Get ready for some hikes. No, not ones with scenic, mountain-top views—we’re talking about state minimum wages.
Several states have set their own minimum wages over the years, but as more move to do so, navigating a fractured compensation compliance landscape will become increasingly complicated for people professionals.
“I think most HR teams are used to minimum wage changes and how to react accordingly,” Erika Johnson, director of work, rewards, and career at Willis Towers Watson (WTW), told HR Brew. “But [in] the past several years, we’ve seen an uptick in the number of new minimum wage pay levels, new laws around automatic indexing, things like strategies to get to $15 an hour, those sorts of objectives.”
Some 23 states—including California, New York, and Illinois—are currently set to raise their minimum wages in 2025. Most increases are set to go into effect on Jan. 1, though Alaska and Oregon’s wage hikes are scheduled for July 1, and Florida’s for Sept. 30. Michigan will raise its minimum wage twice next year, first on Jan. 1 to $10.56, and then on Feb. 21 to $10.61.
Ahead of these changes, compensation experts shared with HR Brew what people professionals should be aware of when navigating minimum wage increases.
Watch out for wage compression. When the minimum wage increases, employees in lower-earning roles may earn the same pay as what staffers in higher-earning positions earn, creating wage compression. This can tick off senior workers, who might feel slighted.
“Most organizations realize this, but they don’t know how to navigate the next step,” Tom Wardrip, a managing director at Gallagher’s HR and compensation consulting practice, told HR Brew. While employers’ initial reaction may be to simply increase the minimum wage of all employees, that can quickly become costly. “It’s really easy to calculate how much it’s going to cost you…the real question is, how far do you expand into the range or the different rates that people are being paid because of that?”
Wardrip recommended compressing the pay grade structure for lower-earning roles, to avoid having to hike wages across the entire company. For example, if the difference between two pay grades is 7%, reduce it to 5% to “concentrate a lot of the spend in those lower grades [and not] just run it throughout the organization.”
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Similarly, Johnson said companies that standardize wages—either across the board, or based on tenure or experience—may have an easier time adjusting to minimum wage increases than those that pay employees using broader, less-defined ranges.
Beware of secondary effects. Increased compensation isn’t the only cost that employers should consider with wage hikes: There may be impacts on pay-based benefits, like health insurance premiums or retirement matches. While minimum wage employees may not be eligible for some of these benefits, it's wise to assess any potential additional costs, Johnson said.
“I think it’s always a good time, especially as you’re getting close to January 1…doing a quick, compliance check, compliance review, and making sure that you have sufficient policies and practices around timekeeping and meal and rest period tracking,” she said.
Keep an eye on the market. Many employers in lower-wage sectors have, in recent years, raised their own minimum wages to retain workers amid record-high turnover. HR teams will need to stay on top of what competitors, as well as employers outside their own industry, are paying to set competitive pay rates as more job seekers consider leaving their field, Johnson said.
Some local jurisdictions may also have a higher minimum wage than the state in which they’re located, which could create a ripple effect in certain regions. For example, Washington’s unincorporated King County will increase its minimum wage to $20.29 in January, in an attempt to keep up with the minimum wages in neighboring cities, like Seattle, where it will rise to $20.76 in the new year. This could impact cities outside of King County, where the state minimum wage of $16.66 will be in effect, Johnson said.
“Wages don’t really care about the border between King County and the next,” she said. “If I’m just across the line… [and] I need to attract employees, what am I going to do? So you start to see some of that ripple effect across nearby communities, not just that local, county, or city.”