Budget Is Not California's Only Problem

Bruce Bialosky
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Posted: Sep 06, 2010 12:01 AM
Budget Is Not California's Only Problem

The Golden State has not been looking so golden for a while now. California has budget deficits that get bigger ever year, despite imposing among the highest tax rates in the country in every category. These factors have begun to chase businesses and their employees to other states that are better managed and far less costly. Yet as bad as these economic conditions are to the burden of running a business (not to mention raising a family), they are only part of the reason that it is so difficult to operate a profitable enterprise in California today.

It is no surprise to anyone with common sense that all these government-union employees create countless rules and regulations in order to justify their existence and perpetuate the need for additional positions. Unfortunately, too many of these bureaucratic decrees are utterly incomprehensible, and many are totally contradictory. This makes it almost impossible for a business owner to run a company within the law while not being vulnerable to lawsuits either from employees or the government.

Recently I ran across a tale of woe from an acquaintance of mine, Shirley (not her real name), who has her own medical services company. The service she provides is vital to all of us. However, there are very few qualified people in this field and the average age of the people performing this technical function is about 55 years. It takes education and training, but few people are following this path despite a bright employment picture today and in the future.

Shirley has become reluctant to let any employees go no matter how grievous their behavior might become. Shirley has had very few problems with her staff because she has done what a responsible employer does – takes care of her employees and works with them. In that spirit, she organized a vote of her staff of eight in 1994 regarding an alternative work schedule. They chose to be able to work four 10-hour days, which allowed them the flexibility to schedule several long weekends with their families every year. Everybody was happy with the new arrangement and things sailed along very smoothly. They felt this new schedule would allow them flexibility to work either 8- or 10-hour days to be able to meet the law’s requirements, but let individual employees determine their own time schedules.

When Shirley needed to expand, she hired someone with good qualifications that had been recommended by one of her staff members. Running a small business, Shirley did not have the resources that larger firms have to exhaustively investigate potential employees, so she relied on the referral and the interview process. Everything was peachy until a year later, when the new employee let slip that she had sued her last two employers.

Shirley began to experience significant problems with the employee’s performance. There were a series of mishaps that would have caused many other employers to ask the employee to find another job. Since Shirley could not afford an employment law attorney, she rode things out and kept her new employee around for 10 years, mainly out of fear of the consequences if she fired the employee.

Oh, happy day, when Shirley’s employee quit. Not only did she quit, but she got another job which eliminated any claims against Shirley’s unemployment insurance. Shirley felt she was in the clear – until receiving a letter from the Department of Industrial Relations’ Division of Labor Standards Enforcement. They stated that there was a claim for unpaid overtime by the former employee. Shirley provided the records for the three years for which the government could go back, and felt comfortable that she had meticulously followed the rules.

Unwilling to spend a large amount of money in legal fees, Shirley went to the hearing without an attorney, confident that she was in the clear. That was until the hearing officer told her she could not operate her alternative schedule the way she had been, and the way her employees preferred. If they converted to 10-hour days, the employees had to work only four days a week. This was something Shirley was not alerted to when instituting the program back in 1994. The hearing officer concluded that Shirley owed the former employee $112 in back pay.

Then the hearing officer informed Shirley she also owed the former employee $3,388 in penalties related to the alleged payroll violation. The officer asserted that even if Shirley had owed just one hour of unpaid overtime, the penalty would still be the staggering figure of $3,388. She also told Shirley that if she appealed and lost, the penalty would be increased to $5,000. Remember that this is for $112 over a three-year period.

Shirley’s story is not unique. People starting a business in a state like California assume all the risk. They have to become experts in employment, tax, and worker’s compensation law. If they are subject to sales tax, they must serve as a collection agency for the government, but remain liable for any incorrect interpretations of the rules. Business owners are subject to city laws, county laws, state laws and federal laws. As evidenced by Shirley’s case, even if you meticulously follow the rules, you can either pay enormous legal fees to attempt to protect yourself or suffer unbelievable and disproportionate consequences.

Shirley is one of those people who is creating livelihoods for others and providing vital services for the community. The government treats her more like a pariah than an asset, and California’s legislature continues to spew out a 1,000 bills a year just making things worse.

Businesses are moving in droves to other states where regulations like this do not exist. The bigger picture is that every time we have a recession, it gets harder to bring jobs back because of states like California who – with the collaboration of the federal government – make it less and less appealing to either start a business or hire someone. If you want to create a new enterprise today, you have to have a team of lawyers and CPAs. When you hear stories like this, it doesn’t take much to understand why 15 million Americans are still out of work and things are not getting any better.