. Only the hotel workers. And even that request was hotly contested at the 15 Now conference on Saturday.
But your larger point is a strawman argument, bringing up businesses that aren’t unionized and aren’t ever likely to be unionized. Also, you are making totally unsupported assumptions that workers are going to lose their benefits due to a higher minimum wage. There is no evidence that this happens.
@13 I disagree that asking why a carve out for some but not others is a strawman despite you saying so. Whether or not Starbucks unionizes is not consequential, but the fact their workers don’t receive the same treatment by $15NOW as Unite Local 18 is. Isn’t the whole point about helping workers, so if total comp helps Unite Local 18, why wouldn’t it help other workers with generous benefit packages? If Starbucks pays $15/hr but cuts those other benefits how does that help the workers? That is what Unite Local 18 claims, and $15NOW supports. My point is the hypocrisy of $15NOW being willing to consider total comp as being a benefit to the workers of Unite Local 18, but not being willing to extend that same benefit to other workers who it is also likely a net benefit for.
In regards to the assumption that benefits would be cut in the case of Tom Douglass Restaurant group, that is no assumption at all. Both Tom Douglass & Howard Shulz are on record as saying benefits would be at stake, in the exact same manner as Unite Local 18 has claimed benefits would be lost if they were paid $15. Not to mention the overall depression of kitchen wages as a result of tipped employees taking so much of the labor budget.
Think about it, for every 1 kitchen employee there are 2 tipped employees if not more. The kitchen guy might get a raise from $13/14 if they are on the low end to $15, if they are on the high end the kitchen guy already makes $15 or more. So 2 tipped employees get raises totaling $11.36/hr for the 2 of them (granted they already make north of $20+/hr at Tom Douglas Restaurants), while the 1 kitchen guy gets only a $1 or $2 at most since no restaurant can afford to give everybody a 60% raise. So of the $13.36 in increased wages 85% of it goes to tipped employees, meanwhile it makes it harder for the kitchen to get future increases. Also the way group health insurance works you can’t discriminate between tipped & non-tipped employees in who is eligible, either they all are eligible or they all are not. So yes I believe Tom Douglass when he says benefits will be cut, it only makes business sense.