Detroit business exodus: Fight back with a PEO?

Detroit business exodus: Are the same problems coming for your business?

Business owners in Detroit explain why the moved their companies out of the city.

A recent article at American Thinker exposes some of the key costs and risks that business owners face when trying to staff their companies in an area that becomes hostile to employers. The stories about the problems of Detroit span the spectrum from race to politics to crime to global economics. But one factor that gets overlooked is the hostile environment Detroit created for small businesses. As we all know, small businesses create the majority of jobs in America but the problems they face don’t get much attention. When small businesses fold or flee, the underpinnings of a local economy are in peril.

In this article I would like to comment on the frustrations expressed by the business owners quoted in the New American story and note how in many cases these same problems are happening across the USA. PEOs are in business to help their client companies address these risks.

Excerpts from The American Thinker “How Detroit Almost Killed My Business” are highlighted in red:
Businessman Don Wilkie discusses his experience as a small business owner in Detroit and explains his reasons for relocating his business. His story is something many small business owners can relate to.

Rather, the beam that really broke the behemoth’s back was built with “Unemployment Insurance, Workman’s Compensation and Wrongful Discharge (i.e. age discrimination, sex discrimination, racial discrimination etc.) [lawsuits],” writes Wilkie. He says there’s a dearth of jobs in the city because “in Detroit, hiring someone became the worst thing an employer could do, and being fired became one of the best days in an employee’s life.”

Let’s take a look at the three main things Mr. Wilkie mentioned, why they are important for business owners and how hiring a PEO could have reduced Mr. Wilkie’s pain.

American Thinker Article: How Detroit Almost Killed My Business

Unemployment Insurance – SUTA – UI

A big part of the problem is that it’s so hard to find acceptable workers, says Wilkie, that “to get one good employee, I had to hire about 8. So to get an additional 15 people, I had to hire over ten years approximately 120 people. This is when doing business in Detroit really started to get expensive.” Because even though Wilkie would be sure to fire bad employees for only documentable reasons to “avoid having to pay for unemployment,” in practice it didn’t matter; the state granted benefits in 8 out of 10 cases, and protesting the decisions was generally a go-fight-city-hall exercise in futility, with Detroit bureaucrats heavily biased against employers.
And the situation got even worse when the state “discovered” that Wilkie hadn’t paid enough into the unemployment system and levied “a surcharge to cover the costs of the benefits paid to people who the State should never have allowed to get benefits in the first place.” His unemployment costs skyrocketed.

This is an important point for business owners. Contesting Unemployment claims is not a fun process and in many cases business owners are either:

  • Unaware of the claim
  • Have adhoc hiring practices with no documentation to contest the claim
  • Don’t know how or where to appeal the UI claim
  • Too busy to take the time to navigate the bureaucracy to contest the claim.
  • Have no idea what the claim will do to their UI rate and thus assume it won’t matter that much

Could hiring a PEO have helped Mr. Wilkie contest unemployment claims? Maybe, although it is uncertain if a PEO would have had more success fighting city hall than he did. However, PEOs have experts on staff to ensure that bogus claims are contested and they know how the bureaucracy works. In some PEO arrangements, it is their UI experience getting raised and they have a direct stake in contesting questionable UI claims. In any case, a PEO will help keep UI costs in check and Mr. Wilkie could have used some help.

Calculate SUTA/ UI costs of turnover

Workers’ Compensation Insurance

But even this paled in comparison to the Workman’s Compensation burden. Employees would game the system: When the unemployment benefits ran dry, a former worker would suddenly become hobbled – an ailing back being the injury of choice – and collect Workman’s Compensation. And the chances of successfully fighting the city on a Comp claim approximated those of winning the lottery. As a result, Wilkie found himself in the “Assigned Risk” pool, which meant his “Workman’s Compensation insurance costs doubled overnight.”

Volumes could be written about the fraud in the government mandated workers’ compensation insurance system. Remember this is private insurance that business owners are required by law to have in place or risk criminal prosecution and also risk personal liability for medical costs. All work comp policies are required to cover soft-tissue injuries which are very difficult to diagnose. In addition, employees without health insurance seem to have many more injuries on the job. Get hurt playing softball on Sunday, go in on Monday and tell them it just happened at work picking up a pencil. Ca Ching! Here again a PEO is a partner in ensuring work comp claims are legitimate and questionable ones are contested. With every new claim, business owners will watch future work comp insurance premiums rise. At StaffMarket we have talked to many business owners who have ignored the problem of work comp claims so long that they have become almost uninsurable. PEOs work to keep work comp costs in check by implementing safety programs for their clients and closely administering work comp claims. Once again, Mr. Wilkie may have avoided the significant costs of the state assigned risk pool for work comp if he had a PEO partner working to keep those costs in check.

How Work Comp insurance is priced with a PEO

Wrongful Disharge

The most frightening prospect for a business, however, was a fate Wilkie suffered three times: being accused of “Wrongful Discharge.” An employer is then called before the “Civil Rights Commission,” where he is guilty until proven innocent – good luck proving your innocence, too. And if the state ruled against you – which happened to Wilkie in two of his three cases – “the remedy was to pay all of an employee’s wages from the time he was separated from your employ to the time of the Commission’s finding. Since the system moved very slowly, an employer could be faced with paying as much as two years’ salary,” he writes.

While no details are given in the story about Mr. Wilkie’s basis for these employee terminations, he lost the wrongful termination suits and it cost him lots of money. However, if Mr. Wilkie had hired a PEO he would have had a business partner to consult with during the employee separation process who knows the legal pitfalls and has a legal team dedicated to minimizing the financial losses.

Why most people are unaware of these problems

These business killers are rarely talked about in the mainstream press. The Wall Street Journal and other pro-business publications mainly cover stories about the issues related to large employers or the latest big business news. While their reporters are talented, those same reporters work for a paycheck. People who get a paycheck have a hard time understanding what it takes to “make a payroll”, i.e. being the business owner who writes the checks.

To summarize, many of the business challenges faced by Mr. Wilkie in Detroit are problems for businesses across the USA. For many small business owners, hiring a PEO may be the best decision to survive and thrive.