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A Crazy Quilt of Wage Laws

August 31, 2006
Related Topics: Compensation Design and Communication, Wages and Hours, Workforce Planning, Featured Article, Benefits
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As Congress stumbled through yet another doomed attempt to raise the federal minimum wage this summer, aldermen in Chicago took matters into their own hands and passed a new "big box" ordinance that sets minimum wages and benefit spending for the city’s largest retailers.

    The Chicago ordinance is now one of hundreds of state and local laws that form a crazy quilt of minimum wage regulations across the United States. Worse yet, this regulatory mess is increasingly incorporating mandatory benefit provisions that push well beyond the already complex assortment of legally required benefits.

    The Chicago ordinance forces stores inside the city limits with more than 90,000 square feet and $1 billion in annual parent company revenues to pay a minimum wage of $9.25 per hour plus $1.50 per hour in benefits, effective July 1, 2007. That rises to $10 per hour in wages and $3 per hour in benefits by 2010 and is indexed to inflation thereafter. Stores with less than 90,000 square feet remain subject to the Illinois state minimum wage of $6.50 an hour and can look forward to a huge labor cost advantage over their competitors.

    If the Chicago ordinance survives a possible mayoral veto and legal challenges, it will spur on the national movement to regulate wages and benefits on state-by-state and city-by-city basis.

    "We’re staring at this patchwork right now," says Jim Hendricks, a partner in the Chicago office of law firm Fisher & Phillips. "If the ordinance survives, any municipality could pass these laws."

    Employers already cope with minimum wage rates set higher than the federal level in 22 states, each with their own set of rules. Add into this mix the more than 100 "living wage" city ordinances for local government contractors, plus a half a dozen cities with their own all-sector minimums and other cities pushing for sector-specific minimums and mandatory benefits, and you have a compensation head­ache of unprecedented proportions.

    "Employers should be deep in prayer," Hendricks says with a long laugh. "And they should be moving proactively to gain more political influence. In Chicago, we call it ‘clout.’ "

    But clout was ineffective in Em­eryville, California, where employers faced not the city council, but a ballot initiative that allowed 194 citizens to cast the deciding votes in setting minimum wages for the city’s hotels. The November 2005 Em­eryville law mandates a minimum wage of $9 per hour and an average wage of at least $11 per hour for employees at hotels with more than 50 rooms. Like the Chicago ordinance, the Emeryville initiative was spearheaded by unions.

    Employers operating in the "tourist zones" in Santa Monica and Berkeley, California, must pay a higher minimum wage rate than employers in other parts of these cities. In Santa Fe, New Mexico, employers with 25 or more employees—less than 10 percent of all employers in the city—must pay a minimum wage of $9.50.

    A Washington, D.C., big box bill under consideration would require retailers with at least 75,000 square feet to pay a minimum wage of 115 percent of the federal poverty level for a family of four, plus at least $3 an hour in benefits. Advocates in Spokane, Washington, are collecting signatures for a big box ballot initiative that would set minimum wages at large retailers at 135 percent of the state minimum wage if the employer provides health benefits, or 165 percent if the retailer does not.

    The November 2006 elections will include minimum wage ballot initiatives in six states and dozens of cities. Handing over minimum wage and benefit regulation to the voting public is a development that few employers envisioned a decade ago when the last federal minimum wage increase passed but failed to include an indexing mechanism that would ensure its efficacy.

Unlikely targets
    Wal-Mart is the whipping boy for both the wage and benefits issue in Chicago and across the country, but the big box retailers are unlikely targets for advocates who are truly concerned about minimum wage workers.

    The retail industry accounts for only 9 percent of the 1.9 million U.S. workers who earn the federal minimum wage or less, according to the Bureau of Labor Statistics. And large retailers are far more likely to offer benefits than are smaller retailers or companies in the food service industry, which employs more than 60 percent of all minimum wage workers.

    Chicago’s large retailers are particularly poor candidates for minimum wage reform. According to the Illinois Retail Merchants Association, the ordinance covers 38 existing stores with a combined workforce of fewer than 8,000 employees in a city with 1.3 million workers. According to the association, workers in the 38 stores average $9.40 per hour. In addition to big box retailers, the parameters established by the ordinance sweep old-line department stores such as Saks and Bloomingdale’s into the regulatory bin along with Target and Home Depot.

    With both entry-level and average wages for all Chicago retail sales workers already well above the state and national industry averages and substantially higher than wages for the lowest-paid jobs in the city, the Chicago ordinance is an odd piece of work. Clearly, improving the lives of Chicago’s working poor is not the only item on the agenda.

    "The Chicago ordinance is straight politics," says Brian Arbetter, partner and member of the compensation and employment practice at Baker & McKenzie’s Chicago office.

    "Aldermen are playing to constituents on the wage and health insurance issues. The irony is that the people supporting the ordinance were not from the areas of Chicago where people stand to lose from it."

    In fact, many of the aldermen with minority constituencies opposed the ordinance because of their well-placed concerns about the loss of entry-level jobs and sales tax revenues if the big retailers abandon the city.

    "The Chicago ordinance is all about unions," Hendricks says. "They have retail stores that are organized, but they can’t organize the competitors, and they are under pressure in collective bargaining because of the lower wages at the nonunion retailers. If you looked out over the demonstrations in favor of the ordinance in Chicago, they were clearly driven by unions."

    "The ordinance is unquestionably a union-led push," says David Vite, president and CEO of the merchants association. "Labor is attempting to accomplish at the local level what it has failed to do at the national level, by requiring unorganized companies to pay more by legislative fiat. The ordinance should be terrifying for all employers."

    Joseph Moore, the Chicago alderman who was the lead sponsor of the ordinance, said big box retailers were selected because they could best absorb increased labor costs. "Most of them are corporations with in excess of $1 billion in profits last year," he says.

    Moore acknowledges that only a limited number of workers will actually see their wages increase as a direct result of the ordinance. "But the big box retailers have a far larger impact," he says. "They set the standard for the rest of the retail industry. The big box retailers are moving into the city, and we don’t want other retailers to feel like they have to cut their wages and benefits to compete with them."

Mandatory benefits spend
    Chicago’s slice-and-dice approach to regulating minimum wages imposes higher labor costs on a small subset of employers who have pursued rational economies of scale.

    "The Chicago law singles out not just an industry, but a portion of an industry," Hendricks notes. "Marshall Fields and Nordstrom will be hit by the ordinance, while their competitors—the small boutiques along Michigan Avenue—will not be affected."

    But a far larger threat to effective workforce management looms in Chicago’s mandatory benefits spend and the growing attempt to address the national health care crisis through state and local benefit mandates, with Wal-Mart once again at the center of the issue. In January, the retailer became the target of Maryland’s new law that requires nongovernmental employers with more than 10,000 employees to spend at least 8 percent of their payroll on health benefits.

    On July 19, 2006, the U.S. District Court in Baltimore struck down the Maryland legislation on the grounds that it violates ERISA’s fundamental purpose of permitting multistate employers to maintain nationwide health and welfare plans with uniform benefits and consistent administration. An appeal to the 4th Circuit in Richmond, Virginia, is pending.

    Employers across the U.S. heaved a sigh of relief when the Maryland law was struck down, but the Chicago ordinance may escape an ERISA challenge.

    "The Chicago ordinance avoids the ERISA pre-emption issue by defining benefits as payments made for ‘any bona fide fringe benefits,’ " says John Raudabaugh, a partner in the Chicago office of law firm Baker & McKenzie who focuses on labor relations. "In other words, the Chicago ordinance does not specifically limit or require payments or regulate payments for an ERISA-regulated benefit—for example, health benefits—as opposed to any other benefit."

    Although the push for mandatory benefits in state and local laws is commonly framed as an attempt to address health care needs, skirting ERISA with a blank benefits spend requirement does little to solve the problem and opens the door to extraordinarily poor benefit practices. "Benefits are generally based on group plans that allow employers to negotiate the best benefits for a large pool," Arbetter notes. "If employers have to negotiate coverage for separate locations, insurers will go to town, and ultimately it will hurt employees."

    The most likely legal basis for a challenge to the Chicago ordinance is a lawsuit based on the equal protection clause, rather than the ERISA-based challenge that worked in Maryland.

    "Absent a mayoral veto, the Chicago ordinance will be challenged on equal protection grounds for arbitrarily imposing regulatory requirements on a narrow class of retail establishments," Raudabaugh says. A lawsuit may also raise regulation of commerce issues and challenge Chicago’s home-rule authority.

    The board of the Illinois Retail Merchants Association has already authorized the group to file a lawsuit on behalf of its members. But even if the Chicago ordinance is voided or forced to take a different form, the already burdensome variations in state and local wage and benefit laws will only become more unmanageable as local governments continue to assume what used to be federal responsibilities.

    Many employers still oppose any increase in the federal minimum wage and rail against a national solution to the health care crisis. Some still strive for a complete deregulation of wages and benefits and favor severe limitations on union organizing and collective bargaining rights.

    But as employers in Chicago now know, deregulation at the federal level may mean re-regulation at the local level, with aldermen and voters setting wage rates and benefits spend. Instead of one large wrench thrown into the market, employers now face hundreds of much smaller ones, with predictable inefficiencies in the offing.

Workforce Management, August 28, 2006, pp. 1, 43-45 -- Subscribe Now!

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