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New Minimum Wage Rate Takes Effect This Summer

June 1, 2007

On May 25, 2007, President Bush signed into law the first increase in the federal minimum wage in a decade. The new law raises the federal minimum wage for non-exempt employees from $5.15 to $7.25 per hour over two years. The initial increase boosts the hourly rate to $5.85, effective July 24, 2007. The federal minimum wage would then rise to $6.55 per hour on July 24, 2008 and to $7.25 on July 24, 2009. Because Texas' minimum wage is linked to the federal standard, Texas hourly workers who are covered by the Fair Labor Standards Act (FLSA) – which includes most workers – must be paid the new rate. According to some estimates, by 2009, the rate hikes could affect the pay of almost one million Texas workers.

Data gathered by the U.S. Bureau of Labor Statistics shows that in 2006, 5.7 million Texas workers were paid based on hourly rates. Of these employees, approximately 173,000 workers (about three percent of all hourly-paid employees) earned at or below the current minimum of $5.15 per hour. The Washington, D.C.-based Economic Policy Institute, however, estimates that more than 860,000 Texas workers (about 8.5 percent of the state’s workforce), earn less than $7.00 per hour, which is below the $7.25 minimum wage that will be in effect on July 24, 2009.

The new law includes tax relief for small businesses to help them offset costs they may incur in complying with the higher minimum wage rate, but many Congressional Republicans and business groups claim that the relief provided is woefully inadequate.

Further, although the rate will rise in relatively small increments of $.70 per hour, some critics of the new law are concerned that there may be a significant "spillover effect," particularly for hourly-paid employees whose earnings are currently only slightly higher than the new minimum wage and perhaps even for lower-paid salaried employees.

Retail employers with commissioned employees currently qualifying for the partial overtime exemption will need to verify that the commissioned employee's regular rate of pay is more than 1.5 times the new minimum wage.  (The second prerequisite of the partial overtime exemption that more than half of the employee's compensation for a representative period must represent commissions is unchanged.)

Employers of tipped employees also may be affected by the minimum wage increase. Even though the new law does not change the current minimum hourly rate of $2.13 per hour for tipped workers, employers must ensure employees for whom they claim a tip credit nevertheless receive the new minimum wage standard.

Employers must post updated minimum wage posters at their facilities by July 24, 2007.

Bottom Line

In addition to ensuring compliance with the new minimum wage rate, this is an opportune time for employers to review all of their compensation practices to make certain that they conform to the myriad requirements of the FLSA.