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Government mandates-one size does not fit all: profit per employee is a more realistic measure of employers' ability to bear the brunt of government mandates.

Amid the constant wrangling in Washington these days loom important issues to the industry including extension of the Bush era tax cuts from, repeal or replacement of the Obama health care reform law, and labor regulatory matters affecting the bottom lines of franchise businesses across the country. Rightly so, these policy debates give serious consideration to the effect on small businesses, the job engines of our economy.

But the definition of a "small" business is itself a policy debate. Depending on the piece of legislation or the implementing agency, a small business could mean one with 50 or less employees or a firm just shy of 500 workers. These thresholds are typically used to apply exemptions to new laws, on the assumption that if a business has grown beyond the small level, it must be able to absorb the costs imposed on it by the new law or regulation.

Profit-Per-Employee Measurement

To say these figures are arbitrary and not reflective of the actual ability of various industries and businesses to absorb the costs of government mandates is akin to saying Jon Huntsman has a significant chance to become president in 2012. A more accurate way to measure whether a business can bear the brunt of new mandates would be to consider its profit per employee or PPE, which would level the playing field for all employers. An easy-to-identify number for any business, PPE is calculated simply by dividing annual profits, or net income, by total number of employees.

Congress, states and local governments continue to expect Main Street employers, such as the hundreds of thousands of franchise businesses in towns and cities across America, to shoulder a disproportionate share of the burden for everything from health care to societal ills. Most franchise companies are labor intensive and operate on razor-thin margins, meaning the added costs of government mandates can be enough to sink the business into the red.

Yet legislators on both sides of the aisle fail to recognize that all businesses are not created equal and continue to utilize unfair metrics when determining which businesses deserve relief from their damaging laws. Exemptions have long been based on overly simplistic and arbitrary measures such as the "fewer than 50 employees" mentioned above, or "total payroll." Unfortunately, these metrics do not consider the ability of a business to absorb the additional costs of a mandate without trimming jobs or closing its doors altogether.

Health Care Law Example

The mandates contained in the new health care law are a prime example of how the exemptions included by Congress fail to protect the service-sector employers that have created most of the nation's jobs over the past two decades. The PPE for most service-industry franchises is less than $5,000, and, in many cases, closer to $2,000 for restaurants and retail. Experts anticipate that requiring employers to provide health insurance will cost at least $2,000 per employee, which would virtually erase any profits and push many low-PPE companies into the red.

Contrast this with technology or financial service firms enjoying huge profits per employee. For example, Google, Microsoft and other technology companies enjoy annual PPEs of more than $200,000. Current exemption guidelines would allow a 48-person firm with a six-figure PPE to avoid having to provide health care to its employees, while a low-margin company with 95 employees in one location or across several commonly owned franchise units would have to fully absorb the added cost, significantly compromising its ability to continue operating.

Paid Sick Leave

Looking ahead, low-margin businesses will face new challenges from Congress, the states and municipalities in 2012. Paid sick leave mandates have been enacted in Connecticut and Seattle, and are quickly becoming the next big trend of policy battles between businesses and unions. File debates on this issue have, again, included a discussion of how small a business should be to be exempted. But as with health care at the federal level, it is not the number of employees that illustrate a company's viability, but its annual profits divided by number of employees.

Mandatory leave proponents think these types of workplace and social mandates are good public policy goals. Employers and voters are pragmatists who acutely understand that mandates happen in a vacuum and come with a price-job loss and economic stagnation. That's one reason the voters of Denver bucked the trend started by Connecticut and Seattle and voted down a mandatory paid sick leave policy put before them on the November 2011 ballot.

A recent study by the University of Tennessee's Center for Business and Economic Research concluded that PPE would be a much better way to determine the ability of a business to absorb financial costs from government mandates. Unlike total payroll or annual sales, PPE recognizes the vast differences in business models across industries, the study showed.

As the franchise community knows, the jobs created by franchise businesses are largely service based and cannot be sent overseas to avoid tax liabilities or reduce other costs. Franchise businesses will remain in this country and, unfortunately, bear a greater burden of the corporate tax base than industries such as manufacturing that can be "offshored." The especially painful part of this situation is that those businesses left in the United States are often the ones with the lowest margins, and therefore least able to absorb added costs imposed on them by government mandates.

Most of the politicians passing these mandates have never run a business, or in some cases, never worked at a job outside of government. That is why IFA is working with a coalition of similarly situated associations and companies, through the Profit Per Employee Coalition, to educate them about this issue. The PPE concept has been well received in both chambers of Congress and across party lines, but getting lawmakers to fully grasp the connection between their mandated policies and jobs is a long-term battle that has just begun.

Franchising supports nearly 18 million jobs in the United States, and as such deserves a more balanced and flair approach when it comes to sharing the cost of mandates. With unemployment high and the economy shaky, the last thing the government should do is further punish the employers that can least afford it.

For more information oil the Profit Per Employee Coalition, contact Jay B. Perron, who is vice president, government relations and public policy of the International Franchise Association. He can be reached at or visit IFA's coalition page, industrysecondary.aspx?id=38888.
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Comment:Government mandates-one size does not fit all: profit per employee is a more realistic measure of employers' ability to bear the brunt of government mandates.(GOVERNMENT RELATIONS & PUBLIC POLICY)
Author:Perron, Jay B.
Publication:Franchising World
Date:Mar 1, 2012
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