Unleash Small Business To Again Lead The Recovery

Monday, February 28, 2011 - 00:00

Al Driver


In addressing the U.S. Chamber, President Obama recognized that something must be done to eliminate regulations that place unnecessary burdens on business and hinder job growth. And, Tom Donohue in his State of Business address heartily agrees. Jeff Immelt, as leader of the President's commission on job growth, will undoubtedly be carefully examining the causes of persistently high unemployment. At a state level, the efforts of Governor Chris Christie to eliminate job-killing red tape in New Jersey are a model for other states. The head of his Red Tape Commission, Lieutenant Governor Kim Guadagno, proclaimed that New Jersey is "Open for Business."

It is hoped that in reviewing regulations that inhibit job growth, those commissions and other bodies that are examining regulatory reform do more than merely fix the language of regulations. To achieve job growth, they must demand transparency on the part of those administering the laws and regulations. Unpublished guidelines and enforcement practices need to be made publicly available and tested for consistency with the law. Adherence to the rule of law demands no less.

It is generally accepted that one of the primary reasons why our country has emerged slowly from the current recession is that small business is not playing its usual role as a job creator. In previous recessions, 65 percent of job growth was attributable to small business. It is useful to examine why this engine of growth is not playing its traditional role today. With huge amounts of capital being accumulated looking for private equity investments, we should be experiencing a similar explosion in job growth led by small businesses.

Over almost two decades, this newspaper has observed those earlier recoveries. The anatomy of growth was that small businesses, founded by entrepreneurs with an idea, were able to reach out for help to experts in other fields whose services were needed to help get that great idea off the ground (and who would otherwise swell the ranks of the unemployed). Many of these were independent contractors - frequently moms with special skills who needed to work from home because of their family responsibilities and whose skills would not otherwise be used.

Today, because of the administration of the laws affecting independent contractors, this vital tool for business growth is not being fully utilized. The mindsets of the regulators and unpublished guidelines create great uncertainties about whether small businesses can grow as they have in the past by reaching out to use the otherwise untapped talents needed to launch their businesses.

Take New Jersey for example. The language of the law is clear. Like many other states, it provides that a business can treat a person as an independent contractor if the relationship meets what is called the ABC test. That test goes only to the nature of the services being provided and degree of control which the business exercises over the independent contractor. Yet, in states like New Jersey, the administration of the law is such that the language of the law is ignored by the regulators. Rigid guidelines not found in the ABC test are applied, such as whether the individual advertises in the yellow pages or uses business cards, while use of the Internet, Facebook or LinkedIn is ignored.

Unpublished guidelines and enforcement practices, inconsistent with the ABC test, require the business to intrude into the financial circumstances of an independent contractor. A 72 percent rule states that if more than that percentage of a person's income as an independent contractor (ignoring other sources of income) is derived from services to a particular company, this would keep that person from qualifying as an independent contractor. This effectively prevents an emergent business from bringing back into the economy a skilled person whose skills are initially used only by that business.

Other unpublished guidelines and enforcement practices look at other aspects of the relationship and similarly disqualify an independent contractor relationship even though, both by contract and in actual practice, it qualifies under the language of the ABC test.

Certainty in the meaning of the law is not only at the heart of the rule of law, but is essential to encouraging business growth and job creation. For example, it is important to let small businesses know of the administrative practice of automatically treating as a qualified independent contractor any service, irrespective of the strict rules applicable to sole proprietors, that has paid the small amounts involved in becoming an LLC.

Small business can again become a dynamic force for job creation if commissions at the federal and state levels carefully examine why it is not performing its traditional role of creating at least 65 percent of new jobs. They should look at not only whether the guidelines as to administration of the law or regulations are transparent in the sense being readily available to emergent businesses eager to comply with the law, but also whether they are consistent with the language of the law or regulations on which they are based. In support of this view is an interview opposite with Philip Kirschner, President, The New Jersey Business & Industry Association. New Jersey can lead the nation in that respect as Lieutenant Governor Kim Guadagno's Red Tape Commission implements her proclamation that New Jersey is indeed "Open for Business."