Obama's Overtime Law Could Mean No More Employees for Startups

Recently President Obama signed an order directing the Labor Department to revise the rules relating to overtime pay for executive, administrative and professional employees.  As it currently stands, salaried employees in these classifications who make below $455 per week are automatically eligible for overtime pay. The rule changes, once in effect, would increase this threshold and possibly change other factors relating to overtime.

This is but the latest example of governmental meddling with the employer-employee relationship. This fundamental relationship now involves countless laws and regulations governing working conditions, minimum wage, overtime, taxes, breaks, health insurance, workers comp, leave, and on and on – not to mention entire HR departments and employment lawyers to administer. It is the strong arm of government in the form of IRS, OSHA, DOL, EEOC, not to mention layers and layers of local and state agencies.

In many cases it has become too onerous, dangerous and expensive for businesses to hire people they need to get the job done. And the law of unintended consequences is likely to disproportionately affect startups and entrepreneurs when the overtime rules become effective.

In the startup world, long hours, low (or no) pay, and an obsessive focus on building something from nothing are the rule. While the hours needed are typically extreme, it’s a badge of honor to be a part of birthing a new enterprise that has the potential to make it big -- or even change the world. Beating the odds and overcoming obstacles are part of the game. Of course, the payoff is the chance to hit it big and have an equity stake in a company where the early participants have traded time and effort for the potential reward of equity – the quintessential American Dream.

Obama’s latest overreaching “employment” requirements will kill innovation and entrepreneurship in startups. Is there a solution? In my opinion, the answer is a resounding YES, and it involves something so simple, it’s almost scary.

If the problem is employees, just don’t have employees.

One of the principles of a Protean Corporation is the protean strategy of having almost no employees, relying instead on outside service providers to get work done.

When a company needs to accomplish a task, they can hire an employee, hire an independent contractor or hire a corporation. Since the government does everything possible to discourage independent contractors and to get them reclassified as employees, in most cases it just isn’t worth it to go that route.

A startup in the age of Obama, can literally eliminate all of the downside of having employees, by hiring corporations any time help is needed. These corporations could be anything from a Fortune 500 enterprise to a one-person nano-corporation.

It’s easy to understand the world of “work relationships” by focusing on what governs them. The employer-employee relationship is governed by employment law and enforced by a host of powerful agencies. By contrast, other relationships are governed by contract law and enforced primarily by courts. To move outside the world of employment law requires the use of an “entity,” specifically a corporate entity (Corporation or LLC). An individual that does work for a company is subject to employment law, while a corporation that does exactly the same work for the same company is subject to contract law.

If there is a “corporation” providing services, a contract is the governing vehicle and the corporation can charge anything they want for their services, including nothing.

Consider how corporate entities are able to do things individuals cannot do. Attorney or law firm corporations often provide pro bono (free) services where they choose to. Also they can provide contingent services, i.e. they receive payment only if the contingency is fulfilled. Google, Facebook, Twitter, etc. give away most of their products and services. Stores offer sales, loss-leaders and other promotions.  These tactics don’t come out of the goodness of the heart, but rather as part of a comprehensive business model and market strategy.

But the government, in its infinite wisdom, has determined that individuals cannot be trusted to give away services or provide contingent services, even if they want to and have a valid strategy and compelling value proposition for doing so - like gaining experience, cultivating new contacts or developing skills in the process (unless in a non-profit setting or in the context of a bona fide internship).

However, if a person owns their own corporation, magically they can do almost anything they want, meaning for all practical purposes that if it is not illegal or fraudulent it’s ok.

Again in my opinion, this so called corp-to-corp relationship is the ultimate solution for startups that find themselves plagued by new and ever more restrictive employment rules, like what Obama has in mind … right after the mid-term elections. 

As startups seek to become more and more innovative and disrupt existing markets with their products and services, they may need to become more innovative in their organizational structures and operational strategies as well. The new standard could well become the employee-free small business.

And of course, the flipside is also the solution for current employees or those looking for work in this difficult economy, to discover new opportunities in startup situations or other entrepreneurial endeavors.

The corporation is the magic strategy that can open up opportunity, freedom, flexibility and choice for both startups and their service providers. It restores free market principles and forces in a relationship that has been overrun by regulations and government interference.

This opinion column was written by Paul Christiansen, an entrepreneur based in San Diego. He has owned an IT-training company and an executive forum group and currently has a Web-design firm, Quorim.com.