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Minimum wage hike's cost to employers weighed

While San Diego's mayor and City Council debate the merits of a minimum wage increase, employers may want to start thinking about how a change in pay requirements would affect their business.

For the second time this month, San Diego City Council on Monday approved an ordinance that would raise the city's minimum wage to $9.75 on Jan. 1, followed by an increase to $10.50 on Jan. 1, 2016, and to $11.50 on Jan. 1, 2017. Starting Jan. 1, 2019, the wage would rise with the inflation rate.

San Diego Mayor Kevin Faulconer said he will veto the measure, but City Council could override the veto with a six-vote majority. The ordinance has passed both times by a 6-3 margin.

Several local attorneys who represent management said an increase in the minimum wage could have hidden consequences.

"A minimum wage increase is more costly than people realize," said San Diego's Jim Fessenden, a labor and employment partner at Fisher & Phillips. "A lot of legal ramifications are triggered.

"Some employers might be in a position where they are forced to reduce benefits or reduce hours that employees work."

Exempt or salaried employees must earn at least twice the minimum wage, so they could see an increase in pay as well. For example, a salaried employee earning twice the current minimum wage makes $33,280 a year. That figure would jump to $47,840 — a 43 percent increase — if the minimum wage goes to $11.50 an hour in 2017.

Some businesses calculate their year-end bonuses based on a percentage of total wages earned, so that figure would increase as well. The new minimum wage increase then might cause employers to change their bonus policy, Fessenden said.

The minimum wage increase would apply to employers outside the city — and even state — if they have employees who spend at least two hours a week working in the city.

The San Diego city attorney's office said there are three significant legal issues that could affect the ability of the city to enforce the ordinance on nonresident employers, but the city could overcome these challenges.

"Generally, the stronger the city’s legitimate reasons for enforcing the ordinance and the less this ordinance burdens interstate commerce, the more likely a court will permit the city to enforce this ordinance on nonresident employers whose employees temporarily or permanently work within the city’s geographical boundaries," City Attorney Jan Goldsmith wrote in a legal memorandum to the City Council.

The geographic boundaries of the city of San Diego — which include some parts of North County — can be tricky to interpret, especially for out-of-state employers, said Stacey James, a shareholder with Littler Mendelson.

"In San Francisco, the county and the city are the same," she said. "When people are in San Francisco, they know they're in San Francisco. The city of San Diego is much different than the county of San Diego."

The state raised the minimum wage from $8 to $9 on July 1. But many municipalities throughout California feel that is not enough and are enacting their own wage increases. This makes it difficult for employers with workers spread throughout several cities.

"It's getting to be a lot more challenging for employers because you have local jurisdictions doing this piecemeal," James said. "The more piecemeal it is, the more difficult it is for employers from inside and outside of the state."

San Diego attorney Lonny Zilberman, a partner with Wilson Turner Kosmo, said a mandatory increase in pay begs the question of who is going to absorb the added costs.

"People who are in favor of raising the minimum wage talk about a living wage and putting more money in the pockets of consumers, which will stimulate the economy," he said.

"On the other hand, it seems to me like someone's going to have to swallow these increased costs — it'll either be the consumers or employers. Or perhaps this will raise the unemployment rate because it might necessitate people being laid off [if] employers can't sustain the increased rate."

Another ordinance being passed in conjunction with the minimum wage increase would require employers to provide five paid sick days per year. The paid sick day proposal could also provide challenges, especially for certain industries.

"Restaurants are not accustomed to [giving sick days], so it may throw off their staffing and certainly could change their business model," said Fisher & Phillips' Fessenden. "You're forcing a new pay scheme on an industry that's not accustomed to it."

Both the minimum wage and paid sick leave ordinances could lead to increased litigation, the local attorneys said. The minimum wage ordinance would allow employees to go directly to court if they have a dispute and not have to appeal to the city.

There also are civil requirements, including posting fliers in the workplace and informing employees at the time of hiring that they are covered by the city of San Diego's minimum wage ordinance.

Monetary damages can reach as high as two times an employee's pay and attorney's fees.

"Whenever you have a new law, if you don’t fully abide by it, there's a potential for liability," Zilberman said.

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