Costs from regulations pile up, hurt small business profits

By Joyce M. Rosenberg
AP Business Writer

NEW YORK (AP) — It’s getting more expensive to be an employer and small business owners say that’s making it harder for them to make money.

The health care law, minimum wage increases and paid sick leave laws in some states and cities are increasing costs. Small companies also face the prospect of higher overtime expenses under a proposed federal regulation.

“We’re going beyond the point where we can comfortably operate a functioning business and meet the requirements of these laws,” says Diana Lamon, who owns a Los Angeles restaurant, Poppy & Rose and a food truck, Peaches’ Smokehouse and Southern Kitchen, with her husband Ryan.

The growing costs the Lamons face include:

—The $9 hourly minimum wage in the city will rise to $10.50 next July, the first step toward a $15 minimum in 2020.

—They may be required to offer health insurance starting Jan. 1 if they go ahead with plans to offer dinner at the restaurant, which now serves breakfast and lunch. The expansion could give the
Lamons 50 or more workers, the point at which employers must provide coverage.

—Employees must be given paid time off when they’re sick under a new California law. When workers are out sick and need to be replaced, an employer pays two salaries.

—Four of the Lamons’ employees would have to be paid overtime under the proposed Labor Department regulation that would raise the threshold at which salaried workers are exempt from overtime.

The regulation is expected to become final early next year.

Owners faced with these accumulating financial demands might be saying, “it’s always something.” But dealing with continual challenges is part of running a small company, says Philip Kim, a professor of entrepreneurship at Babson College.

“It’s the nature of doing business, and those who can be resourceful and be able to be nimble in the process will have a better chance of succeeding,” he says.

The Lamons are looking at ways to increase revenue and cut expenses. One option is catering; their restaurant is surrounded by businesses and new high-rise apartments and they believe customers will be interested in ordering food for events and parties. They’re considering growing their own produce in a rooftop garden.

Higher expenses from regulations come on top of other rising costs. The Lamons are paying more for water because of California’s severe drought. Eggs, a staple in a breakfast restaurant, cost 30 percent more this year because of a bird flu that forced farmers to destroy thousands of hens.

At his restaurants and bookstores, Stephen Mayer is also trying to keep costs from wiping out profits.

“It’s piling on, health care, sick time, a little crazy,” says Mayer, who co-owns a restaurant and bookstores in San Francisco and is sole owner of a San Jose, California, restaurant.

A 14 percent increase in San Francisco’s minimum wage from $10.74 to $12.25 on May 1 will cost Mayer’s restaurant, Cafe de la Presse, about $225,000 a year, more than half the $400,000 profit it made in 2014, Mayer says. He’s already expecting that when the government’s overtime regulation becomes final, staffers at the restaurants and bookstores will work seven hours each day instead of eight. They’ll still be full-time workers, but if they end up working up to an hour past their shifts, the companies won’t have to pay overtime.

A thinner staff is an easier alternative than raising prices, especially in a bookstore, Mayer says.

“If (the price on) a book says $7.95, you can’t charge $8.95,” he says.

Karen Port is concerned about a bill to raise the current St. Louis minimum wage to $11 by 2020 from the current $7.65. She’s paying between $600 and $1,200 a month for each of her four employees for health insurance, and she’s worried that her costs from the health care law will keep going up. She has another problem: Many people haven’t been buying luxury items like the hot tubs that cost thousands of dollars that she sells at her business, Mirage Spa & Recreation. Raising prices is out of the question.

“I wonder about how I’m going to cover all of the bills that seem to be increasing at my current level of sales,” Port says.