10 min read What Happens if an Employer Pays Less Than The Minimum Wage?
As an employer, one of the fundamental issues you must be aware of is the existing state laws governing your workers' pay and how they might affect you. As a rule of thumb, never pay less than minimum wage to avoid trouble.
Here we take a closer look at the ABC's surrounding employee compensation and what penalties you might face if your pay is less than the required minimum wage.
Let's dive right in:
How Minimum Wage Increases Affect All Employees' Pay
It is a no brainer that an increase in the minimum wage transforms to better employee pay. An employee's current salary and increase rate significantly determine the final figure.
According to the Raise the Wage Act of 2019 report, increasing the minimum wage to $15 by 2024 would reverse the real minimum wage value, which started in the 1980s. Having minimum wages by state increased to $15 by 2024 would uplift around twenty-eight point one million workers.
For example, an average worker earning a minimum wage annual salary per year would gain a $3,900 raise in their annual wage income, equating to a 20.9 per cent increment.
The spillover effect generated by such an increase would also benefit another eleven point six million workers earning above $15 to attract and maintain them.
In general, a $15 raise would indirectly and directly impact thirty-nine point seven million workers who constitute 26.6 per cent of the wage-earning employees.
Consequently, about $118 billion will be realized in additional wages. These monies will then trickle down to the worker's families and communities to improve the economy, as well as allow business growth and job opportunities.
Penalties for Paying Less than Minimum Wage
Non-compliance to your state's minimum worker's wage in most cases can result in an investigation by the wage and hour division of the department of labor regarding your FLSA violations. And, if found guilty, a suitable wage recovery method will be implemented.
For instance:
- Face the requirement to pay back your employees
- Or held responsible for liquidated damages and shortfalls
Apart from that, you can equally face criminal prosecution from your federal or state government, leading to severe penalties.
The Importance of Keeping Good Records
One of the primary reasons for keeping good records is to prove that you've been paying your employees the required amounts as per the law in case you're investigated by the Federal Labor Standards ACT (FLSA).
In the same vein, for you to operate a limited company, necessary documentation such as your organizations:
- Memorandum and articles of association
- Minutes for periodic meetings
- A record of directors
- And the registered office addresses are a must
Likewise, the law requires you to keep all your business transactions records. Failure to do so can attract inspections from the HMRC, leading to your trading license suspension, hefty fines, or even imprisonment.
Other reasons for keeping good business records include:
Monitoring your business's progress
From good records, you can determine if your business is moving forward or not, the changes you need to implement, and the most selling items. Understanding such information increases the chances of your business succeeding. For example, you can use it to set adequate targets or develop SMART goals.
Without good records, it can be challenging to determine your current position, as well as keep track of your progress.
Therefore, your job management system should provide easy accessibility to your accomplished work. At the same time, your accounting system should quickly avail the organization's financial details such as revenues, profits and costs. Finally, your Customer Relationship Management system--if you have one—should offer quick access to customer information.
Enables the preparation of financial statements
To enable the preparation of accurate financial statements, you require good records. Such include balance sheets and income statements that can enable your business to acquire loan services from creditors.
To elaborate, a balance sheet indicates your business's liabilities, assets and equity on a particular date. On the other hand, an income statement shows your organization's income and expenses for a specific period.
Keeps track of your deductible expenses
More often you will forget about your expenses if you don't record them. These can present a challenge when preparing your tax returns which makes it wise to do the necessary.
Identifies your income sources
Similarly, it is essential to record property or money you receive from various sources on a daily basis to enable the identification of your income sources. And also, allow the separation of non-business from business receipts and non-taxable from taxable income.
Helps in the creation of a knowledge base that can allow your employees to develop and grow
Keeping excellent records and making them available to your employees can enable them to learn, develop and grow. Besides the information in your workers' fingertips helps them make accurate and immediate decisions while in the field without having to call your office.
Enables the preparation of your tax return
Good recording keeping allows the preparation of tax returns as it provides evidence regarding the expenses, income and credits in your report. You'll utilize the same records in the preparation of the required financial statements.
Help keep track of your basis in the property
Your basis constitutes the taxable investment you can use to determine the loss or gain on the exchange, disposition or sale of property and deductions for amortization, depreciation, casualty losses and depletion. A good record takes care of that.
Allows effective utilization of time
Effective record keeping; for instance, through a useful Job management software helps you keep track of the accomplished jobs, which can help identify where your time is being spent most to allow better delegation.
Consequently, you'll have more time for expanding your business instead of spending it on less important tasks. Besides, having a closer control of your management accounts can allow time to the most profitable clients.
In this case, you can utilize clocking software alongside similar apps to perform various tasks as required by the FLSA.
For example, to record and keep:
- Your employees' identifications, i.e. their full names, address and occupation and social security number
- The number of hours worked by each employee.
- The dates of their payments and the period in which the pay covers
- The total amount of wages paid in each period
- Any additions or deductions on the employees pay
- Other daily transactions
What's the Difference Between a Work Week vs Pay Period?
To cut to the chase, a workweek comprises a consecutive seven-day period that begins with the same calendar day, as well as hour each week. In total it has one hundred and sixty-eight hours that run for twenty-four hours.
According to Statista, an average working week for those working on private nonfarm payrolls in the US is pegged at 38.8 hours, subject to change depending on the seasons and occupation type. For example, a worker in the health and education sectors can work an average of 33.5 hours per week, while an employee in the logging and mining industry works for 44.1 hours in the same period.
Furthermore, a typical week starts on Monday and ends on Friday while Saturday and Sunday constitute the weekend days.
Apart from that, each business can develop a customized workweek depending on what works best for them, the type of employees or groups of employees as long as the timeframes are consistent.
Under the US labor laws, every employer must establish a workweek for their business and make it clear to his workers in a written pay policy or handbook. Similarly, the fair labor standards act states each hour worked by the employees must be taken into account when paying them. Moreover, each workweek must constitute all the seven days in a row regardless of the worker's attendance.
On the other hand, a pay period entails that reoccurring period which your employees earn their wages. Or that length of time of service you pay for service. As an example, you can pay your workers in a weekly, biweekly, semi-monthly or monthly basis.
An analysis of the advantages and disadvantages of each pay period agreement yields the following:
Weekly pay periods
In this arrangement, you'll have your payroll running the same day for fifty-two weeks per annum. As such, each employee will receive about fifty-two paychecks per year.
Pros
- Attractive to employees due to the frequent paychecks
Cons
- Requires a lot of administration time
- Bi-weekly pay periods
In this case, your employees will receive twenty-six paychecks in a year as you will be paying them after every two weeks. However, in some months you'll have to pay up to three times or twenty-seven paychecks during leap years.
Pros
- Reasonable for a larger number of hourly employees
- Frequent checks for your employees
- More cost and time-efficient compared to the weekly pay periods.
Cons
- Complications associated with managing monthly benefit premiums
- The three pay-period months often require comprehensive accounting compared to others making it demanding.
- Complexities brought about by the 27th paycheck, for instance, the failure to meet the employee annual pay expectations, tax and benefit implications and the difficulty in calculating your contributions, among other issues.
- Requires closer attention to the recorded pay-dates to enable the accurate and timely processing of payrolls
Semi-monthly pay periods
Similarly, in this schedule, your employees will receive twenty-four paychecks per annum; in essence, two per month. For instance, on the 1st and 15th or the 15th and last day of each month.
With this arrangement, you can schedule the recurring payments on any other two dates within the affected months as long as they are equally spread apart.
Monthly pay periods
This particular model allows you to pay your workers twelve times a year. That is on the same date of each month--usually the first or last day.
Pros
- Time and cost-effective
- Allows easy management
Cons
- Not suitable for employee budgeting
- Difficult to work for hourly workers
- Might require date adjustments to suit bank holidays
Other than that, some of the issues you need to consider when developing a pay period include:
- The local laws regarding the minimum pay periods
- The number of employees you have
- The cost of processing their payroll; for example, regular payrolls such as weekly arrangement options would require more administration and processing spending.
- The time value of money: the more frequent you pay your employees, the more time you will spend on the associated pay cycle functions
- The type of contract you are having with your employees: hourly-workers would significantly benefit from frequent paychecks, particularly those in the trade sectors often characterized by irregular schedules.
- Your organization's management: For instance, is your cash flow able to sustain your potential pay period? How busy are your months, and do you foresee lots of overtime?
Of noteworthy is to provide clear communication to your employees about the pay period and sticking to it consistently. Timesheet software can come in handy in such a case since it allows automation of the whole process.
FAQ
What causes minimum wages?
The primary reason for a government or state to institute the minimum wages law is to shield desperate workers from being exploited by their employers. This pay should be enough to provide enough clothing, shelter and food or simply put, meet the existing living wage.
This law was first enacted in 1938 by the Fair labor standards Act by the then-president Franklin D. Roosevelt, who termed it as a new deal to protect employees during the Great depression period. He set the minimum wage at $0.25 per hour after daily wages had significantly dropped.
Some of the arguments for the minimum wage include its:
- Ability to boost productivity
- Promotion of self-improvement and education
- Reduction of income inequality
- Improvement of employee retention
Conclusion
As a business owner, it's your primary responsibility to ensure that you're not paying your employees less than the current minimum wage. This is to avoid finding yourself on the wrong side of the law, which can lead to severe penalties from the state that might hamper your organization's reputation and growth.
