Island Sun Times

With minimum wage increases being discussed at the Federal and state levels, entry level workers will no longer be earning the “bare minimum.” Small businesses like tanning salons could suffer maximum impact – only by being proactive and prepared will you be able to roll with the punches.

What It Is
It’s something most working people talk about everyday, but does everyone know what “minimum wage” really is? In plain and simple terms, minimum wage is the lowest hourly, daily or monthly wage that employers may legally pay to employees or workers. More than 90 percent of all countries have some kind of minimum wage legislation – the first of which was enacted in 1896 by the government of New Zealand. Australia followed in 1899, and later, the United Kingdom enacted minimum wage laws in 1902. It took the U.S. a bit longer to jump aboard the bandwagon – statutory minimum wages were first introduced in 1938, contained in the Fair Labor Standards Act (FLSA), set the minimum wage at 25 cents an hour. Needless to say, it’s been amended since then.

In its original proposal, the FLSA provided for a commission that would set the minimum wage after a public hearing considering cost-of-living estimates provided by the Bureau of Statistics. This way, the minimum wage would be updated according to changes in the standard of living, plus inflation; however, the version the FLSA eventually passed set a specific rate, and offered no provision regarding the updating of minimum wage. Increases since then seemed to be based on the political climate – there were five increases during the 1970s, and two during the 1980s.

Upping the Ante
So, why all this talk about minimum wage? Recently, the U.S Senate and House of Representatives began to debate the potential for a federal minimum wage increase. If passed, lawmakers voted to raise the Federal minimum wage requirements from $5.15 to $5.85 within the first 60 days after the bill was passed. In 12 months after enactment, that rate will rise to $6.55; one year later, Federal minimum wage requirements will reach $7.25. That’s a total increase of 41 percent! Once the Feds set the wheels in motion, it didn’t take the states long to get in on the act – while they are required to use the Federal guidelines as a minimum, state governments are allowed to raise the rate of minimum wage in their states.

In addition to the Federal legislation, many states also have minimum wage laws. Recently, at least two states have decided to increase minimum wage. The State of Maryland legislature recently passed an increase from $5.15 an hour to $6.15 an hour, effective February 16, 2006. In Michigan, the current increase from $5.15 to $6.95, represents a 35 percent increase in wages. In July 2007, it will increase again to $7.15 per hour, and again to $7.40 in July 2008 – that represents a total increase of 44 percent, one that will certainly be felt by all business owners in the “Mitten State.”

So who would this affect? According to the Economic Policy Institute, about 11 percent of the workforce – an estimated 14.9 million workers would benefit from an increase in the federal minimum wage. Of these, 6.6 million would be directly affected, with another 8.3 million indirectly receiving raises due to the spillover effect. Of the total affected workers, 80 percent are adults and 59 percent are women. Over half (54 percent) work full time, and another third (30 percent) work 20-34 hours per week. About 26 percent of those who would benefit are parents of children under age 18, including 1,395,000 single parents. The average minimum wage worker brings home over half (58 percent) of his or her family’s weekly earnings.

Two Sides …
When it comes to the minimum wage increase, the U.S. is a country divided between those who support it and those who don’t. Those who favor an increase – typically Democrats – view the issue as a matter of social justice; they believe minimum wage reduces exploitation and ensures workers are able to afford basic necessities. Those against it – typically Republicans – say that arbitrarily increasing minimum wage slows economic growth and increases unemployment among low-wage workers, which harms rather than helps them. Whatever side of the issue you stand on, it seems that the minimum wage increases are affecting many tanning salon owners, and not in a good way, either.

How it Affects Salons
The recent minimum wage increases create a definite cause-and-effect pattern that touches on many aspects of a salon owner’s business. And, worst of all, it could mean a lot less profits for tanning salon operators when all is said and done.

The first criticism of raising minimum wage is that it could create a “close the gap” syndrome among salon employees. A mandatory minimum wage increase gives all of a salon’s lowest-paid employees an automatic raise, regardless of their job performance. This also closes the gap between the lowest-paid employees and the managers or staff members with the most seniority. Naturally, it won’t be long before the senior employees will ask for raises, too, especially if the “bed cleaners” are earning but a small amount less. Responsible salon owners will recognize this disparity and seek to address it by also giving raises to those employees with more responsibilities; but the obvious downside is that the more money spent on payroll diminishes the profits that the salon’s owner is able to keep for herself. And if you think that’s bad, stick around because it only gets worse.

Most tanning pros agree that offering commissions to employees is a great way to motivate them to sell more retail product and tanning sessions. But did you know that the recent minimum wage increases might also negatively affect a salon’s commission program, resulting in less sales? It all lies in where salon owners try to offset the increases in hourly rates, both of minimum wage employees as well as others whose salaries were also raised to keep the difference between new and veteran employees. To keep even more money from flying out the window, salon owners might be forced to reduce commissions on lotion sales. Instead of saving money, however, this move could bite even deeper into the owner’s pockets when faced with the difficulty of trying to inspire employees to continue selling the same lotions for less commission. The end result – lotion sales go down.

The first thing that might cross a salon pro’s mind is to raise prices of sessions, memberships and lotions, but will the market bear it? These days, there seems to be a salon on every corner in most major cities, and raising prices at one could simply drive the majority of the tanners to another. The second solution might be to cut employees and hours; this will definitely save money, but has a good chance of negatively affecting customer service and product sales.

Perhaps the biggest, and most insidious way that minimum wage increases could affect indoor tanning is by inhibiting its growth. With increases in employee pay across the board, as well as diminished lotion sales and working with a skeleton crew, salon owners profits will continue to suffer. Surely, this will have an effect upon the future growth of indoor tanning as an industry, and it won’t be a positive one. After all, it’s difficult to expand one’s business with less profits coming in. Therefore, fewer salon owners will be willing to open more locations, add new equipment and otherwise grow their businesses.

One Man’s Story
Jim Wint, co-owner of Electric Beach Tanning in Odenton, MD, is one salon owner has felt the pinch of recent minimum wage increases. “It took Democrats in the House of Representatives less than 100 hours to screw every Maryland business owner with an employee payroll,” Wint commented. “The new rates increased our hourly payroll expense by more than $5,000 in 2006. Our associates also earn commissions on sales of products and tanning services packages – since we enjoyed a strong increase in sales in 2006, the commissions paid to our associates also increased dramatically. Other salon operational expenses are also increasing, notably electricity, property rent and advertising expense. As a result of the minimum wage increase, we will be reevaluating all our operational expenses for any possible savings.”

Faced with the minimum wage hike, Jim Wint found there’s only one way to combat the problem. “I will no longer hire any bed techs this year, since the difference between their salary and that of a shift supervisor is about $1,” Jim explained. “From now on, I will just hire employees to be shift supervisors, who are fully trained and certified to do everything in the store from cleaning equipment to sales and customer service. Yes, I have to pay a little more to do this, but it’s well worth it in the long run because I’m getting much more in terms of sales and customers serviced per hour.”

A Different Perspective
Robbie Segler, owner of the Darque Tan salon chain, believes that minimum wage increases aren’t good for the tanning salon owner. That being said, Robbie also contends that salon owners shouldn’t hire employees at minimum wage in the first place! “People making minimum wage tend to only do the bare minimum of what’s expected of them – I call it the ‘minimum wage mentality,’” Robbie commented. “I believe that indoor tanning is not a minimum wage industry – it’s a service-oriented industry and, as such, is no place for unskilled workers. With everything we expect from our employees in the realm of retail sales and customer service, everyone at Darque Tan starts out earning more than minimum wage.” Starting salon employees at a wage above minimum tends to keep them happy and motivated to perform up to Darque Tan’s high standards, and Robbie recommends other salon owners do the same. “Even most fast-food restaurant chains pay their workers above minimum wage, so why shouldn’t we?” he asked.

Looking Ahead …
The issue of minimum wage has been debated since its inception, and will no doubt continue to be discussed as long as it exists. What’s more important than how you feel about future increases is how you’re going to prepare for them. As a business owner, you should revise your business plan to take these changes into account, considering the effect they will have on payroll taxes, overtime, wage adjustments, etc. Also, it wouldn’t hurt to develop strategies for absorbing these costs with the least negative effect on your overall business goals.