Report: SMBs Add Employees, Cut Salaries in January

Despite a worsening economic outlook and massive layoffs at enterprise-level organizations, small and midsize businesses managed to add new employees in January, based on a survey of 20,000 small businesses conducted by online payroll service SurePayroll.

The company’s hiring index rose to 11,306 in January, up from 11,274 at the end of December. This represents a 0.3 percent increase in the average small-business size, meaning that the average small business grew in size in January. However, the hiring growth has been flat of late, with the last five months all being in the 0.2 to 0.3 percent range. “I was surprised by the increase,” said SurePayroll President Michael Alter. “We are seeing increases, but at a decelerated rate—sometime in the next few months we’ll go negative.”

The positive news, Alter said, is that small businesses are still hiring. “I think there are some small businesses that are opportunistic, that are doing well and taking advantage of the oversupply of qualified workers right now,” he said. “There are a lot of things very challenging about our economic climate right now, but hiring good workers is not one of them.”

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The hiring index also evaluates company size as a combination of W2 employees and 1099 contractors, finding that while small businesses may still employ the same number of workers, the percentage of employment that is attributable to independent contractors has been increasing.

According to SurePayroll’s Contractor Index, which currently stands at 3.78 percent as of the end of January 2009, the percentage of SMBs hiring independent contractors is at the highest level the company has seen since it began distributing data on midmarket companies. That means that for every 100 workers engaged by small businesses in December, 3.78 are 1099 independent contractors and 96.22 are W2 employees. “For small-business owners, this is an attractive way to engage workers because contractors do not require costly benefits, can be more easily terminated on short notice and also do not provide any incremental employer payroll tax burden,” Alter said.

While SMBs are keeping employment levels relatively steady, the January report found the trend of decreasing salary levels in small businesses continuing. On a percentage basis, small-business annualized salaries dropped 0.12 percent in January, although this is the smallest monthly percentage drop in salaries since May 2008. SurePayroll pegs the current average salary for a small-business employee at $31,572.

The report discovered another trend affecting the small-business community: Small-business startups are not happening at the rate seen in previous recessions. “Reasons that fewer new companies are being formed include an acute dearth of startup capital and fewer new business opportunities to pursue due to a general decline in economic activity,” Alter said. “In addition, people are less willing to quit a job to start a business because the job is more precious; if the business fails, the entrepreneur may not be able to go back to work and get a similar job at a similar pay rate.”

That is something the proposed financial bailout needs to address, he said. “In the last 20 years, 94 percent of the net new jobs created came from small businesses,” Alter pointed out. “The way to grow out of this depression is to get capital to small businesses to help them grow and expand and to help entrepreneurs start small businesses. That’s where jobs are going to be created.”

Alter said he thinks more stimulus money needs to be directed toward small businesses. In the last quarter of 2008, small-business loans made through the Small Business Administration (SBA) loan program fell 57 percent, which resulted from frozen credit lines and newly risk-averse banks. In the last year, 300 banks have stopped providing SBA loans, Alter said, and the recovery package needs to address that.

“When you give money to small-business owners, they’re going to put it directly into jobs,” he said. “There are a lot of entrepreneurs out there who could make real job growth with that money. If history is any lesson for the future, any jobs to be created from growth will come from small businesses.”