The Small Business Work-Around for Minimum Wage in Los Angeles

Small business owners who conduct any business in the City of Los Angeles are liable to violate the City of Los Angeles Minimum Wage Ordinance (MWO), if they are not careful. Specifically, businesses with employees, who work two hours or more, (located in or doing any business) in Los Angeles city limits must comply with the local minimum wage, as well as the separate California state law requirement. However, some business owners may qualify for deferred payment increases if their small businesses has 25 or fewer employees, with a business-friendly definition of employee.

Specifically, the City of Los Angeles MWO applies to any type of paid employee (full-time as well as part-time employees, temporary employees, and/or undocumented workers). Any employee who performs two hours of work or more within a week is entitled to minimum wage payment. Moreover, any employee who performs two hours of work or more in a week within the City of Los Angeles is entitled to be paid the Los Angeles minimum wage. So, regardless of the employer’s geographical location, an employer must pay the minimum wage for an employee performing work within the City of Los Angeles. To determine whether a workplace or job site is within the City limits, see http://neighborhoodinfo.lacity.org/.

Employers with 25 or fewer employees (or non-profit corporations with 26 or more employees) may qualify for a delayed payment based on eligibility until July 1, 2017. Then a minimum wage rate schedule that is specific to small businesses may apply. Note that by 2021 that small businesses will be held to the same standard as large businesses. The two MWO hourly rate schedules, including for small businesses can be found below, or on the City of Los Angeles website.

Employers with 26 or more employees shall pay a wage of no less than the hourly rates set forth:

  1. On July 1, 2016, the hourly wage shall be $10.50.
  2. On July 1, 2017, the hourly wage shall be $12.00.
  3. On July 1, 2018, the hourly wage shall be $13.25.
  4. On July 1, 2019, the hourly wage shall be $14.25.
  5. On July 1, 2020, the hourly wage shall be $15.00.

Employers with 25 or fewer employees shall pay a wage of no less than the hourly rates set forth:

  1. On July 1, 2017, the hourly wage shall be $10.50.
  2. On July 1, 2018, the hourly wage shall be $12.00.
  3. On July 1, 2019, the hourly wage shall be $13.25.
  4. On July 1, 2020, the hourly wage shall be $14.25.
  5. On July 1, 2021, the hourly wage shall be $15.00.

An employer may use other methods of compensation to offset the amount that the Los Angeles MWO requires. The MWO defines “wage” as all amounts of compensation for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation. In this case, the employer must keep clear and accurate records for each pay period to show the amount paid to each employee in case the business is audited. Note that gratuity, tips and/or medical benefits cannot be counted toward the minimum wage.

As for the specifics, the City of Los Angeles proves to be friendly to small businesses. The Ordinance calculates the size of a business taking an average number of employees employed during the previous calendar year, and then rounding up to the next whole number. And if an employer qualifies for the small business deferral and the employer hires more employees, it shall pay based on the deferral schedule for the duration, regardless of the changes.

This MWO also generously interprets defining the size of an employer’s business. In other words, the MWO’s definition of employee does not include employees working outside of Los Angeles. Employees are defined as any individual who performs at least 2 hours of work in a week with the geographic boundaries of the City of Los Angeles. This “work-around” allows larger businesses to qualify for the deferred rate schedule. And once the business qualifies under the deferral schedule, then it continues to pay based on this schedule regardless of any changes of employees. It is imperative for businesses to keep accurate records for each pay period to protect themselves in a future audit.

In addition to keeping complete records, an employer should calculate the number of employees for the deferral schedule. The small business deferral is not an approval process. There is no approval process. It will be complaint based. If the Office of Wage Standards calculates 26 or more “employees” that qualify under the ordinance the that employer is subject to the schedule for large employers plus possible penalties and a potential for a lawsuit. The only deferral approvals being issued are for non-profits.

The MWO is business owners must comply with the Minimum Wage Ordinance for their municipality, as well as the time that their respective employees travel into another municipalities (keep in mind that other municipalities may have their own respective ordinances). Businesses must abide by the Los Angeles MWO or risk incurring fines and legal liability. Small businesses may qualify for the minimum wage rate deferral schedule. Moreover, the size of an employer’s business does not include employees working outside of Los Angeles. The application of the Los Angeles MWO allows small businesses to defer the rate increase incrementally until July 1, 2021.