Small Businesses Struggle Under Increasing Regulatory Burden

It’s undeniable that small business is the growth engine of the economy. The Small Business Administration reports that there are 22.9 million small businesses in the United States. The Bureau of Labor Statistics (BLS) states that 90 percent of all net job creation from 1996-2007 came from small businesses. There is little question that if the US is to recover from this recession and if unemployment is to be driven down, small business will lead the way. Unfortunately, intentionally or unintentionally, the government is crushing our one hope of recovery.

A local bank was very successful. Through hard work and excellent customer service, they had grown their assets exponentially. In the process they had created wonderful jobs and hired many people. It was a great example of small business fueling the growth of the American economy.

As the number of employees grew the diligent head of human resources approached the president and said, “You know, when we hit 50 employees; we’ll be subject to FMLA” (the Family Medical Leave Act). After gaining a thorough understanding of the complexity of complying with the Act, the President made a conscious decision to stop the growth of his bank. Job creation came to a screeching halt. The president wasn’t opposed to extending the benefits of FMLA to his employees. Rather, he made an informed decision to avoid the considerable cost associated with the complexity of maintaining records and making judgments about what qualified for FMLA and what did not ―so much for small businesses fueling the growth of the economy.

Large Fortune 500 companies may be able to afford the cost of regulation because they can amortize it over tens of thousands of employees and over billions of dollars of revenue. Unfortunately, small businesses don’t have that luxury. Further, a company doesn’t have to reach the 50 employee mark to be subject to significant regulatory requirements. In fact, in the Commonwealth of Virginia (a relatively business friendly state), we count dozens of different state and federal regulations with which a business must comply when it hires its first employee. They include things such as the Immigration Reform and Control Act, the Consumer Credit Protection Act, the Fair Labor Standards Act, the Occupational Safety and Health Act, and the list goes on and on. It’s enough to make an entrepreneurs head explode. The load is staggering.

Historically, most small business owners have survived by simply choosing to remain ignorant with regard to the regulations. They simply could not afford the time, effort, and money that it would take to be knowledgeable of and compliant with all of these regulations. For the most part they have successfully flown under the radar. It was the only way they could survive. For example, we helped a successful entrepreneur who had been an employer for 15 years hire an inside salesperson. After the offer was accepted, we told him that the new employee would come in on Friday to complete her Form I-9 (required by the Immigration Reform and Control Act). The business owner responded, “I-what? We don’t do any of that,” and obviously they hadn’t for many years.

However, the days where ignorance of regulations is bliss are ending. The current administration seems to view fines resulting from enforcement of regulations as a source of revenue to fund its large spending initiatives. Significant increases in funding enforcement are rampant. For example, the Department of Labor’s (DOL’s) 2011 budget includes a $25 million initiative to strengthen enforcement of employees misclassified as contractors. The budget also includes an 11 percent increase in funding for the Department of Justice Civil Rights Division and a 5 percent increase in funding for the Equal Employment Opportunity Commission.

Other groups are stepping forward in collaboration with the government to ensure that even the smallest of entrepreneurial enterprises are compliant with every jot and tittle of the regulations. For example, in the Richmond, Virginia area a local law firm named Marks & Harrison has been running commercials inviting people who think that they should have received overtime pay to call for a free consultation. Other firms are running ads like these in essentially every significant market across the country.

On the surface this doesn’t sound too bad. Employees should get the pay to which they are entitled, right? Well yes, but unfortunately the regulations simply are not clear. There is a lot of grey area. The result is that many small business owners will have to hire expensive attorneys they cannot afford to fight charges of improper employee classification. To make matters worse, DOL has recently come to the aid of the Marks & Harrisons of the world by releasing a smart phone timekeeping app that will allow employees to track the hours they work so that employers can be nailed for any perceived irregularity. We can all agree that employees should be paid fairly, but when complex and confusing regulations can be viewed quite differently by two reasonable people, it’s the attorneys who win and job creation that suffers.

There’s no end in sight and it looks like the burden will increase further. In fact, the new regulations that will be established if Obama Care is fully enacted are yet to be completely understood. The one thing on which almost every interested observer can agree is that new regulations will increase the staggering burden on small businesses ―our one hope for recovery.

Doug and Polly White are partners at Whitestone Partners, Inc., a management consulting firm guiding small and midsize businesses through profitable growth.  Combined, they have more than 50 years of experience enabling companies to achieve their goals.