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The Future of Minimum Wage: More Money, But No More One-Size-Fits-All

At the beginning of the month, Seattle's city council voted unanimously to increase the city's minimum wage to $15 an hour in stages over the next three to seven years. To get a business owner's perspective on the issue, we spoke via email with John Pepper, co-founder and former CEO of Boloco, a Boston-based restaurant chain with 22 units across New England. Pepper told us a bit about why a higher minimum wage isn't necessarily bad for business and what else needs to change for small businesses to thrive while paying their workers higher wages.

 John Pepper

(Photo Credit: John Pepper's LinkedIn)

PayScale: Do you think the $15 minimum wage is good or bad for workers and businesses?

John Pepper: $15 is the right step forward, I believe. Seattle is taking a big leap forward on behalf of the entire country, and clearly what happens in the coming months and years will be carefully watched. When I heard the news last week I applauded for a number of reasons.

First, taking what is perceived to be significant business/economic risk on behalf of the well-being of so many low-income, but often hard-working people is the kind of risk that will be looked back upon positively in the decades to come -- almost as a no-brainer. To continue holding back wages as so many of us try to do will in time be viewed in exactly the opposite manner. I would go as far to say that possibly my kids (all 10 and under today) but very likely my grandchildren will view our society's current accepted practices in labor as a derivative of slave labor. So yes, the $15 minimum wage is very good for workers and the strongest step forward for the low income worker that has taken place since I started my business over 15 years ago.

Second, I do believe that businesses will, for the most part, benefit from a $15 wage, especially as time passes and the initial fear and overreactions subside. Yes, it will sting some businesses at first, and even force some who were already struggling due to poor business practices to close their doors permanently. I've always felt, including my own business, that if we couldn't afford to pay our people at least a living wage, we weren't earning the right to be in business anyway. As much as small business owners are a critical part of our society, just because someone wants to be a small business owner doesn't mean that you are entitled to succeed. And paying people so little that they can't pay their own bills so that the business owner can pay his is not a legitimately run business -- in my mind anyway.

Separately, beginning about 15 years ago, I had always hoped that businesses would push wages ever higher as they realize that we really do "get what you pay for" in terms of loyalty, service, and passion. If you are paying someone too little and they can't manage their basic financial obligations, part of their "life job" is to constantly and somewhat aggressively look for a job other than the one you are providing them. They are always working for you with one foot out the door and waiting for someone to come knocking with an offer of an additional $0.50 an hour.

$15 and higher is not going to make anyone rich, but at least they are above the living wage. Now the workers have mental bandwidth to focus on doing a better job for you, and perhaps even quit the second job that was required to pay the bills. When you ask them to buy into your culture, your customer philosophy, and do a little extra to help get better business results, they may actually be willing to do it. You have their attention … finally! And a bonus of $1 an hour, or $2, or whatever, will allow them to invest in further education, or buy something nice for their kids, or themselves, as opposed to the current situation where the bonus might allow them to pay a bill on time but still have others in delinquent status.

While there will be naysayers, as there should be in important debates, I strongly believe that the $15 minimum wage adopted first in Seattle will be a historical positive that we all point back to as a turning point for our country and possibly the moment in time where the decline of the middle class halted and began to swing the other way.

PayScale: What are some of the challenges the new minimum wage presents business owners?

John Pepper: The short-term challenges are clear. Their expenses increase and their profits decrease. For those businesses already struggling with a poor bottom-line, they could fail. Again, if they are short-changing their people from living a life that allows them and their families to cover their basic needs, then they are failing anyway.

PayScale: Does the phase approach to raising the minimum wage help offset any of these challenges?

John Pepper: Yes, the phase-in approach seems reasonable. Allows businesses to prepare and to plan ahead for a new reality. In addition, tying wage increases to inflation or CPI beyond the $15 per hour wage mark is critical. Just today I read again that here in Massachusetts it is likely that over the next three years we will go from $8 per hour to $11 per hour, increasing $1 per hour each year. In Boston and some of the other bigger towns, that's not enough. Perhaps it is in the smaller towns, I'm not sure. But I am 100 percent sure that if there is no formula for increasing wages beyond the $11 per hour, which there apparently is not here in Mass, we will be fighting the very same issue in five years as we are today. A living wage in Boston today is nearly $13 per hour. Seattle has it right. I hope Boston follows suit.

PayScale: What would you change about this law or how it's being implemented?

John Pepper: Since I don't know all of the details of the latest law being passed in Seattle, what I share here could already be taking place.

With that in mind, first, I don't believe the minimum wage can any longer be a universal, one-size-fits-all number. And apparently, the United States Government agrees. In July 2008 the Fair Labor Standards Act established Youth Minimum Wage at $4.25 per hour … but in most cases state law trumps that. Strangely, it's rarely talked about and most politicians I've spoken to aren't even aware of the age caveat that exists at the federal level.

Here's the common sense reason for it … a part-time 16- or 18-year-old working a couple of times per week or for the summer is very different than a committed 23-year-old who works full-time, takes on increasing responsibility, and aspires to a career in business. Comparing those teenagers to an experienced 35-year-old with a family is a non-starter. Employers should have the legal right to pay teenagers less than what I'll call the "adult minimum wage," with the obvious caveat that they are free to pay as much as they like as earned by these younger team members. They aren't forced to pay below minimum wage, after all.

Second, in addition to age, I know and agree with many of my restaurant company leaders who believe a temporary training wage, say 90 days, which would be incredibly helpful to businesses during the riskiest stage of an unproven employee's tenure. RJ Dourney, current CEO of Cosi, also maintains that a "hard-to-hire" wage would give qualifying employees (ex-offenders or long-term unemployed, for example) a far better chance at being hired back into the workforce. Without these kinds of strategic exemptions, a single, one-size-fits-all minimum wage will be perpetually met with the same vicious resistance it encounters today.

Finally, and this is my idea that so far hasn't seen the light of day, we must (gulp) meaningfully reduce the 1.5x overtime pay rule.

That's right. This generally unquestioned "pay ceiling" is causing more harm to our low-wage work force and damage to our economy and the culture of our businesses than most people have ever imagined. To ensure we're speaking the same language here, let me clarify what the 1.5x pay overtime rule means. If a team member's normal wage is $15 per hour, after 40 hours in any given week, she would begin earning $22.50 for every additional hour worked that week. That's a huge jump and even most well-intentioned employers simply can't or won't do it — they'd be happier personally escorting their people to their second job. And that, the now ubiquitous second job, by the way, is the unintended but disastrous effect of the current overtime penalty.

Millions of workers are forced to work two and even three jobs simply because their main employer won’t let them stay on for more than 40 hours. And honestly, it really does get cost prohibitive at those levels, and will be even more so at the new higher minimum wage levels. Imagine what would happen if we dropped the 1.5x penalty to 1.25x, like in Japan, or even lower it to 1.1x or 1.2x. With a lower overtime penalty, more employers would keep their best people on beyond 40 hours, largely removing the need for second jobs.

Employees would actually earn more while working a few less hours, but most importantly they'd be focused on one company, not two (or three). They'd be better trained for that job and would become even more valuable to their companies, and their companies would benefit as a result: better execution, better customer service, more loyalty. Employees; lives would be so much more efficient, no longer having to manage multiple and ever-changing schedules, cultures, uniforms and rules of engagement. Perhaps — and this is a practical stretch right now, but certainly possible down the road — with the few extra hours of newfound "free" time each week, they could go back to school. Overtime policies need to be debated and revised. We will all benefit.

PayScale: What are your thoughts on the law suit filed by the International Franchise Association claiming that the new law unfairly lumps franchise owners in with major corporations in terms of how quickly they must implement the higher wage?

John Pepper: Many new policies targeting business practices across the country are trying to recognize that big business and small business often have different economic realities by splitting the details of policy implementation into different tiers based on size. In many states, for example, nutritional information must be posted on menu boards for restaurant concepts with more than 20 total locations, regardless of where those locations actually exist.

In this case, even the smallest franchisees of larger brands are being treated as though they are big business, which in fact they are not. Small businesses have up to seven years to arrive at $15 per hour in Seattle … larger businesses only three years to do the same. This difference matters a lot.

Whether or not we agree with the different treatment of small and large businesses, one thing is for certain … the small franchisees are still small businesses and deserve to be treated as such. Yes, they have some inherent advantages by being affiliated with large, sometimes nationally recognized brands, but they pay dearly for that affiliation each month. In some of the most established franchise organizations, a franchisee pays more than 8 percent of her monthly sales between royalties and advertising, and yet may do no better economically than the next door mom-and-pop independent operation.

All that said, the larger businesses, ironically, will have a significant hiring advantage over the smaller businesses until the minimum wage of all businesses reaches parity. The best employees will work for the larger companies at the higher wages, and won't as often require second jobs to make ends meet. The larger businesses will end up benefiting as a result. While the small businesses may at first feel good about not having to raise wages as fast as larger businesses, it may not be as advantageous over time as they think and may make hiring good people harder than ever.

Some of John Pepper's thoughts on minimum wage laws appeared in slightly different form in his blog post Minimum Wage and Overtime: Getting Away From the Plain Vanilla Debate.

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