Minimum Wage Changes: Prepare Now

Volume 46 No. 2 ● February 1, 2021 ● Silver Member Sneak Peek

Public support for increasing the minimum wage has risen steadily since 2014. There is now significant federal pressure to consider a $15 per hour national minimum wage. As School Head or Board President, prepare now and update your strategic financial plan accordingly.

The Impact on Budget

An increased minimum wage impacts a school’s budget in several ways. Primarily, any employee compensated at the minimum level required by your state will receive a mandated compensation increase. Further, any worker earning lower than the new minimum wage will also require adjusted compensation. These two increases will not only increase your wage expense but also increase the school’s FICA expense because that tax is calculated as a percentage of wages. In simple math, as wages increase, so do taxes. But that is merely the starting point. 

In simple math, as wages increase, so do taxes.

Many private schools outsource housekeeping, grounds maintenance, transportation services, and food service. Also, many of the people employed by these outside vendors are paid the minimum or low wages. These vendors will be required to increase compensation to all their minimum-wage workers and to many low-wage workers, forcing a pass down of increased labor costs. This will increase the school’s cost for outsourced services. 

Timing Issues

Another critical consideration in this looming change is one of timing. Schools set tuition approximately eight months before a new school year. If a school fails to anticipate a sweeping change such as the debated minimum wage hike, the school could be caught unprepared and find itself in a deficit situation, with little recourse until the next school year. For some schools, especially schools without cash reserves, this could be a difficult path to navigate.

How to Prepare for the Impending Changes

Schools must get ready for these changes now. Consider the following.

• Have your Business Manager create a “Cost Impact Analysis for Minimum Wage and Low Wage Earners.” Review all school employee salaries and do not forget to include the FICA increase associated with a wage increase. Additionally, work with vendors and ask them to provide an analysis of anticipated increases should a $15 minimum wage become a reality. Estimate the overall impact on your operating expenses with a new minimum wage and translate that to the required tuition increase.
• For schools that include lunch or transportation services in their tuition, work with those service vendors now. Understand the impact these increases could have on your costs and plan accordingly. 
• Once you understand the total budgetary impact, increase cash reserves equivalent to one year’s estimated cost. By doing this, regardless of the timing of the wage increase, the school will have the cash to manage the increased operating expense.
• Consider increasing all your minimum- and low-wage employees to the $15 minimum wage before it becomes law. This action will allow the school to be totally in control of the expense side and will establish goodwill with minimum-wage and low-wage team members. If you select this strategy, do not forget about vendor employees. The school will still need to plan for this increased expense once it becomes law.

Forward-thinking and planning for a significant change such as a minimum wage increase will demonstrate to your community and your vendors that your school is well-prepared, a good citizen, and a fair business partner.