‘Job Killer’ Bill Held on Senate Appropriations Committee Suspense File

(August 13, 2013) A California Chamber of Commerce-opposed “job killer” bill that  locks in an automatic 25% minimum wage increase far exceeding any reasonably expected rate of inflation was held on the Senate Appropriations Committee suspense file yesterday,  pending a review of the bill’s fiscal impacts.

AB 10 (Alejo; D-Salinas) unfairly imposes an automatic $2 increase in the minimum wage over the next five years, that will continue to increase costs on employers of all sizes, regardless of other economic factors or costs that California employers are struggling with to sustain their business.

Automatic Indexing

Automatically indexing the minimum wage to inflation has always been troubling to the business community because it fails to take into consideration other economic factors or cumulative costs to which employers may be subjected. While CalChamber appreciates the removal in AB 10 of the automatic adjustment in the minimum wage according to the Consumer Price Index (CPI), the proposed incremental increases over the next five-year period is essentially the same as tying the minimum wage to inflation, and in fact may be even worse.

Historically, the Legislature has never imposed a minimum wage increase that has extended more than two years, given the unpredictability of the economy and the changing dynamics of the labor force.

Although AB 10 has removed the CPI, employers’ concerns remain the same: a very long duration of a very stiff increase in the minimum wage. Instead of limiting the increase to a 15% increase over a three-year period, the amended version of AB 10 seeks to increase the minimum wage by 25% over a five-year period — more than double the historical duration of any expansion of the minimum wage in California.

Similar to CPI, AB 10’s proposed increase will remain in effect, regardless of whether the economy in year three or four takes a downturn, or whether employers are struggling with other cumulative costs. While the proposed form of the increase under the amended version of AB 10 has changed, the result of the proposal is actually worse.

Economy Slowly Improving

Although California’s economy is showing signs of improvement, such improvement is still at the infant stage. California still has one of the highest unemployment rates in the country at 8.6%, with some counties still facing unemployment rates over 20%. An increase in the minimum wage that starts in 2014 and continues through 2018, will have a negative impact on any economic recovery by either limiting available jobs or, worse, creating further job loss.

As recently reported in a study conducted by the National Federation of Independent Business Research Foundation, the expected job loss by 2023 as a result of the prior version of AB 10 would have ranged from 48,000 to 68,000 jobs, dependent upon the annual rate of inflation. Given the lock stepped increase in the amended version of AB 10 over five years that exceeds any plausible rate of inflation, the job loss that will result will likely be much higher.

Notably, the average rate of inflation over the last 10 years in California is 2.5%. Applying a 2.5% rate of inflation over the next five years to the current minimum wage would increase the minimum wage to only $9.06, almost a dollar less than the current proposal under AB 10. Accordingly, the amended version of AB 10 imposes an even higher increase amongst employers than what we might expect to be the rate of inflation, which could ultimately jeopardize their ability to continue to recover from the recession or simply sustain. According to the Department of Finance, expected inflation in California will average 2% from 2013 through 2016, which would – if continued through 2018, result in a minimum wage increase of $.83 to a rate of $8.83. The point of this exercise is not to select an index, but to point out the fruitlessness of mandating an employer’s costs out many years.

Other Costs for Employers

AB 10 also forces this proposed five-year increase without concern to other costs California employers may be facing.

As set forth in the Governor’s budget, California employers will face an increase next year in the annual assessment they are required to pay in order to fund programs within the Department of Industrial Relations. Again, while the exact cost is currently unknown, there is no question that it will be higher than the current assessment. In 2014, California employers will also lose a part of their federal tax credit due to California’s failure to repay money borrowed from the federal government for unemployment insurance benefits. This will increase the total federal tax California employers are required to pay for any employee who earns more than $7,000 per year. Additionally, the tax increases approved under Proposition 30 for personal income tax, as well as the sales-and-use tax, will also be in full effect in 2014.

These cumulative costs are just in 2014. In 2015, California employers will also undoubtedly face an increase in costs as a result of the implementation of the Affordable Care Act. While employers are not sure of the exact costs associated with the implementation, they do know there will be a cost. Any further additional costs in 2015 through 2018 are unknown, which is why the minimum wage should not be increased for such an extended period as AB 10 proposes.

An increase in minimum wage would not only increase hourly employees’ wages, but salaried  employees’ compensation as well. In order for employees to qualify as “exempt” under any of the six exemptions in California, they must meet the salary-basis test, which is two times the monthly minimum wage. If AB 10 is implemented as proposed, that amount in January 2016 will rise from the current annual salary of $33,280 to at least $41,600, which is an increased cost to employers of $8,320 per exempt employee.

There is no reason why California, with a full-time Legislature, needs to set forth a five-year incremental increase for minimum wage. Rather, CalChamber believes a historical two-year incremental increase is more appropriate and allows the Legislature to determine thereafter whether businesses can sustain a further increase given the economy and other cost-related factors.

Action Needed

AB 10 may be considered by Senate Appropriations at the committee’s next hearing and may be voted off the suspense file and sent to the full Senate for a vote.  August 30 is the last day for the committee to meet and send bills to the floor.

Contact your Senate representatives and members of Senate Appropriations and urge them to oppose AB 10.