Crain’s Detroit Business
Nov. 29, 2022
Proposed laws affecting how independent contractors are classified and compensated, a potential increase in the minimum and tipped wages, and a lack of foot traffic in the state’s biggest downtown loom as major issues for Michigan small businesses in 2023.
Small business leaders, though, believe there is a road map to success. Having a solid business plan is key for small businesses going forward, according to Sandy Baruah, president and CEO of the Detroit Regional Chamber.
Baruah said planning and being smart about finances would help small businesses thrive in the next year.
“Even if the economy slows down, you’ll see sectors of the small business community survive and thrive, and you’ll see some struggle,” he said. “It varies, though, based on the business owner. Even those impacted by inflation and slow economic growth, the ones who have planned ahead stand a much better chance of having success.”
Despite inflation being at levels not seen in years, Baruah said consumers are still buying, and demand for goods and services remains high.
That outlook is shared nationally.
A Bank of America survey of more than 1,300 small business owners found that 66 percent believed their revenue will increase in 2023, while 77 percent of respondents believed their business could survive a major economic slowdown. BoA released the survey in early October.
Michigan entrepreneurs are getting in on the action, too. The 18th Annual Small Business Association of Michigan Entrepreneurship Score Card released Nov. 15 found the number of small businesses opening in the state increased by 8 percent between 2020 and 2022 — about 5 percent higher than the national average.
SBAM President and CEO Brian Calley attributes the increase to the growing number of people who have decided to become entrepreneurs, particularly since the start of the COVID-19 pandemic. The number of independent contractors in Michigan has reached about 500,000, Calley said in an email. That accounts for about 9 percent of the workforce in Michigan, a slight drop from the 10 percent reported in 2018.
Trouble on the Horizon
Having new entrepreneurs is great for the state, but Calley said that proposed rules from the U.S. Department of Labor could negatively impact some businesses and workers.
The proposal, released Oct. 11, aims to clarify when restaurant workers, delivery couriers, ride-hailing drivers and other gig workers should be classified as employees or independent contractors in business for themselves. Categorization as an employee would require that businesses provide benefits and protections such as a minimum wage, paid overtime and contributions to unemployment insurance, which companies say would lead to prohibitive operational costs and reduce the amount of flexibility workers have over their jobs.
“This would be a huge blow to our entrepreneurial success,” Calley said.
Another threat to that success is pending legislation in Michigan that would also change minimum wage and paid leave laws, which could have a major impact on the restaurant industry.
A judge in July declared unconstitutional a 2018 Republican lame-duck maneuver called “adopt and amend” to weaken the voter-proposed laws to make the constitutional provisions more business-friendly, saying the original initiatives will take effect in February 2023.
If Court of Claims Judge Douglas Shapiro’s decision holds, the $9.87 hourly minimum wage that is slated to jump to $10.10 in January would increase to $12 on Feb. 20 and increase annually with inflation. The tipped wage, currently $3.75 an hour, would jump to $9.60 and equal the minimum wage by 2024. Also, the amount of mandatory leave that larger employers would offer employees would increase from 40 hours to 72 hours. Employers with fewer than 50 employees would no longer be exempt from offering paid sick days.
Calley, a detractor of the proposal, said the potential changes would change the way restaurants operate.
“It may very well reduce the income potential of restaurant employees, making workforce shortages even tighter,” he said.
“The small business recovery is fragile, and there are more recessionary risks every day. We need policymakers to not take any steps that increase costs on small businesses. What we need now is consistency and certainty. Committing to minimal government intervention is the best thing policymakers could do for small businesses in the next year.”
Those policies are the biggest challenge facing Michigan’s hospitality industry as a whole, said Justin Winslow, president and CEO of the Michigan Restaurant & Lodging Association.
An immediate loss of the tip credit in February would send the restaurant industry reeling as it is trying to restabilize from the last two years that saw the closure of one in six full-service restaurants and the loss of 40,000 to 60,000 industry jobs,” Winslow said. “The elimination of the tip credit would change the hospitality industry as we know it.”
Also affecting the hospitality industry is $180 million in unallocated Restaurant Relief Funds. The U.S. Small Business Administration in August said it would distribute the funds, but the money remains unaccounted for. Overall, more than $300 million in Michigan COVID-19 aid remains unused
There are several ways those funds could be distributed to aid small businesses, according to Calley. That includes tax relief and/or shoring up the state unemployment trust fund. That fund at the start of the year included more than $963 million, according to an April U.S. Department of Labor report.
The MRLA does not expect the funds to be distributed because of the long delay, Vice President of Marketing & Membership Strategy Emily Daunt said in an email.
“… but we still advocate that there is merit in relief for small businesses from COVID relief funds,” Daunt said. “Many small businesses in particular were largely left behind in the first iteration of the Growing MI Business grants and not all of that original money was allocated.”
What About Detroit?
The chamber’s Baruah believes Detroit, particularly downtown, hasn’t rebounded from the pandemic at the rate of other major cities due to one factor: foot traffic.
“(Return to office) is definitely an issue for foot traffic-based downtown businesses. What we see in downtown in particular is restaurants that offer evening, dinner service … doing well,” Baruah said. However, retail and dining are struggling during the day because of the lack of volume of people downtown.
“As we enter the fall and winter season, we’re still likely to have a COVID hangover effect. My guess is it probably won’t be until spring or summer 2023 until we see the impacts or know what the post-pandemic world is. I think the businesses that are based downtown really should think about the impact they could have on the city by bringing employees back.”
That said, Metro Detroit Black Business Alliance President and CEO Charity Dean believes it is still a good time to be a small business owner in the city. Dean, leading a group of more than 500 businesses, said the development of a small business ecosystem in Detroit is making a difference.
“We have groups like Detroit Means Business, the (Detroit Economic Growth Corporation-backed) BuyDetroit program, that are trying to continue to build up small businesses in the city,” said Dean, who owns the Rosa coffee shop in the Rosedale Park neighborhood in northwest Detroit. “We have the beginnings of what could lead the nation in how to support small businesses. There’s a lot of need, and there’s an appetite to support small businesses. I think, in the city, we have what it takes to do something good.”
According to Dean, doing something good includes closing the racial wealth gap.
While Calley and Winslow would like less government intervention, Dean believes there should be policies in place to benefit small businesses, particularly Black-owned small businesses.
A survey released in October by Meta, the company that operates Facebook, found that Black-owned businesses close at rates much higher than white-owned companies. Women-owned businesses fall in that same boat when compared to companies owned by men.
“Change doesn’t happen by accident or mistake,” Dean said. “There needs to be intentionality in terms of making sure all small businesses are supported. I’m very excited and optimistic about what can happen in 2023 for small businesses.”