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.
