The Basics of Subminimum Wage

Subminimum wage was codified in law in 1938 with the passage of the Fair Labor Standards Act (FLSA). The law allows employers to pay a lower wage adjusted to a productivity level for what was referred to at the time as “substandard workers.”¹ Despite disagreement about who was included in the term substandard workers, the law ultimately stated that subminimum wages could be used for workers “whose earning potential is impaired by age or physical or mental deficiency or injury.”²

At the time, many people with disabilities were institutionalized, so the law’s intent was to encourage companies to employ these individuals, while also spurring workforce engagement and training. However, the law has remained essentially unchanged, even as disability rights and education laws were passed. The provision still sits in Section 14(c) of the FLSA, hindering career development and training and keeping many people with disabilities in subminimum wage pay for their entire working lives.

Employers can pay a subminimum wage once they have received a subminimum wage certificate from the U.S. Department of Labor. According to a 2023 Government Accountability Report, workers employed under a subminimum wage certificate are making an average of $4.15 per hour, with more than half making less than $3.50 per hour.³ Note that in law, there is no floor or minimum hourly wage.

Most entities that have a subminimum wage certificate are community rehabilitation programs (CRPs), which are nonprofit organizations that provide employment and day service supports to individuals with disabilities. CRPs that use 14(c) wage certificates provide subminimum wage work to workers with disabilities and may also provide day habilitation, which includes services for personal and health care, social engagement, daily living, and community living. These habilitation services are a critical component of disabled individuals’ daily routines, as many workers with disabilities employed under subminimum wage certificates work part time and receive day habilitation services for the other hours in their day.⁴

Day habilitation and employment services are deeply intertwined. Medicaid, which is a major funding source, also requires some level of interconnection between day habilitation and employment services. This interdependency complicates efforts to reform one part alone and sits at the center of the challenge of transitioning away from subminimum employment.

Although the unemployment rate for disabled workers is still nearly twice as high as that for nondisabled workers,⁵ the employment-to-population ratio among disabled workers has been steadily rising and is now more than 38 percent among workers ages 16–64.⁶ Youth with disabilities are now entitled to receive career counseling and coaching as early as 14 years old in some states and 16 years old in all states, as well as transition support as they prepare for and enter the workforce.

Subminimum wage policy and practices are also changing. As described in detail in our previous “pennies” report, momentum is shifting. Many states have phased out or are in the process of phasing out the use of subminimum wage. Twenty states have either eliminated subminimum wage (14 states) as of the publication of this report or are in the phaseout process after passing legislation (six states): Alaska, California, Colorado, Delaware, District of Columbia, Hawaii, Kansas,⁷ Maine, Maryland, Nevada, New Hampshire, Oregon, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, Washington, Wyoming, and, most recently, Illinois.

There is limited but growing evidence on the impact of transitioning away from subminimum wage policies, although a recent study of New Hampshire and Maryland found that removing subminimum wage led to increased workforce participation and potential employment improvements for people with cognitive disabilities.⁸ New research from Northwestern University found that eliminating subminimum wage supported higher-wage opportunities and did not develop an increased reliance on public benefits.⁹ Research from the Institute for Community Inclusion at the University of Massachusetts Boston offers important considerations for state and local leaders as they transition away from subminimum wage employment, including ensuring there is substantial lead time to plan for changes, providing stronger support for employers and comprehensive benefits counseling for participants, and maintaining existing support programs.¹⁰

While states are taking action to address the issue of subminimum wage, the authority to pay a subminimum wage originates at the federal level, under the Fair Labor Standards Act, Section 14(c). There are several federal bills proposed to phase out Section 14(c), with the most prominent being the bipartisan and bicameral Transformation to Competitive Integrated Employment Act (TCIEA), previously introduced in the 118th Congress by Senators Bob Casey (D-Pa.) and Steve Daines (R-Mont.) and Representatives Robert C. “Bobby” Scott (D-Va.) and Cathy McMorris Rodgers (D-Wash.). While leaders on the bill will change with the 119th Congress, there is significant momentum to discontinue subminimum wage at the federal level.