Soothe the Financial Sting of Rising Wages with the Work Opportunity Tax Credit
By Marky Moore Founder, Capital Review Group | March 06, 2016
Across the country, a labor movement is percolating, with potentially significant implications for businesses, including the hospitality industry in particular. Low-wage workers are increasingly turning to the government to demand better pay via higher minimum wage mandates. This movement has already garnered some critical victories and shows no signs of abating. According to the National Employment Law Project, an organization that advocates for workers' rights, fourteen cities and counties across seven states have agreed to raise their minimum wages to $15 per hour over the next few years. An additional sixteen states, including California and New York, will increase the minimum wage by up to a dollar in 2016. Furthermore, President Obama has voiced his support for the Raise the Wage Act, which would gradually increase the federal minimum wage from its current rate of $7.25 to $12 dollars per hour by 2020.
As workers nationwide celebrate the promise of greater economic security, businesses are grappling with diminished profits due to higher operating expenses. The hospitality industry is especially susceptible to the detrimental impact of raising the minimum wage. From housekeepers to front desk clerks to the food and beverage staff, hotels employ numerous workers who are paid at or slightly above the minimum wage. Therefore, hotels may face significantly increased operating expenses if they are subject to laws that mandate a higher minimum wage.
Hotels may consider various solutions to offset the increased cost of paying their employees. One common reaction is to reduce the size of the workforce. However, this option is problematic because the remaining employees will inevitably face an augmented workload, which may cause quality to suffer to the detriment of the guest experience. Overworking employees may also lead to higher turnover rates, thus increasing costs associated with hiring and training staff.
Another option is to pass the increased costs onto guests by raising room rates. The risk inherent in this measure is that neighboring cities may not have raised their minimum wages, so not all hotels in the area will have the need to raise rates. Therefore, guests may simply opt to book their stays at hotels in municipalities that have not implemented a higher minimum wage.
As another way to combat escalating labor costs, hotels may be forced to take the drastic measure of eliminating entirely those aspects of their operations that are the most costly to run. These often include the hotel's restaurants, which, due to their particularly high proportion of low-wage staff members, may teeter on the brink of unprofitability.
Fortunately, the federal tax code provides a mechanism to offset climbing costs without any of the downsides presented by the above solutions. Hotels that are subject to rising minimum wage rates may find relief in a powerful tax incentive known as the Work Opportunity Tax Credit (WOTC), which generates significant tax savings as businesses expand their workforces.