Unemployment Insurance Problems In Your Own Backyard

Did you know that if you hire your neighbor's kid to mow your lawn, you are liable, under Colorado law, for unemployment insurance for that kid?  

The fact is you cannot sell your labor for a price you are willing to accept unless it meets government criteria. As an employee, you must receive minimum wage -- and be covered by Unemployment Insurance (UI), workers compensation insurance, and have taxes withheld. This is how our state and country disrespect individual enterprise. Let's consider how this affects the small businesses that hire most of the people in our land:

In a recent blog I railed against the Unemployment Insurance (UI) system because it reduces private sector jobs.  The system creates a whole slew of perverse incentives, including these:

§       Businesses are more reluctant to hire an employee who might eventually become an unemployment claim that will raise UI tax rates.

§       Employers facing layoffs have an incentive to fire employees for cause so they avoid an unemployment claim.  This damages the work record of the employee, making it harder to find a new job.

§       In 2009, legislation gave The Colorado Department of Labor and Employment (CDLE) expanded powers to investigate businesses for potential “misclassification” of employees.  With the UI trust fund being $500 million in the hole, CDLE has reason not merely to audit for enforcement, but also to coerce businesses into paying taxes they should not owe. 

Employees don’t see a deduction on their paychecks to cover unemployment insurance.  Nevertheless, they pay for it.  In a competitive labor market, a tax paid by an employer is money that could otherwise be used for employee compensation.  Yet few of the employees who pay for UI taxes will ever receive the benefits.  You only get benefits if you become unemployed “through no fault of your own”.  Employers and CDLE both have strong incentives to prevent payment of benefits.  The UI system is of limited benefit and is a drain on job creation and payrolls.  

To me though, the worst part is that the government limits your right to provide labor.  That is exactly NOT the purpose of government.   Government’s role is to protect your property rights, including your right to sell your labor as you see fit.  You might disagree with me about the value of unemployment insurance, but it is indisputable that it restricts liberties. 

There is a class of people who are exempted from these restrictions: independent contractors and business owners.  If you want to mow your neighbor’s lawn for money, or design a software system for him, you can become a business owner.  Your neighbor won’t have to withhold taxes, buy worker’s compensation insurance, or pay UI taxes.   

But there’s a catch. Colorado law has a list of nine criteria that you must meet to be a valid independent contractor. If you don’t meet all nine, your neighbor will be liable at least for UI taxes.  It is solely the judgment of the auditors from CDLE that determines if you have met those criteria.   

In a recent audit, the auditor interpreted the rules to mean that if an independent contractor gets more than 50% of its revenue from one business, it could be reclassified as an employee and be subject to back taxes, interest and penalties. Such a ruling, were it applied universally, would be totally impractical.  A new contractor could not go into business until it had secured at least two contracts, each for half of its business.  An enterprise would be precluded from doing more than 50% of its business with its best customer.  

The criteria are vague and arbitrary. They lead to abuse by the CDLE who are empowered by the 2009 legislation to enforce the criteria in any way they see fit for the purpose of supporting a UI system that reduces job creation, damages resumes, and robs individual liberties.   

The legislature must change the law to loosen the restrictions on independent contractors. There is only one criterion that is not arbitrary and open to interpretation by unelected and unaccountable bureaucrats: the willingness of an individual to become subject to the risks of business ownership. By expanding the definition of independent contractor, more people will be able to opt out of the failed unemployment insurance system.

Reasons for Optimism

I’m standing at a door.  Outside, the wind howls at 90 miles per hour.  I step out and I’m falling.  As the airplane flies away, I plummet towards the earth, 13,000 feet below. In the back of my mind, I know that if I failed in any of my preparations, I could die. 

I had carefully packed my parachute.  The reserve parachute was packed by a certified specialist.  I had practiced countless times.  Before I jumped, I carefully checked to make sure we were over the landing area. I wore a helmet, in case I had a collision with any of my friends who jumped with me.  If I lost consciousness a device would automatically open my reserve parachute.

Back in the day, I made over 3800 skydives.  I’d say that’s pretty good evidence that I’m an optimist.  But it’s more than just optimism.  I carefully studied the risks and took care to reduce or eliminate those risks. Skydiving is a sport that’s governed by the laws of physics.  Gravity is a constant. Parachute openings are consistent within an acceptable range. The physics of freefall are known, allowing me to control myself in freefall and get away from others to safely deploy my parachute.  A sport that many consider to be “extreme” is really about controlling acceptable known risks.

Let me tell you what IS extreme: owning a small business. I’ve owned my own businesses for over 20 years. There once was a time that you could take a good idea, develop it, market it and make a living as a business owner.  Yes, there was risk involved, and there have always been business failures because there is always risk.

I was young and naive when I started my first business.  I built my facility, bought equipment, hired staff, got the word out and opened for business. Then I had to make payroll.  I remember the shock of payroll deductions in my first paycheck as a teenager. As a business owner I experienced a whole new level of shock when I wrote a monthly check to cover payroll taxes for all my employees.  But that became a knowable expense, so it was no longer a risk.  The biggest unknown was the economy. But as the business cycle fluctuated within acceptable limits, I could control for that risk by saving money during the good times to carry my business through the bad times.

Today the biggest risk to business comes from our own government. It expands at an alarming rate and consumes an ever greater share of the economy. The proliferation of taxes, rules and regulations can leave a company wondering what’s next.  There’s simply no way to plan when the rules change so quickly.  You can’t plan for the unknown.

100 lawmakers in Colorado’s General Assembly have submitted 666 new bills this year.  That’s potentially 666 new laws plus all the rules that are required to administer and enforce those laws.

In Congress, 535 lawmakers mandate untold numbers of bureaucracies in which unelected and unaccountable officials promulgate rules with little consideration of the effects on businesses and individuals.

Local governments exercise their broad powers in senseless ways, like prohibiting barber poles, entering rental properties under court order for unnecessary inspections, and mandating additional trash services.

The list of infringements on personal property and individual rights is endless and growing. Can you imagine investing your money, time and hard work to turn that great idea into a business under these conditions? Like jumping out of a plane without a parachute, it’s difficult to imagine how you would survive.

Still, I’m an optimist.  To paraphrase Milton Friedman, there are three reasons to be optimistic.  First is the “extraordinary ability and ingenuity of the American people in finding ways to get around laws.”  The desire to improve one’s lot in life will continue despite the force of government.  Second, government is inefficient.  Were it otherwise, we would already be serfs.  Government simply is too wasteful to rein in a population that seeks to remain free.  Third, the waste is so obvious and the infringements on freedom so great that people are demanding a return to limits on government. When liberty and property are respected and protected, Americans will return to business.