The COVID-19 pandemic
affected businesses across the states in several ways. Among the entities who
were impacted the most by prolonged quarantine periods were small businesses. Small
businesses account for more than 99% of businesses in the United States, and it
has been estimated that they employ around 60 million people in the country.[1]
Small businesses strongly
felt the impact of the pandemic on various aspects of their operations, such as
“cash flow, inflation, and taxes.”[2] One aspect, however,
played a significant role in contributing to an already deteriorating
condition: Workers’ shortages. Some even went as far as calling the phenomenon
“the Great Resignation.”[3] The shortage is persistent,
even amidst rising vaccination rates and a vaccine mandate in many places.[4] Statistics from the
Department of Labor (DOL) show that as of January 2022, 6 million persons reported an inability to
work due to pandemic-related reasons.[5] Some of those reasons
could be traced back to employers closing or losing their businesses. What is
even more surprising is that those figures were up from “3.1 million” in
December.[6]
Since the beginning of
the pandemic, multiple factors contributed to the change in the labor market. When
the first COVID wave hit the country, national and small businesses alike were
clueless about the future of their businesses and what this new—almost
extraterrestrial—phenomenon would entail. When stores and commercial retailers
across the country went on lockdown, employers’ first response was laying off
their employees and cutting costs in an attempt to mitigate the impact of what
had been an unknown future.[7] At the time, workers who
were accustomed to maintain a regular working schedule suddenly found
themselves without a job. Even for those who managed to get through the lockdown
without getting laid off, as schools went remote, parents across the country
struggled with childcare, online schooling, and caregiving responsibilities,
forcing them out of the labor market. Everyone was forced to adjust to a new
normal: employers and employees alike. Likewise, some workers struggled to
recover from the effects of COVID-19 which proved to be persistent for many of those
infected.[8]
Amidst the change in the
labor force and the workers’ shortage, it is only normal to expect the hiring dynamics
to shift for small businesses. One important aspect that may be affected by
these turbulences is workers’ classification. Workers’ classification involves evaluating
whether a worker is considered an employee versus an independent contractor.
For instance, the Internal Revenue Service (IRS) draws a clear distinction
between employees and independent contractors, requiring businesses to “withhold
income taxes and pay Social Security, Medicare taxes and unemployment tax on
wages paid to an employee.”[9] On the other hand, for independent
contractors, it is up to them to pay for all their social security and Medicare
taxes.[10] Apart from tax
implications, independent contractors generally do not have the same benefits
that businesses are required to provide for their employees under the Fair
Labor Standards Act (FLSA). That includes minimum hourly wages, extra pay, and
breaks and meal periods.[11]
In most cases, independent
contractors are also not eligible for unemployment insurance.[12]
One primary factor
government agencies, courts, and others consider to determine whether a worker
falls within one category or the other is one of control.[13] The IRS uses a 3-part test
that accounts for both behavioral and financial control as well as the type of
relationship between the worker and the employer.[14] That said, there are
consequences to employers from the IRS and the DOL for misclassifying workers
as independent contractors while having them perform employee-duties.[15]
Thanks
to the pandemic—workers have increasingly started looking for more flexibility
in performing their job duties. Some workers have struggled with childcare well
into 2022 while schools were still being held remotely.[16] As the pandemic changed
the dynamics of what we consider a traditional job—the typical day and night
shifts arrangements accompanied with a consistent need for physical presence in
the workplace—workers have now more than ever settled into a new routine. That
made it difficult for workers to readjust to pre-pandemic working models and to
what has been once the norm. The demand for flexibility has become a work
culture by itself. In a 2021 survey by EY Americas, more than half of the
employees surveyed indicated that they would quit their jobs if they were not
provided with “post-pandemic flexibility.”[17]
As
independent contractors tend to have more flexible arrangements in their
working hours and in how they perform their job duties,[18] businesses may be tempted
to shift some of the job positions that would traditionally be reserved for employees
to independent contractor designations.[19] When this is accompanied
by the relevant legal standards, small businesses may in fact benefit from such
a change. Following two years of living in a global pandemic, some small
businesses are still struggling to maintain their operations and to stand on
their own feet,[20]
and recent developments in supply chain issues have only made this problem worse.[21]
Cutting costs while still preserving a workforce could constitute a natural solution that small businesses’ owners might resort to at some point in the future. As hiring employees generally costs more than hiring independent contractors,[22] implementing changes in workers’ dynamics might be the change that small businesses would be looking at to survive these tiring times. If that is to happen, small businesses should be aware that they must abide by the legal requirements necessary to implement such changes.[23] Small businesses are likewise advised to consider their workers when making such decisions, as many employees may not afford a drastic shift in working models.
[1]
https://www.mckinsey.com/featured-insights/mckinsey-live/webinars/protecting-us-small-businesses-from-the-impact-of-covid-19
[2] https://www.linkedin.com/pulse/small-business-owners-exhausted-optimistic-heading-/?trackingId=enHumNEKZYtrL3%2FSXDimyg%3D%3D
[3] https://www.cbsnews.com/news/americans-quit-jobs-states-leading/
[4] https://www.fiercehealthcare.com/hospitals/aha-concerned-federal-vaccine-mandate-could-make-workforce-shortages-worse
[5] https://www.bls.gov/news.release/empsit.nr0.htm
[6] https://www.bls.gov/news.release/empsit.nr0.htm
[7] https://www.shrm.org/hr-today/news/all-things-work/pages/cutting-staff-due-to-coronavirus-fallout.aspx
[8] https://www.cbsnews.com/news/americans-quit-jobs-states-leading/
[9]
https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation
[10]
https://www.ptla.org/worker-classification-employee-vs-independent-contractor
[11] https://www.dol.gov/agencies/whd/flsa/faq
[12] https://bench.co/blog/accounting/independent-contractor-vs-employee/?blog=e6
[13] https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation
[14] https://www.michigan.gov/documents/uia/155_-_Independent_Contractor_20-Factor_IRS_Test_Revised_01-08-13_408013_7.pdf
[15] https://justworks.com/blog/consequences-misclassifying-workers-independent-contractors
[16] https://www.clickondetroit.com/all-about-ann-arbor/2021/12/31/ann-arbor-public-schools-will-have-remote-start-in-2022-due-to-covid-surge/
[17]https://www.ey.com/en_us/news/2021/05/more-than-half-of-employees-globally-would-quit-their-jobs-if-not-provided-post-pandemic-flexibility-ey-survey-finds
[18] https://www.acf.hhs.gov/css/training-technical-assistance/whats-difference-between-independent-contractor-and-employee
[19] https://www.jucm.com/the-hazards-of-independent-contractor-employee-misclassification/
[20] https://upnorthnewswi.com/2022/01/27/nearly-two-years-into-pandemic-some-small-businesses-still-struggling/
[21] https://www.nytimes.com/2021/10/22/business/shortages-supply-chain.html
[22] https://smallbusiness.chron.com/costs-employee-vs-independent-contractor-1077.html
[23] https://www.nolo.com/legal-encyclopedia/employees-vs-independent-contractors.html