Despite the Affordable Care Act (ACA, or, Obamacare) being a lightening rod for political, business, economic and policy debates, there are two related issues concerning the ACA that have direct impact on small businesses that are only now gaining attention outside a tight circle of policy wonks, politicians and tax analysts.
The related issues are (1) the ACA’s definition of a “fulltime employee” as anyone working 30 hours or more per week; and (2) the 50-employee metric used by the ACA to determine whether or not a company must comply with provisions of the law.
While policy analysts and economists can debate whatever they want to believe will happen because of those provisions, one thing is certain: In the life of a growing small business, the owner(s) will reach a point where they will realize the next employee they hire will be the most expensive hire they will ever make, the one that will add significant overhead to their business in the form of benefits, penalties (taxes) and administrative costs.
And it is fairly clear what happens when you create such a trip-wire for growth: employers will seek a legal means to avoid it.
Growing companies find alternatives to hiring employees in order to avoid costs, including mandated benefits
“Not hiring employees” is a practice so baked into American business management theory that it has not only revolutionized the American way of work and life, it has revolutionized the way of work and life of other countries around the globe. Out-sourcing is another way of saying “not hiring employees.” Another term for “not hiring employees” is “independent contractor” or “permatemps.”
Companies like Nike and Apple “don’t employ” more people than they employ to provide us the products carrying their logo. And a significant portion of the cost of employees is wrapped up in benefits.
Many types of small businesses exist today because of the desire by large companies to outsource.
France’s 49-Employee Business
A dramatic example of how mandated benefits are a disincentive to hiring is the phenomenon in France some call “The 49-employee Business.” In France, when a company hires its 50th employee, the accomplishment is accompanied by a long list of regulations, rules and mandated policies and expenses including the establishment of multiple worker councils, setting up a profit-sharing program and restrictions to the company’s ability to layioff employees — all bundled up in something called the French “labor code.”
While economists can argue that the benefits of scale will drive down a company’s costs (the theory is that growth in number of employees correlates to improvements in productivity and therefore economies of scale are gained, despite the associated costs of adding employees), such theories don’t seem to matter to a significant number of French entrepreneurs: According to a 2012 study by the London School of Economics, there are 2.4 times as many companies in France with 49 employees as there are with with 50.
Rather than grow past 49 employees, many French business owners skirt the 50+ labor code by creating new companies rather than expanding existing ones. “I can’t tell you how many times when I was Minister I’d meet an entrepreneur who would tell me about his companies,” Thierry Breton, former French Minister of Finance, said at a 2012 conference. “I’d ask, ‘Why companies?’ He’d say, ‘Oh, I have several so that I can keep [the workforce] under 50.'”
Potential actions U.S. small businesses will take to legally avoid being subject to the Affordable Care Act
The French “49-employee business” demonstrates why you should never under estimate the savvy of entrepreneurs (which, is a French word, no?) to find a way to disrupt a system they believe needs disrupting. Like in the “contractor vs. employee” battle, the legality of creating multiple businesses to avoid the ACA sounds like something that could keep tax and employment attorneys employed for years.
The 29.5 hour work week
Similarly, if a law defines “full time employees” as an individualwho works 30 hours per week and you make it obvious that the difference between 29 hours and 30 hours is several thousand dollars, you create a trip-wire to hiring at 29.5 hours. As the impact of the ACA has not been fully absorbed, it is too early to determine if there is a new class of worker emerging called “the 29.5 hour employee.” However, the phenomenon of “permatemps” suggest there will be such less-than-full-time employee designation soon.
We’ll have to leave that theory to another day as the French have only lowered their definition of full-time employees to 35 hours.