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Washington Times

Higher employee costs are looming for small businesses in 2022

By December 3, 2021December 5th, 2021No Comments

(This article originally appeared in the Washington Times)

For small businesses making their 2022 plans, it’s not going to just be about the supply chain or rising material costs. It’s not going to be about finding people in this tight labor market, either. It’s going to be about paying people. That’s because the cost of people will be going up — significantly.

According to the latest numbers from the U.S. Bureau of Labor Statistics, the average hourly wage has increased approximately 5% in the past year. Total wages and salary disbursements to all workers at all managerial levels, including commissions, tips and bonuses, have increased 9.8% during this same period. Most companies in the service industry say they’ve increased compensation levels by as much as 10%.

CNN reports that HR consulting firms “are seeing employers offer compensation increases of 5% to 10% in a wide swath of jobs, but especially in areas where workers are needed most, in which case those increases can stretch up to 20%.”

These are not “transitory.” These increases are permanent and will continue.

There will be other pressures on small businesses, particularly from the Biden administration and state governments. Many HR experts expect to see the Labor Department revisit an increase of the overtime wage limit to $47,000 as proposed originally by the Obama administration, which would be up $35,568 from the current amount.

The Labor Department and IRS are tightening up the rules for worker classification and independent contractors, which may require some small businesses to reclassify freelancers and independent contractors as employees and incur added taxes and benefits.

Minimum wages in many states and cities are headed to $15 an hour. Some big brands have publicly announced their intention to pay even higher levels (increasing minimum wages also pushes up wages across the board as other employees seek parity). And both small and large firms who may be facing the higher costs of potential unionization should be concerned by the aggressive tactics of the National Labor Relations Board to force another union vote at Amazon.

According to a survey of benefits experts, health care costs are projected to rise between 7% and 7.8% for 2022. IT security and cloud costs to support more work from home employees are an additional burden. Federal, city and state regulations that mandate time off, force training, increase safety reporting and required advanced scheduling will also increase costs. I pity the small business owners in New York City who also comply with mask and vaccine mandates, forcing them to play both policemen and service providers.

All of this means higher compensation costs for all businesses, but there are some actions small business owners can consider.

Investing in technology is probably the most important. As I’ve written here, here and here, many employers — and a rising number of small employers — are doubling down on artificial intelligence, robotics, self-service kiosks, drones, and autonomous carriers technologies to replace lower-skilled workers. Eliminating the equivalent of one person by automating tasks can save a small business tens of thousands of dollars a year.

Trading lifestyle benefits for cash is another strategy. According to a report issued earlier this year, over half of employees in the U.K. said that job flexibility is more important to them than salary when making job choices. In the U.S., 55% of workers have expressed their desire to work remotely most of the week.

Employers can leverage this trend. Want to work from home or from another state with a lower cost of living? Want flexible work hours to meet your personal life? All of that is fine, but those benefits can be offered in lieu of compensation increases. Then both employer and employee will win.

Despite the potential change in independent contractor rules, as I mentioned above, many of my clients are stepping up their use of freelancers and outsourced services. While often requiring a higher rate, the longer-term costs are much less than hiring employees when you consider payroll taxes, benefits and insurance coverages required. There are rules to be followed, and they may change, but it’s a good strategy for keeping payrolls at a minimum. Focus on what you do best. Outsource the rest.

Small employers are good people, and there is not a single client of mine who doesn’t appreciate their employees. The “employees are a company’s greatest asset” cliché may sound trite. But it’s really true.

Like all assets, costs must be managed and return on investment has to be measured. Employees deserve to be compensated fairly, but employers have a responsibility to their shareholders, partners, and employees to make sure they keep these costs at a manageable level to maintain profitability and longer-term sustainability. That will be a big challenge for them in 2022.

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