Minimum Wage

The minimum wage is the legal floor on hourly pay for covered, nonexempt employees. At the federal level it is set by section 6 of the Fair Labor Standards Act, 29 U.S.C. 206, which has required at least $7.25 an hour since July 24, 2009. States, and in some places cities and counties, set their own minimums by statute or ordinance, and because the federal Act expressly preserves any higher state or local rate, the minimum a worker is owed is the highest of the floors that apply to their job.

A federal floor, not a federal rate. Section 218(a) of the Fair Labor Standards Act says nothing in it excuses noncompliance with a federal, state or local law setting a higher minimum wage, and the Department of Labor states the practical rule: where an employee is subject to both state and federal minimum wage laws, the employee is entitled to the higher one. The federal figure is written into the statute itself rather than indexed to inflation, which is why it has not moved since 2009, while state and local minimums are set by their own laws and some of them adjust every year. For many workers, the number that governs their paycheck is therefore the state or local one, and it can differ between neighboring cities.

Tipped employees. Federal law allows an employer to count part of a tipped employee's tips toward the minimum, an arrangement called the tip credit. A "tipped employee" is one who customarily and regularly receives more than $30 a month in tips. The employer must pay a cash wage of at least $2.13 an hour, the figure section 203(m)(2)(A) fixes by reference to the cash wage required on August 20, 1996, and the tip credit may not exceed the tips the employee actually receives. If the cash wage plus tips falls short of $7.25 for the hours worked, the employer must make up the difference. The credit is available only if the employer has told the employee about these rules and the employee keeps all their tips, apart from a valid tip pool among employees who customarily receive tips; and an employer may never keep its employees' tips, including by letting managers or supervisors take a share, whether or not it claims the tip credit. Some states require the state's full minimum wage before tips and allow no tip credit, and others set a cash wage above $2.13, so the federal mechanics are again only the floor.

The youth wage. Section 206(g) lets an employer pay a newly hired employee under age 20 at least $4.25 an hour during the first 90 consecutive calendar days of employment with that employer. After the 90 days, or once the employee turns 20, the regular minimum applies.

Who is not owed it. The minimum wage protects covered, nonexempt employees. Independent contractors are outside the Act, and employees who meet an exemption in section 213, most familiarly the executive, administrative and professional exemptions, lose its minimum wage protection as well as its overtime rules. That exemption generally requires both a salary test and a duties test; a salary on its own does not create it.

Why the number matters beyond paychecks. Other federal rules borrow the federal minimum as a measuring stick. Consumer-credit garnishment protection, for example, shields a worker's weekly disposable earnings up to thirty times the federal minimum hourly wage from an ordinary creditor, and the Federal Work-Study regulations set the floor for student pay by reference to the federal minimum rather than by naming a number.

Working out the minimum an employee is owed takes three steps: find every floor that applies, take the highest, then check the special rules.

1. Federal floor. $7.25 an hour for a covered, nonexempt employee.
2. State and local floors. Look up the state's minimum wage and any city or county ordinance where the work is performed. The highest applicable rate controls.
3. Special rules. Tipped employees may be paid a lower cash wage where the law allows a tip credit, and a new employee under 20 may be paid the youth wage for 90 days under federal law, but state law can override either.

Consider an example under the federal rules alone, in a state that adds nothing of its own: Mateo waits tables and works 30 hours in a week. His employer pays the minimum cash wage of $2.13 an hour, so 30 x $2.13 = $63.90, and Mateo receives $100 in tips. His total for the week is $63.90 + $100 = $163.90. The minimum wage for 30 hours is 30 x $7.25 = $217.50. Because $163.90 falls short, the employer must pay him another $217.50 - $163.90 = $53.60 for that week. In a week where his tips reach $200, his total is $263.90 and nothing extra is owed. In a state that bars the tip credit, the employer would owe the state's full minimum wage for all 30 hours before tips.

Pros

• Gives covered workers an enforceable floor, with back pay and an equal amount in liquidated damages available when it is violated.
• The higher-of rule means a worker never loses a more generous state or local minimum because federal law is lower.
• The tip-credit shortfall rule protects tipped workers in slow weeks.

Cons

• The federal rate is fixed in the statute and has not changed since 2009, so its purchasing power falls every year it stays put.
• Rates vary by state, city and county, so the applicable minimum can be hard for a worker or a small employer to pin down.
• The tip credit and the youth wage let employers pay less than the headline rate, subject to conditions that are easy to get wrong.
• Exempt employees and independent contractors have no federal minimum wage protection at all.