The conversation with the well-established (but certainly not large) residential renovator about the problems of workers’ compensation and employee misclassification took on an unexpected turn, when the contractor explained how he justifies ensuring that everyone on his job site is an “independent contractor.”
“When I had employees, I didn’t have enough financial capacity — such that the bank asked me for a co-signer for a car loan,” the contractor said. “But my employee, he could get the car without problem. Once the bank confirmed his status, he had no trouble receiving financing.”
The image of the business owner being in relatively dire straits compared to his employees may not reflect the popular myth of the entrepreneur, but anyone who has been in a start-up or operated a smaller business understands the painful relevance of this observation. And it shows how it can be truly difficult for businesses to bite the bullet and spend the money they need to spend on staff, marketing and other resources to grow from a small to medium-size enterprise.
The contractor manages to survive by skirting the edges of the law. In Ontario, the government sought to combat employee misclassification as independent contractors by ruling that everyone on non-residential sites (including contractors) needed workers’ compensation insurance, administered by a provincial agency. The same rules apply for larger-scale residential contractors and any contractor working on non-owner occupied residences. But there is one exception: Small scale residential renovators, working on owner-occupied homes, are exempt from the workers’ compensation coverage/independent contractor rules.
Of course, the exemption only applies for independent contractors. It is designed for handymen and other sole proprietors. But the grey area, when a contractor graduates from one-person to a small operation with a few casual employees, becomes a sufficiently murky place that there is a temptation to stretch the rules as far as possible. Accordingly, this renovator has his “contractors” sign waivers saying saying they are not employees.
However, I would say his so-called “independent contractors” fail the smell test — they are under direct supervision, use the employer’s tools and equipment, and work on regular assigned schedules determined by the renovator. I fear what would happen if there is a job-site mishap; would the lawyers appear and suddenly (and probably correctly) determine these “contractors” are truly employees?
The contractor is caught in a paradox. He has two choices. He can shrink his business down to a one-person operation; or he can push and stretch the rules and hope they don’t break; because if he crosses the divide and starts paying his jobsite crews as employees with source deductions and workers’ compensation benefits, he’ll be thrown to the ground with major cost increases and a collapsing business viability.
Alas, this sort of seemingly insurmountable gap I think plagues smaller businesses. I wish I could find the study so I can cite it properly, but I recall reading an observation that the most efficient size of business has three employees/partners. This is where the revenue/yield per employee is highest. Then things deteriorate until the business has about 10 employees, where the productivity/net revenue per employee stabilizes.
Although I can’t find the study, I know from first-hand experience the challenges and see how at the smaller scale, businesses really have an uphill battle once they get to that “three person” level. As the business grows, its complexity and structural inefficiencies increase, and yet the organization isn’t large enough to compete for the bigger projects where this inefficiency isn’t a problem — because all the competitors are in the same place.
These arguments also relate to marketing challenges. Very small businesses, of course, have to find customers, but they manage with a combination of word-of-mouth, referral and repeat clients. Work flow and volume can be closely matched if all goes well, and the organization can survive, seemingly at times on a shoestring.
But when the organization grows beyond the three-person level, the revenue “nut” increases, and the costs of capturing new business can seem to jump exponentially, as the business needs to spend marketing dollars on publicity, advertising and sales — without the economics of scale or market power of larger organizations.
The simplest, and wisest, solution for most businesses is simply to stay small. If they try to grow, they are usually kicked back to the lower level before they can break through the 10-person stability/efficiency barrier.
These observations may in fact represent a positive opportunity. We can argue that growth for growth’s sake isn’t necessary; and there is nothing wrong with staying small, and surviving. If we want to break through this gap, we will need exceptional energy, courage, great employees/partners and truly effective and efficient marketing. It can be done, but no one is saying this is easy to do.