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Cartels and Concierge Bureaucracy Management
Several years ago I heard an amusing story on NPR’s Planet Money program. The story described an Indian entrepreneur who, frustrated with India’s local political corruption and red tape, started a new business: Concierge Bribery. For a fee, he would seek out and pay off all of the sundry local officials whenever a local business needed something done. I thought how lucky we were that America had not yet descended to that level. I was deeply wrong. We, in fact, have had concierge bureaucracy managers for some time.
While it is generally a good maxim to never ascribe to mendacity that which can be explained by incompetence, normal logic seems rarely to apply to any of the corruption and rot stemming from Obamacare (and for the record, I refuse to call it “The Affordable Care Act”, or ACA). The act seems explicitly designed, among other things, as a tool to force a cartelization of the entire medical industry. We see this in the rapid demise of independent practices, as they close up shop and merge into large provider networks — effectively regional medical cartels. What we are not yet seeing, or rather noticing, on any scale is the very similar effect Obamacare (when coupled with the many other business strictures in place) is having on general employment itself.
The complexities of complying with the myriad kludges of federal, state, and local income taxes, payroll taxes, workers’ comp systems, and unemployment taxes have already driven most employers to contract with specialized firms for handling payroll. Only larger corporations have the budget to acquire and maintain the complicated accounting packages for running payrolls internally, so most smaller companies have, for years, offloaded this work on companies such as ADP or Paychex. With every added employee comes a new set of filings, and more potential for error. Just within my own company, we have have employees from two states and seven different local taxing jurisdictions, each of which has its own income tax, to be submitted on its own form, and by its own arbitrary deadlines. Say what you will about the virtues of federalism, each of those various towns, cities, and counties is a petty fiefdom unto itself, and all must be paid whether I actually do business there or not. Payroll services are effectively already the concierge bureaucracy managers. Now they are also changing into employment cartels.
The risks to an employer only grow should that employer choose to extend any benefits to employees, whether to meet some new arbitrary caprice of our rules (i.e. Obamacare), or to improve retention or morale. Just since the beginning of the Obamacare mandate, I have had a significant increase in the amount of paperwork I have to file each year, and in the number of mandatory notices and lectures I have to give my staff. Then there are the multiple workers’ comp filings I have to make every year (not to mention arguing with the state over how my employees are classified). Adding a 401k program could expose me to lawsuits for mismanagement if the market crashes, and the fees and audits would negate any upsides.
Adding to all of this is the greatest uncertainty: liability. Our legal structure is such that frivolous lawsuits are cheaper to file, and often less expensive to settle, than fighting them off, even when the entire lawsuit is without merit. The risk of lawsuits from one’s own employees is especially acute owing to whistleblower laws and other protections that make it especially difficult to gain redress even from completely unmerited lawsuits. An aggrieved employee can find a toehold in places unthinkable even a few years ago.
Realistically, if you are careful in your hiring and everyone acts like adults, the risks from these sorts of suits and annoyances are minimal. But I have learned the hard way that a particularly vicious and manipulative employee can stir anger and gossip like poison throughout an entire organization. And even long-trusted employees can change or harbor resentments for years, blindsiding everyone when that emotional dam cracks. Employers must be ever-vigilant about such things, laying groundwork against any damaging eventuality, no matter how slight the exposure seems at the moment.
In short, businesses in America run a gamut of risks to their well-being, and the laws and regulations today put them, almost by default, on the hook for actions that in another time would have fallen on individual actors. And just as Obamacare has driven the medical industry into cartels to cope with the bureaucracy, so now general employers now are consolidating their employee pools for protection. The payroll firms of old are now changing into something new: The Professional Employment Organization, or PEO.
The PEO is the logical extension to outsourcing payroll processing. The way a PEO works is simple: A business shifts its employees from direct employment to the PEO. The business then no longer directly employs anyone, but contracts its employees back from the PEO — for a fee, of course. In return, the PEO not only assumes the administration of payroll, but handling of benefits, the creation of HR policy, and all of the overhead thus entailed. The PEO, being effectively a national employer, can offer health and retirement benefits that my own little company cannot possibly offer, and liability concerns shift as well. The PEO is the ultimate concierge service in employment. However, PEOs are by their nature employment cartels, consolidating the employment pool into just a few firms.
I was informed by one PEO that PEOs in general have seen their employee pool grow nationwide by 15-20 percent per year since Obamacare was shoved down our throats (prior to that, their main markets were in the usual lefty bastions of California, New York, and Illinois). This is an alarming trend, not because the PEO concept is somehow wrong in itself, but because it is a sign that even small businesses are now economically unable to keep up with the burden of our government. A small business in America can no longer easily manage the regulations of Human Resources. Just as small medical practitioners have found themselves driven into large regional medical cartels, so now American businesses are finding themselves drawn to employment cartels.
Human beings are ingenious and creative. We find ways to get things done, even when the powers of bureaucracy weigh heavy. Think of Boss Mongo’s tales of procurement in the desert, or the Indian Concierge Bureaucracy service, or black markets in the former Warsaw Pact. We recognize in all of these stories that there is a troubling backstory — one of deep government corruption and inefficiency. We know that if goods, services, and people were truly free to flow, all this human resourcefulness and ingenuity could be directed toward something productive. PEOs are, of course, very clever too. But their rapid growth is another sign that our top-heavy government has grown beyond the point where anyone can navigate it or fend it off.
How can we continue to point to America as a land of opportunity when even the act of employing a person requires the employer join a cartel and hire a concierge bureaucrat manager? Such are the fruits of socialist central control.
Published in General
This is a little off-topic, but I have an acquaintance who does niche IT consulting work. When offered a project that’s too big for one person, he often invites a competitor to work with him on it. He says that over the long term, this results in more (and better) opportunities, and helps him stay better informed about the state of the art.
We call it “coopetition” in the tech world.
Excellent post!
On the subject of Federalism, I’m torn. I love the “50 laboratories” concept. However, I used to be in mortgages, and the spiderweb of regulations drove us crazy. Every state has different definitions and requirements, and then Cook County got into the mix, and soon cities and counties had their own laws. Unless you are a national player with an army of programmers and and lawyers, the only way to avoid breaking the law is to focus on just one or a few jurisdictions, which means sacrificing scale. The result is a cartel of the behemoths.
Standardizing with a national law would improve competition and benefit millions of people, until, of course, the law is changed when Dems get in control, and then we’ll all be pining for “federalism” and the inefficiency of 1,000 governing jurisdictions.
Don’t believe he can hire a subcontractor legally (I imagine that’s your friend’s arrangement) without getting worker’s comp. I imagine there’s a lot less touchiness about worker’s comp in IT than in construction.
I agree. I’m seriously contemplating taking my business down the PEO route for this reason. When I look at the liability mitigation, automated paperwork filings, health benefit savings, etc., the nominal increase in costs is more than offset by the benefits offered.
Specialization in business is a good thing. But I do wish it were such that I did not have to contract out so much of what once could be easily handled in house.
Heh.
We’ve outsourced piecemeal, but never went whole hog because recruiting and placement are so integral to our business. However, Obamacare has tipped the balance.
I work as a subcontractor, and the company contracting for my services has no liability whatsoever for anything. There’s no worker’s compensation or anything else.
You don’t have to give up recruiting and placement to go PEO. PM me if you want more info.
“A friend” of mine will only hire medical assistants and nurses who have husbands (not partners) who have their own medical insurance. It may be improper to ask about marital status, but there are ways. I myself have abandoned employee investment plans and providing health insurance for similar reasons to the author’s.
Having one’s own insurance and bearing the risk is one of the major factors which indicate it is truly a contractor relationship instead of an employee/employer relationship.
That’s exactly what I thought. So JoJo’s husband should be able to hire his son or anyone else for a two-week project without incurring any other expenses.
I previously employed up to 18 people. All that Skipsul is saying was certainly baked into the cake when I sold and retired. It just hadn’t come out of the oven yet. This was only 21/2 years ago and being an employer of less than 50 people was a great advantage in being able to avoid some of the regulations. I doubt that is the case anymore. The PEO’s however had already been knocking on my door for several years. They make themselves sound like saviors, but I will bet that soon they will be just another bureaucratic noose around a business owners neck.
The problem is, if you eliminate the complexities that are due to the crazy patchwork of state and local regulations, you clear the way for the biggest, best capitalized companies to use economies of scale to take all, and from there it’s a quick, easy step to socialism. It has already happened with the banking industry.
Not sure if you mean should, or can. My husband cannot legally hire our son without covering him by worker’s comp insurance. Our son does not have worker’s comp on himself. As far as hiring a sub, in order to get a building permit you have to show proof of worker’s comp or provide a state-mandated form certifying that you are doing it yourself and hiring no subcontractors.
Eh, the salesmen all try to make it sound like they’re saviors. No matter the industry it’s one of the tools of the sales trade.
PEO’s could be a great benefit in the right circumstances and no great shakes in others. But loosening the regulatory/administrative noose is central to the value proposition.
I’m glad you got help for your adoption. I’m sorry that it influenced your vote. Congressmen who perform constituent services like that should go to jail. It might motivate the rest to fix the system so it doesn’t need their interventions.
(I seem to remember a certain poster pooh-poohing the idea that constituent services work just as you described. We were discussing the Ex-Im bank at the time.)
The government hates subcontracting. Complying with the government’s insistence that anyone on the site have worker’s comp would keep your husband from being able to hire his son.
By the way, that is a good example of crony capitalism. It favors the big contractors who can afford that stuff. Keeps out the little guys.
And the owner’s costs go up and up and up.
This is the kind of thing that drives me nuts, where the government is the cause of the biggest problems we have, not the solution.
I saw this play out so dramatically one night at a selectmen’s meeting where these very liberal people running some program for the senior citizens wanted to hire someone but couldn’t do so because of the employment regulations and so had to beg the selectmen to hire this person through the town.
We say we care about unemployment and we spend big bucks to address it on the one hand, and then we cause it on the other hand. Sigh.
Funny you should put it that way as if complying with the regulation is optional. Of course it is always optional, if you’re willing to risk fines and jail. Most of the other contractors around here don’t comply.
I didn’t lose sleep about it. It was my last resort, he wasn’t going to get a campaign contribution from me, and a vote in a 70:30 race was more of a tip of the cap than anything else. Also, I wasn’t lobbying for a law that benefited me or my firm. I wanted the administrative procedure already in place to work.
However, I agree that there needs to be liability for government employees who screw up. Though perhaps the bureaucrats and administrators should get it in the neck first.
As an in-house intellectual property lawyer at a very large company I am horrified by the articles in the law newsletters I receive. Most of them report new or additional ways an employer can get in trouble if the employer makes the tiniest of missteps. I keep thinking, “Why would anyone go into business today, especially if it might involve hiring employees? The risks are too high.”
For the record, when lefts are listening I prefer to call it The Affordable Care Act, preferably with just a touch of irony. No acronym. Spell it out. They need to be reminded of how they were accessories to the biggest consumer scam in world history.
One of the perversities of the act is that it allows insurance companies to really jack up rates on small players like me – it can no longer use age, sex, or medical conditions to set rates. But for large employers (100+) it can waive everything save zip code, and thus steeply discount. If I stick with my current carrier my rates will go up over 17% at renewal. By changing carrier they only go up 6%. By going with a PEO they go DOWN 15%, all for the same plans! I honestly do think that the law was designed to further punish small employers, in favor of big old donor firms.
I would agree. Yes, they may have thrown a few bones to small companies, but their every instinct is to force consolidation and concentration as a step towards socialism, which they can then bring about in the name of breaking up monopolies or by taking over decision-making for those that are deemed “systemically important.”
A more charitable explanation of their behavior would be that they don’t have a clue about the world of small business. But I suspect they do have a clue and they don’t like what they see because it’s hard to control.
I expressed my thoughts really badly. I apologize. What I meant was that the government was trying to make it hard for small contractors like your husband to get work. (a) The government does everything it can to discourage subcontracting, for what reason I do not know but I suspect it is because subcontractors can deduct their work expenses, which must drive the government crazy–all that income they can’t tax :) And (b) the larger contractors feed these regulations to the government, which is more than happy to have and enforce them, for reason (a), so as to put their competition out of business. It the government and big business at their worst. :)
I don’t know the history of independent contracting, but I strongly suspect unions had a little something to do with writing the rules. The heart of it is that employees are given protections that contractors do not have, and those protections are written and guarded by federal bureaucrats. The wages and hours rules come largely out of our union history, I believe.
It should be noted, though, that there are also advantages to businesses to having employees instead of contractors. If you have good employees you don’t want to lose them, and the benefits help retention. At least in my experience, they also help to produce loyalty to the company, which contractors do not seem to have much of, and why should they?
Your original example reminded me of a “benefits concierge” outfit that my company engaged for us. Their entire function is to intercede between employees/dependents and the health insurance company, since the health insurance company’s customer service is apparently so inscrutable.
I’m sure that didn’t cost us very much … {sarcastic eyeroll emoji}
I’m sure there is some socialism and cronyism that goes on, but I think the biggest driver is the fact of the indispensable (at this point) middle man we call insurers. The insurers assume the risk on both the patient end and the provider end. In exchange, they have every incentive (and some justification) for squeezing the care providers in terms of lower reimbursement rates and squeezing the patients in terms of premiums and level/amount of care.
Of course there is a series of actions and reactions. So the providers have incentive to raise rates in order to get reimbursed at a net level they want (considering the cost of education, insurance, etc they always want more). The patients too then have incentive to be less discriminating in what they seek medical care for and in what manner they seek it. And on the cycle goes.
I think HSA’s are big part of the way out along with locally provided medical facilities for those who truly can’t afford care (or who are willing to deal with the lower service they’ll find at the municipal hospital/clinic. Also, on the provider end, we need to be less afraid of these people making money – the profit motive and the Hippocratic oath can exist side by side. There will always be abuses, and trying to stamp out all of it has led to other unintended consequences.
Absolutely! No profit, no quality. We have already lost the individual doctor firms. They can’t exist without working on hospital staff any longer. Their salaries are pre-determined by hospital administrators. I fear that without the ability to control their own destinies, the brightest amongst us will no longer be interested in the medical field. That is scary!