The Hidden Risks of Hiring in States with Low Minimum Wage

With remote work becoming the norm, the entire country is your talent pool. Looking for states with the lowest minimum wages for hiring may seem like a wise approach to control costs. Yet there are compliance hurdles and long-term costs. 

This approach also ignores modern talent demands. With transparency now a key factor for job seekers, a strategy built on low, opaque wages is at a disadvantage from the start. Research shows that nearly 75% of job seekers are more likely to apply to jobs if a salary is listed. 

This guide will reveal the real risks, from aggressive state laws to hidden turnover costs, of building a team in supposedly cheap labor states.

Busting the Myth of Cheap Labor States

The first mistake is assuming a low minimum wage equals a low overall cost of doing business. The reality is far more complex. A state's overall business climate is a mix of different taxes and regulations that can offset low wage costs. Some states with no income tax compensate with high property or sales taxes that impact the overall business environment. 

In addition, total payroll cost goes far beyond the wage itself. Each state has its own State Unemployment Insurance (SUI) tax rates and wage bases. A state with a low minimum wage might have a higher SUI tax burden that narrows the cost gap compared to the highest minimum wage state.

Founders who chase low wages without understanding the total cost picture are often surprised when the savings don't materialize. What you save on wages, you may end up paying in higher taxes, insurance, and legal fees for non-compliance.

Compliance Traps

Beyond the numbers, some risks in low-wage states come from their unique and often aggressive employment regulations in other areas.

Trap 1: Aggressive final paycheck laws

Consider Texas, a state that uses the $7.25 federal minimum wage. While the salary is low, its final pay laws are very specific. Terminated employees must be paid in full within six calendar days of their last day. A company used to a more lenient ‘next scheduled payday’ rule could immediately find itself non-compliant.

Trap 2: Complex covenants

Many businesses rely on non-compete and non-solicitation agreements. However, the enforceability of these agreements varies dramatically.

States like Georgia and Florida, both of which have relatively low labor costs, have detailed and complex statutes governing these restrictive covenants. An agreement that works in New York may be completely unenforceable in Georgia, leaving your business exposed.

Trap 3: Web of local ordinances

Even in a low-wage state, a city can have its own set of laws. For example, some cities have passed predictive scheduling or local paid sick leave laws that are much stricter than the state laws. This means HR compliance management must be tracked not just at the state level, but at the city and county levels as well.

Invest in Your People

A truly strategic approach looks beyond the wage to the total employee investment.

Financial wellness

A growing trend is employer-sponsored financial wellness programs. 84% of employers claim that offering financial wellness tools helps increase employee retention. These benefits can be more cost-effective than universal raises, but they also impact employee loyalty and reduce the financial stress that leads to turnover.

Modern talent strategy

A modern company thinks beyond just pay. This includes adopting modern hiring practices like skills-based hiring. By removing degree requirements, employers could access a vastly larger talent pool for many roles. To attract the best talent from this wider pool, a fair and transparent compensation strategy is essential, not a race to the bottom.

DianaHR: Your Reliable Multi-State Compliance Partner

Navigating the state-wise legal landscape is a challenge for any growing business. It requires a level of expertise and constant monitoring that most founders simply don't have time for.

This is where DianaHR’s panel of HR experts can help. They provide expert HR compliance services designed for the modern, distributed workforce.

• State-specific onboarding: Our HR experts don't use a one-size-fits-all process. They manage state registrations and provide state-specific offer letters, policy additions to handbooks, and workers' compensation by state for every employee you hire.

• Proactive policy management: They monitor the new state labor laws across all 50 states and proactively update your handbook. This includes aspects like compliant final pay procedures and modelling the language to match local requirements.

• Strategic payroll: Our experts help you look beyond the minimum wage by state, providing data to help you set competitive wages that reduce turnover. They advise you on the total payroll cost, including local taxes and benefits.

Make your compliance strategy foolproof with DianaHR. Chat with HR experts today. 

FAQs

1. Is it always cheaper to hire employees in states with the federal minimum wage?

Not necessarily. The hourly wage is only one component of your total labor cost. States with low minimum wages may have higher costs in other areas, such as higher State Unemployment Insurance (SUI) taxes or more complex and litigious environments for other employment laws, like final pay or non-compete agreements. Further, as confirmed by numerous studies, paying the bare minimum wage is often linked to higher employee turnover, and the cost of recruiting, hiring, and training new employees can quickly overturn any initial savings.

2. What are some non-wage compliance issues to watch for in different states? 

Beyond wages, you need to watch for a range of state-specific laws. Key areas include final paycheck timing, rules for meal and rest breaks, paid sick leave mandates, and the enforceability of restrictive covenants like non-compete agreements. Each of these state minimum wage laws and regulations requires a tailored approach. 

3. How does employee turnover affect the cost savings of hiring in a low-wage state? 

Employee turnover can wipe out the perceived cost savings of hiring in a low-wage state. Replacing an employee can cost up to two times their annual salary in recruiting, interviewing, and training expenses. There is also lost productivity during the vacancy and ramp-up period.

Since low wages are a primary driver of turnover, any savings from a lower hourly rate are often lost to the continuous cycle of replacing employees. This makes a strategy of paying a more competitive wage a more prudent financial decision.