Small Matters: A mountain of regulations deters job creation

Posted: March 12, 2012

Hiring the first employee can be so costly that many entrepreneurs never do it. They prefer to stay in solo businesses, which number more than 10 million in the United States.

A brief summary of the regulations involved makes it clear why many decide not to become an "employer." My electrician refuses to have an employee, citing the regulatory and tax hassles he would have to endure. Here's what he is talking about.

Once a candidate accepts a job offer, the Fair Labor Standards Act kicks in, regulating minimum wages, overtime pay, and child labor. Seventeen states have their own minimum wages, including Pennsylvania and New Jersey.

Of course Workman's Compensation Insurance must be initiated. Then there's the I-9 form and the W-4 (Withholding Allowance Certificate), the FICA (Federal Insurance Contribution Act) tax to compute and file on the Form 941 and Form 940 (Federal Unemployment Tax Act). Owners should know OSHA requirements, because an inspection could occur (and states may have parallel laws).

Record keeping starts with 10 employees. Owners must make sure that all appropriate posters are prominently displayed. And new stuff continually comes along, prescribing all sorts of obligations for firms that have become instruments of social policy, not creators of jobs and wealth.

A firm would not have to expand by much to require attention to even more rules, including Title VII of the Civil Rights Act of 1964, the 1975 Pregnancy Discrimination Act, The Age Discrimination in Employment Act, the American's With Disabilities Act (employment sections), the 1986 Immigration Reform and Control Act, and the Genetic Information Nondiscrimination Act of 2008.

The federal government cannot possibly manage business in a manner that is sensitive to the varying circumstances of the economy.

Even worse, the political "managers" have little if any business experience at all and are heavily influenced by lobbyists. Federal rule-making is by necessity "macro" in nature, applying to businesses in all 50 states uniformly. Attempts to do otherwise create widespread confusion and inequities.

Congress sometimes seems to be in the business of granting exemptions. The Affordable Care Act, aka the health bill, is a case in point. Passed by Congress to apply to everyone and every business, more than 1,700 "exemptions" have already been granted, and more will undoubtedly be handed out.

State and local governments view small businesses primarily as a major part of the tax base - since many large firms have made tax abatement deals to "stay in town" - and payers of fees and fines.

Small business also provide jobs that produce income and sales tax revenue. They are viewed by the politicians ("city council") as a tool of social policy, requiring firms to provide certain benefits to the disabled or the indigent.

Recently, a surge of regulations requiring paid sick days has appeared (San Francisco, Oregon, Connecticut, and Philadelphia). The bill that originally passed Philadelphia City Council (vetoed by the mayor) is typical, requiring five paid days for employees at firms with fewer than 11 workers and 9 paid days for firms with 11 or more workers.

It required regulations to be posted, and if 10 percent or more of the workforce did not speak English as their major language, the regulations had to be posted in all applicable languages.

Records for each employee were required to be carefully kept. Large fines were imposed for violations. Such measures raise the cost of hiring, but, as importantly, divert the owner's time to less productive activities.

The entrepreneur's job is to provide a product or service at the lowest possible cost, not run a welfare agency. Such regulations can intrude on compensation negotiations. As more of the compensation package is mandated, less of a worker's compensation can be paid in cash and owners can provide less flexibility.

2010 set a record for regulations posted in the Congressional Record. State and local officials impose regulations on top of this. Outdated regulations are not removed. Small firms do not have the specialized staff to deal with this or keep track of all the changes, making these regulations "regressive" taxes and a barrier to job creation and business formation.

The regulators need to be more mindful of the damage that excessive and poorly designed regulation can do to the vitality of its small-business community.


Bill Dunkelberg is a professor of economics at Temple University and a nationally recognized expert in small business. Contact him at dunk@temple.edu. Read more of his columns at www.philly.com/dunkelberg

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