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New year may bring trouble for small businesses

In November 2022, people visited the Main Street Café in downtown Stockbridge, Massachusettes. High inflation, a looming recession, and other issues could hurt small businesses this year. (Gillian Jones/The Berkshire Eagle via AP, file)

By Mae Anderson
The Associated Press

NEW YORK — Small businesses face a mix of old and new challenges as another year begins. A looming recession, still high (although easing) inflation and labor woes are some of the issues carrying over from 2022. There are also new regulatory wrinkles, such as a proposed change in how to classify gig workers and more states requiring pay transparency. After three precarious pandemic years, what transpires in 2023 will make a big difference in whether small businesses across the country are able to stay afloat.

Recession worries

In some ways, the possibility of an economic recession is less of an issue for small businesses than day-to-day operations.

Nela Richardson, chief economist for payroll company ADP, said small business owners should focus on bigger issues like labor and wages.

“Recession for the most part is an academic question,” she said. “We won’t know for several months until after it happens and no one on Main Street makes that call. It’s far removed from hiring and turnover.”

Given the economic uncertainty, small businesses will have to keep a tight rein on costs and run their operations as efficiently as possible, said Ray Keating, chief economist for the Small Business & Entrepreneurship Council.

Technology can help with efficiency, Keating said, and one way to keep costs down is to cast a wider net in terms of suppliers.

Inflation

The reason businesses need to keep a firm grip on costs is inflation, which appears to have peaked last summer but remains high. According to the latest data from the government, consumer prices rose 7.1 percent in November from 12 months previous, down from an increase of 7.7 percent in October.

Experts say inflation is unlikely to fall back to the levels seen prior to 2022, mostly because of higher wages and low employment. The monthly employment report released Friday showed wages rose by 4.6 percent year over year in December and the unemployment rate at just 3.5 percent.

“We want the unemployment level to increase because if it does, wage growth will slow, and not only is there no evidence that’s happening, if anything wage growth is about to get rocket fuel this time of year when wages go up,” said David Lewis, CEO of HR firm Operations Inc., which advises small businesses.

Lewis expects inflation to stay in limbo.

“I don’t see inflation dropping in any significant way … but I don’t see it going back up above that 8 percent level,” he said.

In June 2022, early morning light shined upon shops on Main Street in Bar Harbor, Maine. (Robert F. Bukaty/The Associated Press, file)

Labor

An ongoing challenge for small businesses is hiring and keeping workers. The matter is particularly stark at the beginning of the year. Since businesses typically give raises or bonuses at the end of the year, many workers use the period from mid-January to mid-April to decide if they need to make a job change.

“Everything we’re seeing, or hearing, suggests companies need to look at increases double to what they used to do in the last, on average, 15 years in order to keep up with everybody,” Lewis said. “Unfortunately, smaller businesses have the fewest resources available to pony up.”

Since small businesses can’t keep up with the raises at bigger companies, they will have to find new ways to retain workers in 2023.

One solution for small businesses in 2023 could be more extensive on-the-job training, Keating said.

“Not that they don’t train them now, but they need to go deeper than they have in the past and train all the way across the board,” he said. “That’s one of the answers to these labor challenges.”

Proposed gig worker rule

The Labor Department has proposed a rule that would make it easier to classify independent workers as employees. It’s part of a long-running debate about whether gig workers like Uber drivers or Instacart delivery workers are contractors or employees.

The proposal will protect workers and “even the playing field” for businesses that classify their workers correctly, according to the Labor Department, by reducing the number of misclassified employees.

Workers classified as employees can qualify for benefits such as minimum wage and Social Security. But critics of the proposed rule say gig workers don’t always want employee status and the new rule will be a burden on small businesses.

The proposed rule is “much too broad, unwieldy, arbitrary and confusing, which means it will drag countless numbers of independent contractors and freelancing individuals into a ‘misclassified’ pit, if enacted,” said Karen Kerrigan CEO of the Small Business & Entrepreneurship Council.

The proposal applies only to laws that the Labor Department enforces, like the federal minimum wage. But employers and courts often use Labor Department rules as a guideline for wider issues.

The Labor Department’s final ruling is expected this year, likely in the first quarter.

Minimum wage changes/state regulations

Finally, small businesses should be aware of regulatory changes – particularly at the state level – taking effect this year.

There are 27 states raising minimum wages in 2023. For example, in Michigan, the minimum wage is set to increase from $9.87 to $10.10 per hour. California is setting the minimum wage at $15.50 per hour for all employees, regardless of size of employer. That’s changing from $15 for employers with 25 or more workers and $14 for employers with fewer than 25 workers.

Pay transparency laws are going into effect too. Beginning Jan. 1, California began requiring employers with 15 or more workers to list salary ranges on job postings. In New York state, a salary transparency bill expected to go into effect in September will require pay ranges on job postings.

Minimum wage and pay transparency laws vary widely by state, so small businesses should stay on top of any changes affecting their locations.


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