The Federal Minimum Wage
The federal minimum wage, established by the Fair Labor Standards Act, sets the baseline wage that covered, non-exempt workers must receive. As of 2026, the federal minimum wage has remained at $7.25 per hour since 2009, making it one of the longest periods without an increase in the history of the federal minimum wage. However, the practical impact of the federal rate has diminished as the majority of states and many localities have enacted higher minimum wages.
State and Local Minimum Wage Laws
More than 30 states and the District of Columbia have minimum wage rates above the federal level. Additionally, numerous cities and counties have enacted their own minimum wages, often significantly higher than their state's rate. When federal, state, and local rates differ, employers must pay the highest applicable rate.
Key Trends in State Minimum Wages
- Several states have enacted gradual increases targeting $15 per hour or higher
- Many states have tied minimum wage increases to the Consumer Price Index (CPI), creating automatic annual adjustments
- Some states have different rates for tipped employees, small employers, or workers under age 18
- A growing number of localities have enacted rates above their state minimum
Tipped Employee Wages
Under the FLSA, employers may pay tipped employees a lower direct wage (currently $2.13 per hour at the federal level) as long as the employee's tips bring total compensation to at least the full minimum wage. This is known as the "tip credit." However, several states do not allow a tip credit and require employers to pay tipped employees the full state minimum wage before tips. HR professionals must understand the specific rules in each jurisdiction where tipped employees work.
Tip Credit Requirements
- Employees must regularly receive more than $30 per month in tips
- Employers must inform employees about tip credit provisions before taking the credit
- If tips plus the direct wage do not equal the full minimum wage, the employer must make up the difference
- Employers cannot require tip pooling with employees who do not customarily receive tips (with some exceptions under recent regulatory changes)
Subminimum Wage Provisions
The FLSA allows subminimum wages in certain limited circumstances. These include youth workers under age 20 during their first 90 days of employment (at a rate of $4.25 per hour), student learners in certain vocational programs, and workers with disabilities under certificates issued by the Department of Labor. These provisions have come under increasing scrutiny, and some states have eliminated or restricted their use.
Compliance Challenges for Multi-State Employers
Organizations operating in multiple states face significant compliance challenges. Different minimum wage rates, tip credit rules, pay frequency requirements, and pay stub disclosure obligations create a complex patchwork of requirements. Remote work arrangements further complicate matters, as employers must determine which jurisdiction's laws apply to each remote employee.
Compliance Strategies
- Maintain a database of all applicable minimum wage rates and update it regularly
- Configure payroll systems to automatically apply the correct rate based on work location
- Monitor legislative developments at the federal, state, and local levels
- Conduct regular audits to verify compliance, particularly for tipped and piece-rate employees
- Train managers and payroll staff on jurisdiction-specific requirements
Impact on Compensation Strategy
Rising minimum wages have ripple effects throughout the compensation structure. As minimum wages increase, organizations often face pay compression, where the gap between entry-level and more experienced workers narrows. This can lead to morale issues and may require across-the-board adjustments to maintain internal equity. HR professionals should model the impact of minimum wage increases on their entire pay structure and develop strategies to address compression proactively.
SHRM Exam Topics
Be prepared for questions on FLSA minimum wage provisions, the interplay between federal, state, and local rates, tip credit requirements, subminimum wage provisions, and the organizational impact of minimum wage changes. Scenario questions may test your ability to determine the correct minimum wage in a multi-jurisdiction situation or to address pay compression resulting from a minimum wage increase.