Do you own a business? Here are 10 examples of government regulation & policies that hurt small businesses and what you can do in the future to save yours.
Small businesses are the epitome of innovation for the American economy. They wear many hats, from hiring and managing employees to monitoring profits, to paying bills to making sales. They are on the front lines of commerce and are often the first to feel the effects of a slowing economy or bad public policy.
Starting and managing a small business is not easy, especially in today’s economic environment. Despite these challenges, net job creation by small firms has consistently outpaced job growth by big businesses. Historically, small businesses have been responsible for two-thirds of all new jobs. This ubiquity makes small businesses a key piece of the American economy, playing a critical role in its success and growth.
Each year, more than half a million new business establishments are launched, creating more than 2.5 million jobs. Even with the prevalence of small businesses, reports have it that federal regulations and their infrastructure are growing and have a disproportionate impact on small businesses and free enterprise in America.
Why You Should Not Ignore Government Regulations
Federal regulations alone are estimated to cost the American economy as much as $1.9 trillion a year in direct costs, lost productivity, and higher prices. The costs to smaller businesses with 50 employees or fewer are nearly 20% higher than the average for all firms. This growing burden of federal regulations come in the midst of a falling pace in new business formation.
After the undue regulations and policies from the federal level, small businesses have to deal with the rigorous restrictions from state and local governments to start a business, apply for a business or occupational license, hire employees, pay taxes, enforce contracts, and even close a business.
Regulatory complexity is death by a thousand cuts to America’s small businesses. This problem is compounded by the estimated over 90,000 state and local governments in the United States, each with their own varied authority to promulgate rules and regulations. Their rules and complexity continue to harm to America’s small business.
The Code of Federal Regulations has grown to 175,000 pages, so it’s no wonder that small businesses cite regulatory burdens as one of their biggest challenges. In most cases, the regulations imposed by governments on businesses are classified into four main categories; employee relations, taxes, bureaucratic and international trade.
Some regulations are more burdensome than others, however. While many regulations affect only certain industries, some regulatory requirements apply to virtually every business. Below are typical examples of regulations and policies that have particularly affected, are still affecting, or will affect small businesses in the US.
10 Examples of Regulation and Government Policies That Hurt Small Businesses
- Paid sick leave and minimum wage policies at local and state levels
Measures raising the minimum wage or mandating paid sick leave have been gaining popularity throughout the country in municipalities and statehouses. As was the case in 2017, paid leave policies will likely be implemented in a patchwork fashion by localities and states.
Paid leave bills were also introduced in Congress, but they are unlikely to gain traction in either Republican-led chamber. For entrepreneurs, offering paid leave benefits represents an attractive incentive when courting talent, but mandatory paid leave policies would likely require additional considerations in planning and budgeting.
- State licensing requirements
Not all regulations come from the federal government — small businesses must deal with local and state regulations as well. Licensing requirements can be a particular pain. A license is required to do business in an increasing number of professions, and not just where health and safety concerns are obvious.
The share of licensed workers varies widely across states, ranging from 15.9% in South Carolina to 38.5% in Kentucky. Education, health care, and financial services are the top three industries that require licenses or certificates to practice. Currently, more than 12.2 million or 21.7% of small business workers require a license to practice a trade or a profession.
- The federal tax code
Navigating the complexities of the federal tax code is more of a burden than the money they lose to the government. It’s not just income taxes; payroll taxes are a hassle as well. That’s why most businesses with more than five employees use an external payroll company.
According to reports, small businesses spend over 80 hours per year on federal taxes, and nearly half pay at least $5,000 a year to accountants or other tax practitioners. That’s why there’s strong support among small businesses for simplifying the tax code.
- Independent contractor test
Guidance from the Department of Labor appears to make it more difficult for employers to classify people who are integral to their business as independent contractors. Uber drivers may be the face of this employee vs. independent contractor debate, but it’s an issue with lots of businesses. More than 10 million workers in the U.S. are classified as independent contractors, but this classification is increasingly under fire.
The distinction between an employee and an independent contractor is important because employees are eligible for workplace protections such as the minimum wage, overtime compensation, unemployment insurance and workers’ compensation. Plus, employers must pay payroll taxes for employees, so companies that misclassify workers as independent contractors have an unfair advantage over competitors that follow the rules.
Workers who are economically dependent on an employer are employees, said guidance issued last summer by the head of the Department of Labor’s Wage and Hour Division. This guidance puts more emphasis on a worker’s economic relationship with a business than on what control a business has over a worker, such as their hours.
- The evolving joint employer standard
For some businesses, the question of whether they are joint employers with another business is becoming a major question mark. Notably, because National Labor Relations Board broadened its definition of who constitutes a “joint employer” in a ruling last summer.
On a 3-2 vote, the NLRB ruled businesses without direct control over workers employed by their franchisees, subcontractors or temporary staffing agencies can be considered to be joint employers if they have indirect control or potential control over these workers’ terms and conditions of employment. If implemented widely, the ruling will make it easier for labor unions to organize fast-food restaurants.
It also could upset the traditional franchising model, because franchisors would feel the need to exercise more control over franchisees in order to protect themselves from liability for any employment law violations by franchisees. That would make owning a franchise a less desirable option for small business owners.
- Reporting pay data by gender and race
For the aim of combating wage discrimination, the Equal Employment Opportunity Commission wants to require employers with 100 or more workers to report how much they pay workers, broken down by sex and ethnicity. The form for doing so looks daunting:
It includes 12 rows for different pay levels in 10 broad job categories, ranging from executives to service workers. For each of these rows, there are 15 columns identifying employees by gender and ethnicity — not just white, black or Latino, but also Native Hawaiian or Pacific Islander, Asian, Native American or Alaska Native, or “Two or More Races.”
Employers also would have to tally the total number of hours worked by employees in each pay band over the past 12 months.
This regulation will not only impose a new paperwork burden on businesses, the data also could be misleading, because pay disparities could be due to legitimate factors such as seniority, training or decisions workers make on whether to work overtime. That’s a problem since the EEOC has indicated it will use this new data to target employers who appear to be engaged in wage discrimination.
- EPA’s expansion of Clean Water Act jurisdiction
Under this rule, owners such as small businesses will have less flexibility on using their land, which extends federal jurisdiction to bodies of water that can flow into rivers and lakes. Opponents of the rule, who are fighting it in court, contend the regulation is so broad that it covers ditches, ponds and streams that only flow when it rains.
They contend the rule makes it more difficult for property owners to develop their land and interferes with local land use decisions.
Also, under the rule, property owners would have “to spend tens of thousands of dollars to obtain federal permits before doing things as simple as landscaping or dredging soil if the land (or land near it) collects water for any significant period of time throughout the year,” the National Federation of Independent Business states.
- The Affordable Care Act
Indeed Obamacare did not only change the health insurance market, it also has added a host of data collection and reporting requirements for businesses. Employers are now mandated to devote significant time and energy to maintain compliance with the law.
The extensive amounts of data that employers are required to collect can take hours and even require complex IT infrastructures. The process has meant a cost increase for many, especially smaller organizations.
For instance, businesses with 50 or more employees must file 1095-C forms with the Internal Revenue Services for every worker, showing that they have health insurance coverage meeting the ACA’s minimum essential coverage requirements.
- Overtime rules
A huge number of employees are about to become eligible for overtime pay under a final regulation that will be issued soon by the U.S. Department of Labor. That’s because the proposed rule nearly doubles the salary threshold where overtime pay is required. Workers who make up to $55,440 a year would be eligible for overtime pay under the proposed rule.
Employees above this salary level would be exempt from overtime pay requirements if they meet job duty tests that qualify them as executive, administrative or professional personnel. Businesses contend they’ll be forced to cut workers’ hours and hire more part-time workers in order to cope with the cost increases imposed by the regulation.
- The fiduciary rule for investment advisers
It’s very important to state that small businesses sometimes suffer collateral damage from regulations that are imposed on others. That could be the case with the Department of Labor’s fiduciary rule, which is designed to protect investors from conflicts of interest by investment advisers.
The rule would impose significant new compliance costs and legal liabilities on advisers that offer SEP and Simple IRA plans to small businesses, according to the U.S. Chamber of Commerce.
These advisers likely would pass on these costs to their customers, or some advisers could get out of the small business market altogether, concluding “that the small-scale of such plans means the expense and risk of changing business models and fee structures is not justified,” the report contends.
SEP and Simple IRA plans are a popular option for small businesses who can’t afford the cost and administrative hassles of 401(k) plans, but the proposed rule could limit their availability.
Government regulation of the US economy has expanded massively over the past century, prompting business complaints that interventions impede growth and efficiency. Proponents of intervention say it’s necessary to limit the adverse impacts of unregulated commerce, which range from environmental harm to labor abuses.
Although some regulations and policies are aimed at helping businesses by (among other things) providing loans and advice to small businesses and protecting copyrights. Howbeit, it is important to understand that business laws differ by state, locality or country.
And although it is quite a challenge to know all the regulations that apply to your particular line of business, it is important that you get someone who knows better to represent you. A business lawyer is indeed the right person to direct you towards success and profits without breaking the law.