Most Americans have an inherent orientation towards fair play. We don’t always get things right, but I believe, on balance, we try. So, for example, most of us would try to help the small guy (person) first rather than the person who already has a lot. We understand that the big guy often does not need as much help.
Small businesses struggle each day to make ends meet. So, when trying to remedy the fallout from the virus, I would guess that we want to help small businesses. Yet, Congress just passed the Families First Coronavirus Response Act, which turns this thinking upside down.
In the bill, companies with more than 500 employees are exempt from the requirement to provide paid leave for their employees. Employers with under 500 employees (small businesses) are required to provide paid time off for their employees who are kept away from work as a result of the current pandemic.
I am not going to argue about whether employees should receive paid time off. It seems reasonable to me, and I think we can agree that people who are sick need help. What does not make any sense is that this burden should fall exclusively to small businesses, institutions that are already struggling.
Small businesses have an average net profit margin of 5 percent. If they take in $500,000 a year in revenue, their average take home profit is only about $25,000. That is not a significant amount given the risk that owners take in running a business. So, while it’s true that the Families First Coronavirus Response Act provides for a tax credit for any contributions made by small businesses, it is forcing businesses to pay money now and get a kind of rebate later- at a time in history when small businesses are getting crushed under the weight of liquidity today.
Small businesses are constrained right now and a credit a year from now at tax time provides virtually no benefit or compensating relief (especially as many businesses will probably have zero net income for 2020 anyway, given that small decreases in sales lever much larger decreases in profit because many costs are fixed). I have to guess that the lack of a coordinated lobby for small businesses caused this inequity in the bill. Instead of relying on paid leave from small business employers, the relief should come directly from the government. A better possible solution is a government loan to any small business that needs money to maintain its employee base. The government gets an asset (a loan) that gets a return and small businesses get the money they need to meet payroll. Most importantly, people get the cash they need to feel safe and continue to buy things and stabilize the economy.
The White House and Congress argue that businesses with under 50 employees could be exempt from the tax. But, these businesses would have to “prove” their hardship, whereas large businesses are exempt completely from the fee. Some say that large businesses should not have to pay because many of them provide leave benefits, but the specific burden of the legislation puts more leave and cost burden on small businesses than large ones currently provide for. This is a subtle but important point. The burden will be proportionally and numerically larger for small businesses.
Despite the popularity of entrepreneurship, the rate of ownership in small private companies has continued to fall significantly over the past 50 years. Where are most jobs and innovation created? Small businesses. Yet, they have few advocates. This is probably because they are working hard every day just to make ends meet.
Congress, in a rush to remedy a problem that is admittedly complex, is placing an anvil on the shoulders of the people who build our economy- the quiet heroes who struggle every day.
Brian Hamilton is the co-founder of Sageworks, where he developed ProfitCents, an artificial intelligence platform used to help millions of small businesses understand their financial information. He is also the founder of the Brian Hamilton Foundation and Inmates to Entrepreneurs, both national organizations that help small businesses.