California has birthed many great success stories: the Gold Rush, Hollywood and Silicon Valley, for starters. For centuries people have moved to the West Coast seeking unconventional opportunities and fast fortunes.
Those who hope to get rich quick using more conventional means may have a hard lesson to learn. Brick-and-mortar startups don’t become profitable overnight and the risks are high. In few places is that truer than California, where hostile legislation and an anti-business legal climate create large liabilities for small businesses.
Still, opportunity awaits startups that learn to stay afloat amid California’s angry regulatory chop.
California Startups That Hire May Take on More Than They Bargained for
Over 12 percent of Americans reside in California. That’s a huge pool of workers to pull from. But in the famously left-leaning state, going from startup to stable can shake up an unprepared business faster than the San Andreas Fault.
Once businesspeople take on employees, they’re essentially running two businesses: the first makes them money and the other keeps them from losing it.
The first is what comes to mind when most people think of businesses: the selling of products and services for a profit.
The second is all-but-hidden from everyone except owners, senior managers and human resources personnel. Working in the shadows, HR departments have taken on an increasingly important role as liabilities, the mere existence of which raise costs, have grown teeth sharp enough to hurt both failing and successful businesses alike. Businesses owners that feel the bite are often caught unaware: One subcontractor arrived at a worksite only to find a line of enforcement personnel from three different agencies waiting for him; having been made to sign an agreement to indemnify the project’s deep-pocketed managers, he suddenly had months of legal work ahead — just to prove his non-involvement.
California’s Runaway Compliance Sector Raises Barriers for Small Businesses
Labor laws manage relationships between employers, workers, governments and third-parties. Too little protection leads to poor working conditions, unfair practices, health risks and unfair industry collusion. Too much can overburden businesses with liability, fees, admin, and the need to constantly supervise and document compliance practices.
Avoiding malfeasance doesn’t always lower costs. Most businesses would rather avoid process than deal with agencies or reach a settlement than risk a lawsuit, especially in employee friendly states. In such an environment, mere accusations of wrongdoing can trigger administrative investigations and insurance claims that lead to larger legal fees and higher premium costs.
Liability, or the responsibility that accompanies a legal condition such as a contract or statute, cannot wholly be gotten rid of. Following the rules helps ensure legal consequences don’t occur; some liabilities can be covered through insurance, some shifted to third parties by agreement; but nothing can relieve a business from its duty to follow the law.
On a long enough timeline even the best-run business can expect to deal with unforeseen compliance issues. Waiting for the next bomb to go off is hard; not knowing what damage it may cause is even worse. How the laws are structured by legislatures and interpreted by judges determines whether the eventual detonation will be a powderkeg or mere firecracker.
Most American businesses must deal with at least three levels of government: federal, state and local. Laws vary by municipality and state. Which apply where and to what kind of business is a matter of continuous dispute amongst armies of legislators, lobbyists and labor attorneys, whose continual rejiggering of existing laws making compliance even more difficult.
Although insuring against liability can help a business avoid devastating short-term losses, it may also be responsible for further increasing compliance costs. Heavy insurance sector involvement creates self-perpetuating cottage legal industries. Here’s how:
- Businesses that own policies are less likely to fight undeserved allegations and will instead file claims with their underwriters, who then recover policy payouts by charging higher premiums.
- At the same time, lawyers are more eager to pursue litigation against deep-pocketed insurers.
- The result is an even more expensive system, albeit one that spreads rising costs across sectors over a longer period of time.
Plan B: Move on Back to Dodge
California businesses, which pay more for employment practices liability policies than those of any state, feel these problems acutely. Not only are laws hard on business owners, but an employee friendly judiciary system is quick to place blame on businesses and dispense penalties.
Over the course of the past several decades, compliance has gone from a part of doing business to a business of its own. As the legal framework is ratcheted ever tighter, business owners already buffeted over their bottom lines must now strain under the constant pressure of answering to their internal HR empires.
This has led many businesses to seek an easier path — the one that leads out of town. In 2005, after spending more than a century in California, Buck Knives, inventor of the foldaway hunting knife, moved its headquarters to Idaho, where it could save millions in utilities, insurance and manufacturing costs each year. When Tesla, a manufacturer of electric cars, was considering where to headquarter its battery-building “gigafactory” in 2014, the California company’s home state didn’t even make the short list. More recently, Toyota announced it will be moving its headquarters from Torrance, Calif., to Plano, Tex., in 2017.
One corporate relocation expert estimated that over 200 large companies have left California since 2010, taking tens of thousands of jobs with them. Considering that during the same period California added 30,000 new jobs, just 2.3 percent of nation’s total, the mass exodus should be cause for alarm among regulators. Changes may be coming, but owners shouldn’t hold their breath.
Doubling Down in California Pays Big for Smart Small Businesses
Startups crossing the threshold to become employers have a hard choice to make: With so many booming, business-friendly cities just over the Sierras, those that can run parts of their businesses elsewhere may benefit from employing staff or even moving to other states.
Still, those that can afford the California “premium” and navigate its legal requirements have an opportunity to thrive. Forbes “Best States for Business” lists the state fifth in growth prospects and eleventh in economic climate despite sub-forty rankings in both regulatory environment and cost of doing business. Those with strong local business and community ties or established clienteles may have no choice but to remain in-state.
For those taking that harder road, the liability question looms large. Measures that all businesses should take include:
- Keeping records of all firings, including documentation of reasons for dismissal and attempts at rehabilitation.
- Staying current on insurance premiums and compliance deadlines.
- Seeking business friendly municipalities, which exist even in unfriendly states.
Long-term strategies are more complicated. Ignoring the problem creates a “ticking time bomb” where issues are dealt with as they arise. Internal compliance multiplies the system’s complexity by divvying compliance among a mish-mash of attorneys, consultants and brokers. Outsourced solutions can bundle services at a lower cost, but large rapidly growing HR management firms struggle to provide customized services to unique small businesses.
RELATED: What Are the HR Functions of a PEO?
California’s Best Entrepreneurs Are Unsung Heroes
Today’s image of a California entrepreneur may be that of a newly minted twenty-something who in a single breath has gone from parents’ basement to public offering, but building a traditional business in the Golden State is less about founding a company and more about running one. Accomplishing that requires a healthy appetite for risk, an eye for detail, and a willingness to stay on top of all the details.
A watched pot never boils; a watched bomb, on the other hand . . . .
If you found this article helpful, may we suggest:
- For more on building your HR department as you grow, read How to Create an Effective Human Resources Management Plan.
- For more on handling employee injuries, read Reducing Liability Through Efficient Claims Management.
- For more on new employer health regulations, read ACA Compliance: New Regulations & Rising Costs in 2016.