Understanding Subminimum Wage

Can you legally pay your employees less than minimum wage? Subminimum wage is one solution, but it isn’t clear cut.

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Answers to subminimum wage FAQs

You have seen the term “subminimum wage” thrown about in the news or in small business discussions. But is it a viable option for your company?

It’s complicated.

Subminimum wage is one legal, although somewhat controversial, avenue to pay employees less than the federal minimum wage — which is set at $7.25 nationwide. Many states are now proposing their own, higher standard for minimum wages.

Restaurants are perhaps the most common example of establishments that use subminimum wage. Typically, waiters and waitresses get only $2.13 in direct wages, as it is expected that they will reach $7.25 with tips.

But there are other establishments who are also eligible to pay a subminimum wage to their employees.

Subminimum wage explained

The Fair Labor Standards Act offers subminimum wage as a solution to prevent the loss of employment opportunities to certain individuals. This allows employers to pay less than minimum wage for the following employees:

  • Vocational education students
  • Full-time students, if you are a retail or service establishment, agricultural organization, or institution of higher education
  • Individuals with a physical or mental disability

Subminimum wage is common for tipped employees. It is assumed that they will make back the minimum wage with tips.

What are the subminimum wage requirements?

To get approval for paying an employee subminimum wage based on disability, you must first get a certificate from the Wage and Hour Division. There are 2 primary forms you’ll need to fill out to apply for authorization:

  • Form WH-226 is the main form, called the Application for Authority to Employ Workers with Disabilities at Special Minimum Wages. This includes information about the work and your wage research.
  • Form WH-226A is a supplemental form that includes information about the proposed employees, including the disabilities that impair their productivity.

These certificates are distributed based on your establishment, including:

  • Community rehabilitation program
  • Hospitals
  • Residential care centers
  • Business establishment that is not a work center or an employer of patient workers, or
  • School Work Experience Program

Each certificate comes with an expiration date. It’s recommended that you renew them 2 months in advance of that date.

Is subminimum wage ending?

While it may not top our 2021 upcoming federal changes list, subminimum wage has been in the spotlight for many years now. In September, the United States Commission on Civil Rights supported ending the program, and it even appeared on Joe Biden’s presidential ticket. As individual states continue to increase the minimum wage, it’s possible that eventually we’ll see subminimum wage phased out.

The program aimed to allow those with disabilities or younger, apprentice-type employees to take part in the economy. But with an ever-rising cost of living, many are now questioning if it is ethical to pay employees less than minimum wage.

At the end of the day, you have to ask yourself if someone should be paid less than minimum wage just because their productivity is lower due to a disability or inexperience.

You have to ask yourself if someone should be paid less than minimum wage just because their productivity is lower due to a disability or inexperience.

While there is no set date for ending subminimum wage, the growing pushback against the practice is something to keep in mind.

Are there drawbacks to subminimum wage?

The major negatives of instituting subminimum wage is that it will likely result in a higher turnover rate. In a Sam’s Club and Costco comparison by Harvard Business Review, Wayne F. Cascio found that when Costco paid their employees almost twice as much as Sam’s Club, the turnover rate also plummeted. The cost of employee churn for Sams Club was more than twice the amount of Costco’s. And when you are dealing with replacing employees, you aren’t just dealing with lost revenue, but also lost productivity.

A healthy salary is a key method to ensure employees are motivated, productive, and loyal. Opting for subminimum wage may indirectly increase costs through turnover and lost productivity.

Rather than depend on subminimum wage, you may decide to invest in alternatives like part-time workers and independent contractors to reduce costs while maintaining productivity.

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