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April 26, 2016

Nonprofit Risk Management: Rising Minimum Wage Creates Financial Tightrope

On Monday, April 4, 2016, both California Governor Jerry Brown and New York Governor Andrew Cuomo signed legislation raising the mandatory minimum wage in their respective states to $15 over the next several years. That makes them the first states in the nation to enact such legislation, coming on the heels of cities such as Los Angeles and San Francisco recently voting to gradually raise their minimum wages.

In California, the statewide minimum will increase to $10.50 on January 1, 2017, for businesses with 26 or more employees. Incremental increases over the coming years (tied to inflation) will take the rate to $15 by 2022. At that point, a full-time minimum wage worker would see an increase in annual earnings to $30,000 from today’s $20,000.

A seismic shift

The implications of the minimum wage hike are huge, especially for the state’s agriculture, restaurant, and retail industries, which employ the lion’s share of minimum wage workers. Supporters say it’s a long overdue measure that will help provide a more equitable living wage for those low income workers, but opponents say it will lead to more unemployment among those very low income workers it’s designed to help, and raise prices for everyone.

One thing is clear: higher wages will have many nonprofits and charity organizations walking an even thinner financial tightrope.

Unlike a retailer or fast-food restaurant that can absorb a wage hike by charging more for their products, most nonprofits don’t have those means. Many are operating on a shoestring budget as it is, and they’re now faced with figuring out how to pay higher wages while their revenues remain flat (if they’re lucky). So everything is on the table including cutting programs and personnel, raising fees, and reducing employee benefits.

For those committed to helping the needy, it’s an especially bitter pill to swallow.

The minimum wage issue also puts nonprofits between the proverbial rock and a hard place. There’s been such a groundswell of support behind this reform that nonprofits have been put in a precarious position – supporting a measure that helps their clients but could break the bank unless they come up with new sources of funding or make painful cuts to services and people.

Unfortunately, when resources are stretched thin, too many nonprofits cut back on safety measures, suffer more accidents, and see an increase in claims. So with more of your limited resources going to payroll, your risk management strategies will be even more crucial in the months and years ahead.

One of the most crucial risk management decisions you’ll make is how to finance those risks.

When you run a nonprofit, many of your insurance needs are the same as any other business. But you also have exposures that are unique to your cause and your operation. Make sure you’re covering all the bases. Some of the most common types of insurance you may need to consider include:

  • General Liability
  • Property
  • Commercial Auto
  • Directors and Officers
  • Workers’ Compensation
  • Employment Practices Liability

Will your nonprofit survive the changing wage landscape?

While the minimum wage hike will put an even bigger squeeze on nonprofits, a robust risk management strategy is one of the best remedies to soften the blow. Don’t be deterred from your vital mission. Talk to the risk management experts at Heffernan’s Nonprofit Practice to learn more about protecting your nonprofit, so you can go on doing the work your clients depend on. 

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