Thresholds of Pain | Wall Street Journal | 08.10.94

Like a canary in a mine, an obscure, high-technology entrepreneur named E.O. Schonstedt may have been a warning signal to the U.S. economy. In the 1970s, he learned that a friend of his, in complying with civil-rights reporting demanded of government contractors with 50 or more employees, had been required to submit eight pounds of paperwork. Mr. Schonstedt, believing he could not afford to divert his attention or capital from the productive work of his business, decided to halt his firm’s expansion. Until Mr. Schonstedt’s death last year, Schonstedt Instruments never had more than 49 employees.

Since first appearing in the 1964 Civil Rights Act, thresholds have proliferated to more than a dozen federal laws, with most added in the past decade. More still are in state law, and soon health care legislation may add yet another. The health care plan put forward last week by Sen. George Mitchell includes mandated insurance payments by employers of 25 or more people if 95% of the country has not received coverage by the year 2000. (Companies in states with 95% coverage would be exempted.) The House Democratic leadership’s plan includes subsidies for businesses of fewer than 50 employees.

Thresholds reflect the recognition of legislators that, while big businesses may be able to carry the cost of most mandates and regulations, they could force many small businesses to lay off employees or go out of business. The answer has been to exempt businesses under a certain size, varying with the actual law. But as thresholds have accumulated, so too have stories of companies like Schonstedt Instruments that have stopped growing rather than face the costs and uncertainties of becoming subject to added regulations.

No wonder, either. The list of federal laws with thresholds reads like a Who’s Who of regulatory horror shows. For example, the Equal Employment Opportunity Commission enforces Title VII of the 1964 Civil Rights Act. In recent years, it has taken to suing companies that employ mostly minority workers. Their sin? The wrong mix of minorities. Compliance has become a matter of hiring exactly the same percentage of minorities or other favored categories as live in the community — if one can determine the EEOC’s definition of “the community,” or today’s favored categories.

Thirty years after the Civil Rights Act’s passage, standards should have become clear and compliance routine. Just the opposite has happened. Federal discrimination law suits increased by 20 times between 1970 and 1989. And from the passage of the Americans With Disabilities Act in 1990 and the Civil Rights Act Amendments in 1991 to early 1993, discrimination case filings jumped an added 30%. Hiring a 15th employee draws a company into this legal Russian roulette, exposing owners to vast new risks, if not immediate costs.

One entrepreneur who will not play with that pistol is Kelly Herstedt of United Truck Body, a truck body and school bus distributor in Duluth, Minn. In business for more than 20 years, he now employs seven full-time, two part-time and one temporary worker. Though his company is too small for most of these laws, he has tried to live by them, particularly in the OSHA and civil-rights areas. The result: Several years ago it took him a full month to follow the procedures required for one new hire. Fearing the complexity of the rules and the penalties that go with violations, he resolves never to hire more than 10 employees, even though the market would allow it. Last year each worker logged 500 hours of overtime.

Many companies have, of course, found ways to grow without crossing thresholds — hiring temps, part-timers and outside contractors. All three categories are expanding rapidly. President Clinton decried this trend in the last election as he promised “good jobs at good wages.”

But now, in health care reform, Mr. Clinton is working for a powerful new threshold that would put another brake on the small-business job machine that has accounted for so many of the truly “good jobs at good wages” of the past 15 years. An employment threshold is not the answer to the crushing burden that any of the employer health care mandates now under consideration would impose on small businesses. Instead, it would simply seal in place another pane in the glass ceiling that Congress has unwittingly lowered on small business and entrepreneurs.

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— At 15 Employees or More . . .

Federal laws that, however well-intentioned, impose burdensome compliance costs on businesses whose number of employees goes beyond a certain “threshold”:

— Civil Rights Act of 1964 (Title VII): banned race discrimination in employment but, despite assurances to the contrary by its sponsors, became the legal basis of quotas; applies to companies of 15 or more employees.

— Age Discrimination Employment Act of 1967: banned forced retirement before 65, raised to 70 in 1978; applies to companies of 20 or more employees.

— Employee Retirement Income Security Act of 1974 (ERISA): set forth rules for pension and welfare benefit plans and established federal pension fund insurance; reporting requirements are of such complexity that it has become known as the “lawyer’s relief act”; applies to companies with 100 or more employees.

— Occupational Safety and Health Act of 1970 (OSHA): now a regulatory monster that some studies suggest does little for worker safety while adding billions of dollars in costs to the economy; current threshold for required reporting and eligibility for famously arbitrary inspection, 11 employees or more.

— Omnibus Reconciliation Act of 1986: bans terminating a still-working employee’s pension accrual because of age; applies to companies of 20 or more employees.

— Immigration Reform and Control Act of 1986: on one hand, bans hiring illegal immigrants; on the other, makes it an offense to refuse employment to anyone who the employer believes may be an illegal immigrant but turns out not to be; applies to companies with four employees or more.

— Worker Adjustment and Retraining Notification Act of 1988 (WARN): the controversial plant closing legislation passed over President Reagan’s veto requires 60 days’ written notice of large-scale layoffs and plant closings; applies to companies with 50 or more employees.

— Emergency Planning and Community Right to Know Act of 1986: requires reporting of toxic chemicals used in manufacturing; applies to companies of 10 employees or more.

— Americans With Disabilities Act of 1990: a remarkably sweeping, vaguely constructed piece of legislation, already giving rise to thousands of suits against businesses; applies to companies of 15 or more employees.

— Civil Rights Act Amendments of 1991: increased employer exposure to discrimination suits; applies to companies of 15 or more employees.

— Older Workers Benefit Protection Act of 1990: as of April 1991 brought employee benefits, pensions and early retirement incentives under the Age Discrimination Employment Act; two years later, under 1986 amendments, ADEA coverage was extended to everyone over 40; applies to companies of 20 or more employees.

— Family Medical Leave Act of 1993: mandates 12 work weeks of leave for either husband or wife upon birth or adoption of a child or sickness in the family; applies to companies with 50 or more employees.

— Clean Air Act Amendments of 1990: as of October 1995 will require companies in target regions and states to implement plans increasing the average occupancy of their employees’ commuting vehicles by 25%; projected costs to employers go as high as $1,000 per employee; applies to companies with 100 or more employees.